羅致恆富 (RHI) 2014 Q1 法說會逐字稿

Hello and welcome to the Robert Half First-Quarter 2014 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.

Hello, everyone. We appreciate your time today.

Before we begin, we would like to remind you that comments made on today's call contain predictions, estimates and other forward-looking statements. These statements represent our current judgment of what the future holds and include words such as forecasts, estimate, project, expect, believe, guidance, and similar expressions.

We believe these remarks to be reasonable, but 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.

Beginning this quarter, we are publishing our prepared remarks for this conference call at the same time the quarterly earnings statement is released. The prepared remarks were included with today's press release and are also available on the Robert Half website by using the quarterly conference calls link on the homepage of our Investor Center.

Now let's discuss the first quarter. First quarter revenues were $1.08 billion, up 6% year over year. Income per share was $0.45, up 12% from one year ago.

Cash flow from operations was $59 million during the first quarter. Capital expenditures were $12 million.

Our Board of Directors increased the Company's quarterly cash dividend by $0.02 per share during the quarter, to $0.18. The dividend was paid to shareholders on March 14, 2014, at a cost of $24 million. We started paying a cash dividend 10 years ago and have increased it annually.

We repurchased 800,000 Robert Half shares during the first quarter at a cost of $33 million. Approximately 7.3 million shares remain available for repurchase under our Board-approved stock repurchase plan.

We were pleased with the Company's operating results for the first quarter. We saw strong demand in all areas of the business, especially in the latter part of the quarter. Growth was strongest in our Protiviti, technology staffing and permanent placement divisions.

Non-US operations also improved, particularly permanent placement services, which reported solid sequential and year-over-year revenue gains during the quarter. This was Robert Half's 16th consecutive quarter of double-digit net income and earnings-per-share growth on a year-over-year basis. Our unlevered return on equity was 27% for the quarter.

Now I'll turn the call over to Keith for a more detailed review of our first-quarter financial results.

Thank you, Max.

Global revenues were $1.08 billion in the first quarter. This is up 6% from the first quarter one year ago on both a reported and same-day, constant-currency basis.

Global staffing revenues were up 5% on a same day, constant currency basis. US staffing revenues were $720 million in the first quarter, up 6% on a same-day basis.

International staffing revenues were $230 million in the first quarter, up 1% on a same-day, constant-currency basis. We have 342 staffing locations worldwide, including 99 locations in 18 countries outside the US.

We had 62.4 billing days in the first quarter, compared to 62.2 in the first quarter of 2013. This had the effect of increasing reported year-over-year staffing growth rates by 0.5%. The current quarter had 63.2 billing days, compared to 63.5 billing days in the year ago quarter.

Currency exchange rates reduced first-quarter year-over-year staffing revenues by $2 million. The strengthening of the euro and pound sterling were more than offset by weakness in the Canadian and Australian dollars. This reduced year-over-year reported staffing growth rates by 0.2% in the first quarter.

We provide a supplemental schedule with our earnings release that shows year-over-year revenue growth rates for our various 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.

You can find the schedule in today's press release and in the Investor Center of our website. This is a non-GAAP financial measure. We provide it to give you certain information on certain revenue trends in our staffing operations.

Global revenues for Protiviti were $134 million in the first quarter, with $108 million in revenue in the United States and $26 million in revenues outside the US. Global revenues for Protiviti were up 15% year over year, with US revenues up 19% and non-US revenues flat with the prior year. Protiviti and independently owned Member Firms serve clients through a network of 75 locations in 25 countries.

Now turning to gross margin. In our temporary and consulting staffing operations, gross margin was 36.1% of applicable revenues. This is the same as the prior year's first quarter.

First-quarter revenues for our permanent placement operations were 9.7% of overall staffing revenues, compared to 9.2% of staffing revenues in the first quarter a year ago. Together with the temporary and consulting gross margin previously discussed, overall staffing gross margin expanded by 40 basis points versus one year ago, to 42.3%.

