羅致恆富 (RHI) 2014 Q2 法說會逐字稿

Hello, and welcome to the Robert Half second-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, and 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 forecast, estimate, project, expect, believe, guidance, and similar such 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.

For your convenience, we have published our prepared remarks for this conference call on the Robert Half website, at RobertHalf.com. Simply click on the Quarterly Conference Calls link from the home page of the Investor Center.

Now let's discuss the second quarter. Second-quarter revenues were $1.16 billion, up 10% from the second quarter of 2013. Income per share was $0.55, up 21% year over year. Cash flow from operations was $105 million during the second quarter. Capital expenditures were $11 million.

We paid an $0.18 quarterly cash dividend to shareholders on June 16, 2014, at a cost of $24 million. We also repurchased 500,000 Robert Half shares during the second quarter, at a cost of $21 million. Approximately 6.8 million shares remain available for repurchase under our Board-approved stock repurchase plan.

We were pleased with Robert Half's performance in the second quarter. The Company's growth was broad-based and reflective of improving labor markets, and higher global demand for our professional staffing services. Year-over-year revenue growth rates accelerated nicely during the quarter, both in the United States and in our international operations.

Protiviti also continued to post very strong operating results. The highest sequential and year-over-year revenue growth rates were reported by our permanent placement operations and by Protiviti. This was Robert Half's 17th consecutive quarter of double-digit net income and earnings per share growth on a year-over-year basis. Return on equity, on an unlevered basis, was 31% for the quarter.

Now let's turn the call over to Keith for a more detailed review of our second-quarter financial results.

Thank you, Max. Global revenues were $1.16 billion in the second quarter. This is up 10% year over year on both a reported and same-day constant-currency basis.

Global staffing revenues were up 9% on a same-day constant-currency basis. US staffing revenues were $772 million in the second quarter, up 10% on a same-day basis. International staffing revenues were $242 million in the second quarter, up 4% on a same-day constant-currency basis. We have 342 staffing locations worldwide, including 99 locations in 18 countries outside the United States.

We had 63.2 billing days in the second quarter compared to 63.5 days in the second quarter of 2013. This had the effect of decreasing reported year-over-year staffing growth rates by 0.6%. The current quarter has 64.2 billing days, compared to 64.0 days in the third quarter a year ago.

Currency exchange rates increased second-quarter year-over-year staffing revenues by $4 million, and reported staffing growth rates by 0.4%. The strengthening of the euro and pound sterling were partially offset by weaknesses in the Canadian and Australian dollars.

We provided 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 information on certain revenue trends in our staffing operations.

Global revenues for Protiviti were $151 million in the second quarter, with $122 million in revenues in the United States, and $29 million in revenues outside the United States. Global revenues for Protiviti were up 14% year over year on a same-day constant-currency basis, with US revenues up 18%, and non-US revenues flat from the prior year. Protiviti and its 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 36.5% of applicable revenues. This is up 40 basis points from the second quarter a year ago. Higher conversion revenues added 16 basis points to gross margin, while the balance is due to lower payroll tax and fringe benefit costs. The second quarters of 2014 and 2013 include workers' compensation credits of $900,000 and $300,000, respectively, pursuant to third-party reviews of our workers' compensation accruals.

Second-quarter revenues for our permanent placement operations were 10.1% of staffing revenues, compared to 9.7% of staffing revenues in the second quarter of 2013. Together with the temporary and consulting gross margin previously discussed, overall staffing gross margin expanded by 70 basis points versus a year ago to 43.0%. Second-quarter gross margin for Protiviti was $43 million, or 28.4% of Protiviti revenues, compared to $37 million, or 28.6% of Protiviti revenues a year ago.

Staffing selling, general and administrative costs were 32.0% of staffing revenues in the second quarter, versus 32.5% in last year's second quarter. SG&A costs for Protiviti were 20.2% of Protiviti revenues in the second quarter, versus 21.9% of Protiviti revenues reported this time last year.

Operating income from our staffing divisions was $111 million in the second quarter, or 11.0% of staffing revenues. The temporary and consulting divisions reported $89 million in operating income, or 9.7% of applicable revenues. Operating income for our permanent placement division was $22 million in the second quarter, or 21.8% of applicable revenues.

Second-quarter operating profit for Protiviti was $13 million, or 8.2% of Protiviti revenues, compared to $9 million, or 6.7% of its revenues, in the second quarter of 2013. Protiviti operating profit increased 43% over the prior year.

Our second-quarter 2014 income tax rate increased to 39.2%, up from 37.3% in last year's second quarter. This was primarily due to fewer available unused foreign tax benefits. At the end of the second quarter, accounts receivable were $617 million, implied days sales outstanding was 48.2 days compared to 47.7 days at the end of the second quarter a year ago.

Before we move to third-quarter guidance, let's review the trends we saw as we moved through the second quarter, and so far into July. Our intra-quarter trends for the second quarter, measured on a year-over-year and same-day constant-currency basis were as follows:

Global temporary and consulting division growth rates accelerated each month during the quarter, with the US showing acceleration in April and June, and non-US locations showing acceleration in April and May. Global permanent placement division growth rates accelerated in April and May, then decelerated a bit in June. The US reported accelerating growth rates in April, and non-US locations reported accelerating growth rates in May.

For the first two weeks of July, revenues for our temporary and consulting operations were up 11% on a same-day constant-currency basis, compared to the same period last year, with US temporary and consulting revenues up 12%, and non-US temporary and consulting revenues up 8%. For the first three weeks of July, permanent placement revenues were up 6% on a same-day constant-currency basis, compared to the same period last year, with US perm revenues up 9% and non-US perm revenues flat. We provide this information with the caveat that it's difficult to read a great deal into these trends, given the short time periods they represent.

We now offer the following third-quarter guidance:

Revenues, $1,175,000,000 to $1,225,000,000:

Income per share, $0.55 to $0.60.

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, we were pleased with the performance during the quarter. Revenue growth was broad-based as a result of improving labor markets in many of the countries where we do business. We've seen notable improvement in Europe, for example.

In the United States, the unemployment rate is at its lowest level since September 2008. The number of temporary workers as a percentage of total employment reached an all-time high in June, which means that companies are using temporary professionals as part of their staffing mix to a larger extent than ever before.

The demand for skilled talent continues to outpace the supply in many of our specialty areas. Our strength is in helping companies locate and hire this hard-to-find talent. As a result, we saw a greater demand for our professional staffing and recruitment services in the second quarter. This was the case among our small- and mid-sized clients, in particular. These firms often lack an internal human resources function, and turn to us for help filling their open temporary and full-time positions.

As noted earlier on the call, Protiviti also had another excellent quarter. We were pleased to see continued growth in IT consulting, risk and compliance, and internal audit, in addition to Protiviti's other service areas. Protiviti has an excellent reputation in the marketplace, and has developed a very loyal client base. Better market conditions and a stricter regulatory environment are also contributing to the higher demand for Protiviti's consulting solutions.

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

(Operator Instructions)

Your first question comes from the line of Gary Bisbee with RBC Capital Markets. Your line is open.

Congratulations on the strong quarter and outlook. I know you give one quarter guidance, but if we were to think about the next couple of years, you have revenue that's approaching the prior peak levels. Your temp margins still are at a reasonable amount below those peak margins, but how do we think about the ability for margins to trend, if you were to continue to see healthy revenue growth for a while? Are there any puts and takes versus the last cycle, costs that have changed? Anything about the environment that would make it unlikely to exceed the prior margins? Or any commentary there would be helpful. Thanks.