First-quarter gross margin for Protiviti was $37 million, or 27.4% of Protiviti revenues, compared to $30 million, or 25.7% of Protiviti revenues one year ago. This increase is due primarily to higher staff utilization.

Staffing SG&A costs were 32.3% of staffing revenues in the first quarter, versus 32.5% in the first quarter of 2013. SG&A costs for Protiviti were 21.9% of Protiviti revenues in the first quarter versus 22.5% of Protiviti revenues reported this time last year.

Operating income from our staffing divisions was $95 million in the first quarter, or 10% of staffing revenues. The temporary and consulting divisions reported $78 million in operating income, or 9% of applicable revenues. Operating income for our permanent placement division was $17 million in the first quarter, or 18.7% of applicable revenues.

First-quarter operating profit for Protiviti was $7 million, or 5.5% of Protiviti revenues, compared to $4 million or 3.2% of revenues in the first quarter one year ago. Protiviti operating profit increased 96% over the prior year.

Our first-quarter 2014 income tax rate increased to 39.7%, up from 37.5% in the first quarter of 2013. This was primarily due to fewer available unused foreign tax benefits. The higher tax rate lowered our first-quarter results by approximately $0.02 per share.

At the end of the first quarter, accounts receivable were $587 million. Implied days sales outstanding, DSO, was 49.3 days, compared with 48.7 days at the end of the first quarter of 2013.

And now for second quarter guidance. We saw the following trends in the first quarter and so far in April.

In the US, year-over-year growth rates for our temporary and consulting divisions decelerated in January, accelerated in February, and accelerated at an even faster pace in March. Also in the US, year-over-year growth rates for our permanent placement division accelerated in January, accelerated again in February and slowed slightly in March.

Outside the US, year-over-year temporary and consulting staffing growth rates decelerated in January, accelerated in February turning positive, and stayed positive in March. Perm placement growth rates outside the US decelerated in January, accelerated in February, and remained at February levels in March.

For the first two weeks of April, revenues for our temporary and consulting operations were up 9% on a same-day, constant-currency basis compared to the same period last year, with US temporary and consulting revenues up 10% and non-US temporary and consulting revenues up 5%.

For the first three weeks of April, permanent placement revenues were up 14% on a same-day, constant-currency basis compared to the same period last year, with US perm revenues up 24% and non-US perm revenues down 4%.

We provide this information with the caveat that it is difficult to read a great deal into these trends given the short time periods they represent.

We offer the following second-quarter guidance. Revenues, $1.11 billion to $1.16 billion; income per share, $0.48 to $0.53.

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 to Max.

Thank you, Keith.

Demand for our professional staffing services and Protiviti consulting solutions remained solid during the first quarter, with growth rates accelerating in March and so far in April. We were also pleased to see higher staffing demand outside the United States, including Europe.

In the United States, the unemployment rate for college-educated workers 25 years of age and older, which we view as an indicator of professional level demand, is 3.4%. US jobless claims have approached a seven-year low.

The first quarter saw the number of temporary workers as a percentage of total US employment exceed the all-time high established in 2000. More and more businesses appreciate the value of interim staff to better manage variable work loads and specialized project demands.

We work with companies of all sizes, but Robert Half is a particularly smart staffing option for small and midsize businesses. The cost of a bad hiring decision can affect these companies disproportionately compared to larger firms that may have a deeper bench of workers from which to draw. Our clients value our personal service approach, our expertise at assessing skills and our deep talent networks.

Protiviti is serving an expanding client base. All of Protiviti's key services grew nicely during the quarter, most notably IT consulting, risk and compliance and internal audit. Client demand was driven by improving market conditions and a more stringent regulatory environment.

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

Thank you.

(Operator Instructions)

Mark Marcon, with Robert W. Baird.