Sure. On the temp side, our current margins are about 50-basis points below peak. That's notwithstanding that conversions are at the lower end of a 3% to 5% range, notwithstanding a little strength this quarter. So even to the midpoint, you've got 100 basis points of upside there. The fringe costs we have on our temporary payroll are high, now by 30 to 40 basis points, primarily because of unemployment tax rates that are high, post any downturn, and typically trail off as things improve. Further, as the labor markets improve, there's typically wage pressure. That wage pressure, so far, in prior recoveries, has allowed us to pass through not only that additional cost, but to expand our pay-bill spreads as well.

So in our mind, we have three sources of additional temp gross margin, as we go forward. At the SG&A line, the traditional fixed costs -- rent, depreciation, administrative compensation -- you typically lever, as you move forward in a recovery. On the perm side, we had nice 20%-plus operating margins this quarter. If you look back in history, we've had periods of sustained operating margins of greater than 20%. Look at 2005, 2006, 2007. We do think operating margins in the 20%-plus range for permanent placement are sustainable, and might even expand a bit as you lever the fixed cost of our recruiters, as you grow revenues.

And then finally on Protiviti, while Protiviti's operating margins expanded this quarter to 8.2%, our objective is to get them into at least double-digits. We saw double-digits in the fourth quarter of last year. We've seen a nice progression so far this year, and our hope is that we can get to a double-digit annualized operating margin in Protiviti. So quite frankly, we're pretty optimistic in all the major segments of our business. As things improve, not only will we benefit from the operating leverage of the additional revenues relative to our fixed cost, but we have other very discrete sources of additional operating margin improvement, as well.

Thanks for all that color.

Your next question comes from the line of Andrew Steinerman with JPMorgan. Your line is open.

I wanted to ask about internal investments, your own staff. I remember, in the fourth quarter, you made some headcount additions. In the first quarter, it was more holding steady on headcount additions, and I was wondering where you stand on that now. Are we adding to our internal resources, and if so, what will be the SG&A effect going into the third quarter?

Andrew, you're correct that in the first quarter we held headcounts fairly steady, although toward the back end of the first quarter, we did start adding more aggressively to staff. Given the revenue performance, the demand we're now seeing, we do intend to ratchet up our headcounts in the second quarter. From an SG&A and margin impact, that will have a modest negative impact on our incremental operating margins, and that's measured on a year-over-year basis in Q3, but it won't be dramatic. So we still think we can report very nice incremental operating margins in Q3, notwithstanding that we're going to ratchet the headcounts up, given the strong demand environment that, quite frankly, we're seeing on a global basis.

Could you just mention any skill sets, and is it more temp versus perm?

Well, the skill sets that are the tightest from a supply standpoint are in the technology segment, the applications developers, the database developers. It's the higher-level development side of technology. In Management Resources, it's the higher-level financial analyst, business systems analyst, anything to do with regulatory compliance. So we are clearly beginning to see more chronic skill shortages, but the past would say it's in those environments where we do best because we get our permanent placement fees, and it's harder for our clients to find candidates, either full-time or on a temporary basis. That's good for our temporary division, while they fill those orders temporarily, while clients look for full-time.

Okay. Perfect. Thank you, Keith.

Your next question comes from the line of Mark Marcon with Robert W. Baird. Please go ahead.

Congratulations on the great results. I was wondering if you could talk a little bit about two things: One, the trends that you're seeing internationally. You mentioned Europe was stronger. If there's any additional color that you can provide in terms of the countries that you're seeing that in? And then secondly, how we should think about Robert Half Technology in terms of the potential growth rates that you could achieve there? That's the only area that didn't accelerate, and I was wondering if there's anything specific that's occurring there because the results have been fantastic.

Okay. On the international front, we saw particular strength in the UK, and in Australia. We saw accelerating top-line growth in Belgium, in Germany, in France. The only one of our major six international countries that did not see acceleration was Canada. That decelerated somewhat. The labor markets up there aren't quite as robust as they are in the US. But five of our big six non-US countries all had nice accelerating growth, and that accelerating growth is baked into our guidance, to continue accelerating even more.