My question revolves around the temp staffing trends that you were seeing by segment. It was nice to see the continued improvement on Accountemps. I was wondering if you could talk a little bit about your experiences from a cyclical perspective in terms of the driver, the resumption to year-over-year growth on the Accountemps side and how you would expect that to play out as the year unfolds.

And then secondly, as it relates to Robert Half Technology, against solid comps, we saw a little bit of deceleration. I was wondering if there there's any color that you could provide there as well? Thank you.

Okay. From a cyclical perspective, so first of all, as we look through the quarter, January, February were clearly revenue, weather impacted. We would estimate that the weather reduced our growth rates on the temp side by about 1%.

We then look at March, March was a very solid month. As we talked about, those growth rates accelerated very nicely into the first two weeks of April.

I guess cyclically we were also encouraged by seeing rising pay rates for our temporary staff, which in turn meant rising bill rates. Our bill rates were up 2.6% year-over-year this quarter and that compares to 1.7%, so we were encouraged that we're starting to see some wage inflation, which is usually indicative as you're beginning to start the growth part of a cycle in earnest. The Accountemps acceleration you saw adjusted for weather is about in line with what we talked about for the absence of the foreclosure look back the prior year.

Then when you look at Robert Half Technology, the deceleration, I think is a little misleading because the prior quarter, its year ago comparison was quite easy. If you take a look at the fourth quarter of 2012 versus the third quarter of 2012 and the first quarter of 2013 you'll see that that was the easiest comparison of the year. So given the more difficult comparison, I think Robert Half Technology growth rates are more understandable and still among the best we reported for the quarter.

And if we adjust for the weather, then we're probably looking at something that would be north of double digits?

That's correct.

Great. And then can you talk a little bit about Protiviti. I mean, obviously great progress there. Can you talk a little bit more about the outlook as we think about the next 12 to 24 months?

Well, I say Protiviti was the continuation of very good trends we've seen for a good quarters. Internal audit was quite strong. We talked about PCAOB inspections that are dictating more audit work which trickles down to internal audit.

We've talked about more IPOs, which is more public company readiness work for Protiviti as well as internal audit co-sourcing and outsourcing thereafter. We have talked about risk and compliance, particularly in the financial services industry. Anti-money laundering, model validation.

We've also talked about IT security, business continuity, all remain strong, all the trends remained intact that we've talked about for the last couple of quarters. And as we talk to our people at Protiviti their outlook would remain as positive going throughout 2014 as it has been the last few quarters.

Terrific. Thank you.

Andrew Steinerman with JPMorgan.

Keith, maybe you can help us a little bit squaring away the April trends that you gave, and I know that doesn't include Protiviti to the middle of guidance, so if you look at the middle of second quarter guidance, that's up about 7% year-over-year and I know that's on a reported basis, that's why I'm asking about it. But when you look at the April trends on the temp side, it was 9%, and on perm it was 10%. How do you aggregate that up and get to the middle range of your guidance, thinking about days and currency and any other factors?

Our guidance certainly relative to our April start is quite conservative. So one way to look at guidance is for the first quarter just ended on the staffing side, same day constant currency we grew at 4.5%. At the midpoint that grows to 6.5%, and that 6.5% looks a lot more like March than it does the start in April. So our thought was, given that our April start while we're ecstatic about, and it's the best growth we've seen in years, frankly. What we did was target our midpoint to the growth we saw in March, which was the non-weather impacted month during the quarter.

Yes. That makes sense. And then just make a comment on Protiviti in the second quarter. What would be included in the guidance, would it be similar year-over-year growth that it was in the first quarter?

The guidance for Protiviti, again as the comparisons in Protiviti are the toughest that we have, we would have those growth rates slowing a little bit, but still staying nicely double digit.

Cool. Okay. Thank you.

Tim McHugh, with William Blair and Company.

First, just on the SG&A leverage at this point, SG&A for the staffing operations were down a little bit, and I know you've been investing ahead of growth, which now you seem to be having. How should we think about it from this point? Were you pulling back on some investments and as growth picks up here, do you double down on investment, reverse that and invest even more, or will you leverage it, just trying to think about SG&A leverage the next year or so?