As to Robert Half Technology, the growth rates, while they did decelerate slightly from 9.5% to 8.5%, they weren't bad. Clearly, technology is the area that is the most supply constrained. We felt like we got a little bit behind with the headcount and our recruiters, and so part of what we did late second quarter and into this quarter was hire more recruiters in Robert Half Technology, as well as adding to headcount in our other divisions. But we felt like we got a little bit behind adding to recruiter internal staff, which impacted our growth rates a touch.

Great. Thanks for the color.

Your next question comes from the line of Sara Gubins with Bank of America-Merrill Lynch. Your line is open.

The midpoint of your guidance suggests about 11% same-day revenue growth, which looks like it's pretty close to where temp was in July, but above where perm was. Does the guidance expect perm to improve, versus what you saw in July? Or is it just that you're keeping it where it is, and maybe strong growth in Protiviti will make up the difference?

Well, I wouldn't get too carried away with a couple, three weeks of post-quarter performance. I think if you look back in time, and compare with hindsight how did we start a quarter versus how did the whole quarter pan out? While in temp, the early start is more predictive than in perm, neither one of them is terribly predictive. When we did the midpoint of the guidance, it shows some acceleration from what we reported in Q2, temp and perm, but not as much acceleration as is implied by our July start in temp, and not the deceleration that would be implied if you looked at our July start in perm. But again, if you go back and look with the benefit of hindsight, you would see that our post-quarter perm results are the least predictive.

That makes sense. Thanks. And then turning to Protiviti, 18% growth in the US on a same-day basis is very impressive. Can you talk a little bit more about where that's coming from? And what percent of Protiviti work is now being done in conjunction with one of the temp groups? Thanks.

Well, Protiviti was very strong in the quarter, and the nice part of that is the strength was very broad-based. Internal audit did very well. IT consulting, including security, business continuity, application controls did very well. And then financial services, risk and compliance, regulatory, anti-money laundering, model validation, they all performed quite well, and it was very broad-based, and we were very encouraged by.

As far as the work done in conjunction with our staffing divisions, while we don't publish that exact percentage, we can tell you that the picture there is quite positive. We have an ever-growing relationship between staffing and Protiviti. They go to market together. Protiviti relies on staffing to provide staff when it doesn't or can't otherwise fill the positions internally.

If you'll note, Management Resources was particularly strong this quarter, more so than any other division. Taking a page from Protiviti's playbook, they had a lot of success in the financial services risk and regulatory area, primarily anti-money laundering. So the strong demand that we see in Protiviti spills over to the strong demand we see in Management Resources as well. So we're very pleased not only with how Protiviti's doing in its own right, but also how it's partnering with our staffing divisions in going to market.

Thank you.

Your next question comes from the line of Jeff Silber with BMO Capital Markets. Please go ahead.

Sorry to focus on a small negative, but it looks like your Protiviti gross margins declined slightly on a year-over-year basis. Can you just give us a little bit of color as to why that happened, and is that something we expect to continue for the rest of the year?

So Jeff, that happened because Protiviti has added some higher-level managing directors to their cost structure, in these hot areas of their practice. In the short term, that depresses gross margin, but we think in the long term, it will do just the opposite. So for Protiviti to get the double-digit operating margins that it aspires to, that's got to come primarily from expanding gross margins, and we're very committed to seeing that happen. But in the short term, sometimes you make investment hires, and particularly at the managing director level, that depress your reported gross margins a little bit.

Okay. That makes sense. Just a quick numbers question. What are you budgeting for capital spending for the year and what should we expect for tax rates?

The tax rates would be in the 39% range, maybe a little higher, maybe a little lower, call it plus or minus 0.5 point. And on the CapEx side, we typically backload our CapEx, so we spent $23 million so far. I think the range we gave was $50 million to $60 million earlier. Maybe we'll be toward the low end of that range, but that's the range.

Okay. Great. Thanks so much.

Your next question comes from the line of Tobey Sommer with SunTrust. Your line is open.

Interested to know how you feel like the bill-rate environment may materialize, and how it may evolve over the next couple quarters, given that the demand environment is improving. And how you feel about your ability to harness those rising bill rates, and retain them in your gross margin, versus prior cycles? Thanks.

Okay. The good news on bill rates is that whereas last quarter, bill rates were up 2.6% year-over-year, this quarter, bill rates are up 3.5% year-over-year. So we are beginning to see some wage inflation. Typically, that's a good thing for our business, and our expansion of gross margins, as we talked about earlier. We're optimistic that higher wage rates mean higher bill rates, which means higher pay-bill spreads. If you look back in the last cycle, we had four or five years of uninterrupted mid-single-digit inflation that allowed us to expand our pay-bill spreads, and we haven't even gotten into that sweet spot yet. We're certainly moving in the right direction.

If you look at the last three quarters, year-over-year, we were up 1.7%. Then we were up 2.6%, and now we're up 3.5%. So it's clearly going in the right direction, but it's still below the sweet spot that we've experienced in the past, and when we've gotten to that sweet spot in the past, we stayed there four or five years. So we feel quite good about that. We feel quite good about our ability to manage and hopefully expand gross margins as we move forward in time.

Appreciate that. In terms of your efforts on the Robert Half Technology side, are you satisfied the company is keeping up with the market rate of growth? And do you have any intentions to substantially increase the number of recruiters you have there? Or do you feel like you've been kind of feeding the fire there, with fuel over the last several quarters and years, so that you're in a position to grow as you would like?

You'd always like more growth, whatever it is. And clearly, with Robert Half Technology, the demand is not a problem, as we speak. The issue is recruiting the candidates. As we said a few minutes ago, we got a little bit behind in adding to recruiters internally, and we're ramping that up somewhat. It's a long race, rather than hire huge numbers and then digest them over time, our style is to do it more steadily as you go along. We're pleased with the progress we've made with Robert Half Technology. We feel like the demand that in prior years was primarily focused on larger companies, particularly in application development, has now drifted down to our middle-market sweet spot, which gives us a unique opportunity.

At the moment, demand isn't the problem. The problem is getting the candidates. As I said earlier, we're in the process of adding to our recruiter base. But more growth is always better, and what the market is for technology staffing services, for companies that service middle-market companies, who knows what that market is.

Thank you very much.

Your next question comes from the line of Randy Reece with Avondale Partners. Please go ahead.

I wanted to talk about the level of conservatism of your guidance, over time. Just looking at the past few quarters, how have the moving parts changed in how you roll up your guidance? How many pieces are out-performing now? Is there some core that's driving the out-performance, or have you seen a broadening of success?

Well, I think for this quarter particularly, it's pretty broad-based. You look in the US, you look at temp, you look at perm, you look at non-US, you look at temp, you look at perm, you look at Protiviti, quite frankly, it's as broad-based as I can remember the out-performance. But it changes quarter by quarter, and every quarter, we do our best to give a range of where we think we'll perform, and within that range, we've done reasonably well.

There's a piece that I have a hard time understanding, and we all do, I guess. Within the brands, between US and other markets, if there is a hot spot, or something that really blew out your expectations, and I would think Accountemps was it this quarter.

Well, I'd say it was two-fold. Accountemps was very broad-based, three yards and a cloud of dust, where every little small business, in every market, there was better demand. In Management Resources, where the growth rate accelerated the most, it was most related to risk and regulatory-related assignments at some larger financial institutions, that were more discrete, and more limited to a smaller number of clients. But Accountemps was very broad-based, led by Texas and California, but frankly, virtually every market improved.

In Management Resources, do you have much participation outside the US, in terms of regulatory demand?