We talked on the last call and prior about how we front-ended to some extent our headcount investments in the middle part of 2013. So for the first quarter of this year, we held our head counts pretty flat, so you've got some leverage from head counts being flat.

In the aggregate, SG&A came down a little bit primarily because of things like travel, meals, printing, those kinds of costs in the fourth quarter are typically higher. It's budget season, it's holiday time, you're printing stuff for the following year, so it was those costs that came down on an absolute basis. If you look at our payroll costs for our staff, they were pretty flat.

As we go forward in the second quarter and the rest of the year, the thought is we will continue, we will begin to add staff again, but not disproportionately to the growth we expect. So the staff we expect to add, at least in the second quarter, we expect to be commensurate with the revenue growth that's implicit in our guidance, which would say [with] SG&A, we should get a little leverage just because we're going to lever the fixed costs more with growth, but from a payroll cost standpoint, as a percent of revenue, they should stay pretty constant.

Okay. And then I guess just as we, go forward, where at a high level are we with IT staffing investment you've talked about the last couple few years, in terms of building out a bigger overhead? Have you seen enough growth to absorb that or is that still an overhead cost that we need to grow into more the next year or two here?

Well, we have invested more in our internal IT staffing headcount. We think that's paid off nicely. I would say our investments from this point on would be more commensurate with the revenue growth, which still remains double digit, but it won't be as out sized to revenue growth as it's been in the past. But we still have a bit of an operating income drag from Robert Half Technology as it has a relatively higher headcount than our other divisions, but we think that's money well spent.

So all together, do you think SG&A expense for the temp and perm businesses, that's the part as I look at the income statement where you still seem to have a fair amount of leverage relative to the prior peak, do you think as you're seeing growth pick up, is the prior peak of SG&A in terms of revenue a reasonable number that you might be able to get to as growth gets better?

We're hopeful we can do better than we did at the prior peak, but we'd be very disappointed if we don't do at least as well.

Okay. Thank you.

Jeff Silber of BMO Capital Markets.

Just wanted to go back to Protiviti, it looked like you had some diverging trends where US growth was fairly strong and international business was flat. Can you just give us a little more color [as to] what was going on in the different regions?

The US was particularly strong. The US has much more diversified revenue sources than does international. They have more exposure to FSI risk and regulatory. They have more exposure to IT security and because they have more exposure to those high growth areas, you're going to see more growth in the US than outside the US.

We continue to do reasonably well in Europe. Our challenges remain in Asia. We're making progress in Asia, but there's more progress to be made.

All right. Fair enough. And just a couple quick modeling questions. What should we be using for tax rate for the rest of the year, and what are you budgeting for capital spending? Thanks.

Tax rate, mid 39% in that range. It's higher as we've said because the foreign tax credits that we had last year have been absorbed. CapEx, we talked about $60 million to $65 million for the year. It will be a little back ended so it might be a little light the first half but we'll catch it up in the second half. But it's in that range.

All right. Great. Thanks so much, Keith.

Sara Gubins with Bank of America, Merrill Lynch.

In light of perm fees, how are temp-to-perm fees trending?

Temp to perm is pretty stable. We have talked about traditionally it's a range of 3% to 5% of revenue in each of our temp lines of business. We've been bumping along at around 3% for many quarters, and there wasn't much change during the quarter.

We're very pleased that if you look at our pay bill spreads, our pay bill spreads are essentially back at peak levels. What isn't back at peak levels are temp-to-perm conversions, and further we're carrying a higher fringe cost today than at peak levels because, as you know, for state and Federal unemployment, there's a lag between the claims and your rate, so we still have a much higher state and Federal unemployment cost today than we did at peak. I think there's about a 50-basis point differential, which should be some upside as the cycle improves.