Well we participate. We certainly don't participate to the extent we do in the United States, and we also have the greater possibility of collaboration with Protiviti with financial services firms in the US, where we have more Protiviti exposure to financial services.

Within your guidance range for this quarter, is there more play in your assumptions for temp or perm?

More play, it's hard to react to. Perm seasonally is typically flat relative to the second quarter. Perm outside the US typically is impacted by August in Europe, which is a heavy vacation month. So perm, overall, is usually flattish. On the temp side, again, the summer months are pretty much flat with the prior quarter. It starts to get better seasonally toward the end of the third quarter. So I'm not sure how to react to where there's more play.

Perm is always a bit more volatile and harder to forecast than temp. But that's not unique to now. That's always been the case.

I'm just trying to figure out how the heck I'm going to get into your guidance range. Thanks.

Be gentle. (Laughter)

Your next question comes from the line of Tim McHugh with William Blair, Inc. Your line is open.

Just somewhat following up on some of the prior questions there, the Accountemps and strength in Management Resources. On the Management Resources side, what's the length or the sustainability of some of the upside there? Some of those large regulatory projects can flash and burn kind of quickly. Does it feel more sustained, or are there any large projects that we have to be aware of that drove some of the acceleration there?

There are some large projects in Management Resources, and the duration of those projects is unknown. So there is some risk that they fall off more discretely than our other projects typically would. As we sit today, we don't see that on the horizon, but the nature of the business is such that it could be the case. But, from an overall consolidated standpoint, Management Resources isn't going to move if one of those projects falls off. It's not going to move the overall needle in a huge way.

Okay. Is it fair to say it's not on the order of magnitude of the mortgage-related projects that you just finished comping against, or is it that big of an impact?

It's not on that order of magnitude. But from a Management Resources only standpoint, it definitely moved the needle, relative to that line of business.

Okay. And then as Europe is getting better here, how should we think about the profitability of Europe relative to the US, and in the context of how much room is there for leverage, as that comes back, as we think about that as a driver of margins the next couple years here? Is there a fair amount of underutilized capacity that you can leverage as that bounces back?

Well, I think the biggest upside is the fact that in Europe, we have more exposure to perm placement than we do in the United States, and Europe has more operating leverage inherently than is the case in temp. So as Europe improves, perm will improve, and as perm improves, you'll enjoy the higher operating margins we get from the perm business. Further, as Europe improves, you'll see more temp expansion in Belgium and in Germany, where we get better temp margins than we do in our non-US locations overall.

So I do think there's some margin expansion that we could get from Europe, for the reasons I just mentioned. I wouldn't, however, place a lot of weight on that as we have a lot of excess capacity with our existing staff in Europe. Because quite frankly, we manage those headcounts fairly aggressively in the downturn, so there's not a huge amount of capacity utilization benefit to get, as Europe improves. We would instead have to add headcount, but, probably not disproportionate to the revenues.

Okay. Thanks.

(Operator Instructions)

Your next question comes from the line of Hamzah Mazari with Credit Suisse. Your line is open.

This is Anj Singh dialing in for Hamzah. I was just wondering, on a broader level, if you can comment on the temp penetration rates you spoke to earlier. We know they've reached or surpassed prior peaks, without really a strong cyclical driver. I was wondering if you have a view as to what rates might be reasonable to expect in this cycle, or what your general view might be as to what we might see in this cycle?

Without giving a specific percentage, we've long held that the temp penetration rate recovery has been principally secular to this point. The percentage of new jobs represented by temp jobs is much higher. In fact, double what it was in the prior recovery. And we, therefore, think what is ahead of us is the penetration benefit you typically get from a cyclical recovery, of which we've seen very little so far. So we're quite bullish that temp penetration rates for the entire industry, and for us more specifically, have the potential to go much higher than where they are.