With the combination of more conversions, and less fringe or unemployment costs, we feel like we've got some upside in gross margin and that's assuming we don't make any more progress with pay bill spreads, which we will certainly attempt to. And as pay rates begin to rise, which we're starting to see, that typically is the backdrop where we expand our pay bill spreads. So a lot of good news on the cycle front with the progression during the quarter and then we're just delighted with the first couple of weeks of April.

Great. And then a question on gross margins in temp staffing. You have more international today than in the past. So I'm wondering as you think about gross margin potential for temp staffing over time, would you expect to go back to prior peak? How does international impact that?

Well, I guess the comments I make hold globally. Our gross margins are a bit higher in the US, but as you look at the future growth non-US, it's going to be concentrated in countries like Germany and Belgium that have higher than non-US average margins. Therefore, if anything, mix would be your friend relative to status quo. So I certainly don't expect a drag on gross margin expansion because of non-US mix given the countries [where] we expect that growth to occur.

Great. Thank you.

Paul Ginocchio with Deutsche Bank.

Keith just one clarification, you talked about the bill rate up 2.6%, then you made another comment about 1.7%, was 1.7% the last quarter?

It was the last quarter's increase year-over-year. So fourth quarter is up 1.7%. First quarter it's up 2.6%, and its pay rates are up commensurately, so we're starting to see some pay rate increases in earnest as the Canada situation begins to tighten.

We're having to pay more. We're seeing higher pay rates. We're seeing higher bill rates that pass that on, and we think that's a good sign relative to the cycle.

Great. And just quick on, I know it's not a big part of your business, but the mortgage processing, when do the comps get a lot easier in mortgage processing, is that in the third quarter?

Well, so let's split mortgage into two distinct pieces. One was the foreclosure look back, and we anniversaried that in early January.

The other is refinancing ordinary course, so that's drifted, it's drifted down a bit the last few quarters, but it hasn't had anywhere near the cliff impact that the foreclosure look back has. It was a little bit of a headwind for Accountemps during the quarter, but nothing like the foreclosure look back.

Right. And based on the run rate now, when does it no longer become a headwind?

Well, again, it wouldn't otherwise register, such that we're not going to make a big deal out of it, but it did drift down a bit in the first quarter.

Thank you.

Hamzah Mazari with Credit Suisse.

This is Anj Singh dialing in for Hamzah Mazari. I was wondering if you can give us an update on ACA, and if there's any further activity you're seeing there beyond what you saw with healthcare providers and insurance companies last quarter?

There's not a lot of update. As you know, the law got deferred, so for employers between 50 and 99, they don't have to comply now until January of 2016 rather than January of 2015. So the strategy to stay below 50 for companies [that are] close essentially got pushed back for yet another year, so we've seen a little activity there, but not much. As we talked about last quarter, primarily in OfficeTeam, primarily in customer service, we have seen some demand from both the exchanges and from insurance carriers. That demand continued in the first quarter, but it doesn't move the needle in a major way.

Okay. That's helpful, thank you. And then as a follow-up on the perm growth, how sustainable do you see that trend being, and can you call out any particular pockets of strength there? And also do you still have the same view on your headcount investments on the perm side of the business as you did prior, or is there any change to that?

Well, it's not atypical that perm gets hit harder on a down cycle and grows more rapidly back to prior peaks, so as we sit here today, we're at 90% of peak on the temp side, we're at 80% of peak on the perm side. That's globally, US is obviously better. But the point is it's not at all unusual seeing perm out growing temp given where we are in the cycle., And we're not a bit afraid to invest in headcount in perm as we've talked about in the past, but it's an investment that we think will be commensurate with the revenues we expect.

Okay. That's helpful. Thank you.

Tobey Sommer, with SunTrust.

I know most of your customer concentration is focused on small and mid-sized businesses. Are you seeing any distinguishing features of demand by customer size to the limited extent you have exposure to larger businesses?

Well, we have some exposure to larger businesses, but it's usually in small quantities or a smaller number of temporaries per client than many of the other staffing firms. We know best the small to mid-size market.

We clearly saw strengthening during the course of the quarter. Adjusted for weather, look at March on a stand-alone basis, look at the start of April, so clearly with our sweet spot, we see broad- based improving demand. I would particularly call out Accountemps, OfficeTeam, Management Resources, those saw a lot of strengthening the latter part of March and the early part of April, which we're delighted by. As I said earlier, so while we do business with larger firms in smaller quantities, what we know best is small to mid-size, and it's the best trend in demand [from] small to mid-size we've seen in several quarters.

Is there any discernible variation in the duration of your assignments? Or perhaps said a different way, strengthening in demand of assignments and professionals engaged in longer term projects?

Our mix, the duration of our assignments overall hasn't changed dramatically, nor as the mix between small to mid-sized businesses and semi-larger firms, so I don't think there's any discernible trend or change that we would call out.

Thank you very much.

Gary Bisbee with RBC.

Can you give us a sense of how much of the Protiviti revenue base now is outside of the historical, I guess still core F&A area? You've said a few, the last few quarters audits have actually been among the strongest areas, but has a mix of IT and the financial compliance risen sharply in the last couple of years?

Well, certainly IT and risk and compliance have come on, but the last couple of quarters internal audit has been even stronger, such that when you look at our mix of business between the two, it hasn't changed dramatically. The largest single segment is internal audit and financial advisory, which would also include some Sarbanes-Oxley, but IT consulting and risk and compliance have made meaningful contributions.

Okay.

They've all been good. The relative size of each hasn't changed much because they've all been good.

Okay. All right. Fair enough. And then, on the perm margins, they were the strongest they've been in a while, I assume that's just the slowdown in headcount growth, but as you grow in line with revenue as you talked about for the next quarter or so, is this a good area to be in, this 18.7% operating margin? Or is that number sort of over, maybe a little higher than it should be because of the no headcount growth this quarter and then it comes down?

Well, I'd say mid-to-high teens should be a sustainable level as long as we gauge headcount additions to anticipated growth rates. If we decide to get more aggressive, and add even more headcount, which would be a good sign, it might drift down from there, but mid-to-high teens, if you look back through history isn't a bad run rate operating margin for perm.

Okay. Fair enough. Thank you.

Randle Reece from Avondale Partners.

It seems like a lot of recruiters around the country attribute efficiency gains to technology they have implemented and Robert Half doesn't seem to be a stranger to that. Do you think that between that and some price compressions say in some of the areas like on-line advertising, have we seen the best that we're going to see as far as those costs improvements go?

Well, Randy, we spend a lot of time internally looking at how technology can better enable our people to do their jobs, and I would say we're optimistic that we can get some further efficiency gains from technology investments we're making today. Some of which relate to how we recruit candidates. Some relates to how we determine which leads are most actionable.

The online advertising cost savings are there, but they don't move the needle. But at the end of the day, we're optimistic that our people can get more productive with the assistance they can get with technology. But let's not forget at the end of the day, somebody has to close the deal, and we've yet to find any technology that's very good at closing.

That's something that stuck out in our research. By our count, there are fewer people in corporate America responsible for recruiting now than there were in 2007 and we're back to similar employment levels, but the hiring pace has been slow.

It looks like hiring and recruiting is still a very labor intensive business regardless of the technology you apply. Do you think that there is going to be a little bit more opportunity this time around as the labor market recovers because customers are so lean in HR?

Well, I think it is correct that they're leaner, and I think our client size has never made the investment in internal HR that other companies have anyway, because they rely on companies like us for that purpose. So I do think you could make a case that there's more upside as we move forward because the starting point has a leaner client investment in HR. I would also believe that we can get efficiency gains and have our people spend more time closing than identifying the population of candidates to determine which is the best fit for our clients.

Very good. Thank you very much.

That was our last question. We would like to thank you 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 Investor Center of Robert Half's website at www.roberthalf.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.