Okay. Thank you. And one quick follow-up on perm, if I may. I was wondering where you are seeing most of your strength internationally? It seems like, in Europe, the environment there still hasn't quite recovered enough to have perm growth there in earnest. Wondering what you're seeing as far as perm growth or perm strength in Europe?

Actually, it's a very easy question to answer, because the UK is actually in a league of its own, as far as perm growth rates for Europe, broadly defined. We made a decision some time ago to focus, and provide resources to grow our permanent placement practice in the UK, and it's paid off quite nicely. We've had very significant growth in this quarter, and project it into next quarter for perm in the UK.

Okay. Great. Thank you.

Your next question comes from the line of Kevin McVeigh with Macquarie. Your line is open.

Keith, I think one of the big differences this cycle is that Protiviti seems like it's set up to peak in conjunction with the rest of the segments, as opposed to two years earlier last cycle. As you think about that from an EPS contribution, how are we thinking about that, number one, as we get later into this cycle? Then if you can, how much exposure does Management Resources, have to Protiviti today, versus the last cycle, 2005, 2006?

Okay. So we've told you that we want to get Protiviti's operating margins to double-digit. So given that, you can model the EPS benefit to the total you get versus in the last peak for the company, it was a post-SOX, it was during a SOX fatigue period, where Protiviti didn't contribute much to the bottom line. So I think you can do your own math, if you start with a model that has low double-digit Protiviti operating margins.

As far as the exposure or the cross-selling between Management Resources and Protiviti, now versus last cycle, clearly, one, Protiviti uses Management Resources contractors and staff on a much larger percentage of their engagements today than was the case, back in the last cycle. And in those situations, by the way, the revenues are reported by Protiviti. So if Protiviti has a client, and let's say they have five staff on their engagement, and one of those five is from Management Resources, in the numbers you see, all of that revenue is reported as Protiviti, and none of that revenue is reported as Management Resources. So Protiviti is clearly using more Management Resources' staff on their engagements, generally, today than they were in the last cycle. You see that in Protiviti, Management Resources is exclusive of any intra-company activity with Protiviti.

In addition, the situations where Protiviti and Management Resources go to market together, they literally join together and make a client visit and sell the full enterprise, all the way from staff augmentation to full outsourcing. There, it's a matter of who has the client relationship following from that meeting, following from those approaches, and that division that has the relationship is the division that reports the revenue.

Got it. And then if you gave this, I missed it, but how were conversions trending in the quarter? It sounds like they've lagged a little bit, relative to the rest of perm. Any reason for that?

Conversions are improving. We reported that I think it was they're up. They accounted for 16 basis points of the gross margin improvement, but they're still at the low end of the 3% to 5% of revenue, maybe not the absolute low. They come a bit off the bottom but still low traditionally. Perm and conversions march to their own drummers. They don't necessarily go hand-in-hand, but generally, as one improves, the other improves. So we don't feel differently about the future for conversions than we do for the future of perm itself. We think there's upside there.

Super. Thanks.

Our final question comes from the line of Gary Bisbee with RBC Capital Markets. Your line is open.

Just one quick follow-up. Despite the return of cash that you're doing, and the dividend and the buyback, the cash balance keeps growing. As we think out, looking forward, is the mix that you have had the last two years between the way you've grown the dividend and used excess cash for buybacks, is that a level you're comfortable with? Would you think about maybe raising the dividend a bit more? Any commentary on how you're thinking about that?

So the cash balance has grown a little bit. If you look for the first six months, I think we spent about 80% of our free cash flow on some combination of dividends and repurchases. So we're a little light of 100%, but not significantly light of that. As to the mix of dividends and buybacks, I think if you look at the last few years, you'll see that we've grown the mix related to dividends a bit. While this is a decision our Board makes every year, I think it would be reasonable to expect that, over time, we tend to favor dividends a little more, but 50/50, 40/60, 55/45, it's not grossly out of balance.

Thank you.

That was our last question. We'd 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 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. You may now disconnect.