羅致恆富 (RHI) 2014 Q3 法說會逐字稿

Hello and welcome to the Robert Half third-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 get started, I'd 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 our 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 do now publish the prepared remarks for this conference call at the same time we issue our quarterly earnings statement. You will find these remarks on the Robert Half website at roberthalf.com. Simply click on the quarterly conference calls link from the homepage of the investor center.

Now let's discuss the third quarter. Third-quarter revenues were $1.22 billion, up 14% from the third quarter 2013. Income per share was $0.63, up 30% year-over-year. Cash flow from operations was $94 million during the third quarter. Capital expenditures were $13 million. We paid an $0.18 per share cash dividend to stockholders on September 15, 2014 at a cost of $24 million. We also repurchased 1.2 million Robert Half shares during the quarter at a cost of $61 million. Approximately 5.5 million shares remain available for repurchase under our board-approved stock repurchase plan.

Demand for our staffing and consulting services accelerated during the third quarter, with all lines of business reporting double-digit year-over-year revenue gains. The strength in our operations was broad-based and included both US and international locations. This was Robert Half's 18th consecutive quarter of double-digit net income and earnings per share percentage growth on a year-over-year basis. Return on equity on an unlevered basis was 35% for the quarter.

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

Thank you, Max.

Global staffing revenues were $1.22 billion in the third quarter. This is up 14% year-over-year on a reported basis and up 13% on a same-day constant currency basis. Global staffing revenues were up 13% on a same-day constant currency basis. US staffing revenues were $807 million in the third quarter, up 14% on a same-day basis. International staffing revenues were $250 million in the third quarter, up 9% on a same-day constant currency basis.

We have 341 staffing locations worldwide including 99 locations in 18 countries outside the United States. There were 64.2 billing days in the third quarter compared to 64.0 days in the third quarter of 2013. This had the effect of increasing reported year-over-year staffing growth rates by 0.2%. The current quarter has 61.7 billing days compared to 61.9 days in the year ago fourth quarter. Currency exchange rates had the effect of increasing third-quarter year-over-year staffing revenues by $1 million and improving year-over-year reported staffing growth rates by 0.1%.

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, as well as on a same-day constant currency basis. This 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 that provides information on certain revenue trends in our operations.

Global revenues for Protiviti were $168 million in the third quarter with $138 million in revenues in the United States and $30 million revenues outside the US. Global revenues for Protiviti were up 18% year-over-year on a same-day constant currency basis with US revenue up 20% and non-US revenue up 11% from the prior year. Protiviti and its independently owned member firms serve clients through a network of 76 locations in 25 countries.

Turning to gross margin, in our temporary and consulting staffing operations, gross margin was 36.9% of applicable revenues. This is up 70 basis points from the third quarter a year ago. The improvement includes higher pay/bill spreads, higher temp-to-hire conversion fees and lower payroll taxes and other fringe benefit costs.

Third-quarter revenues for our permanent placement operations were 9.7% of overall staffing revenues compared to 9.4% of staffing revenues in the third quarter a year ago. Together with the temporary and consulting gross margin previously discussed, overall staffing gross margin expanded by 80 basis points versus a year ago to 43.0%. Third quarter gross margin for Protiviti was $51 million, or 30.5% of Protiviti revenues compared to $42 million, or 30.5% of Protiviti revenues one year ago.

Staffing SG&A costs were 31.7% of staffing revenues in the third quarter versus 32.6% in last year's third quarter. SG&A costs for Protiviti were 19.0% of Protiviti revenues in the third quarter versus 20.6% of Protiviti revenues reported this time last year. Operating income from our staffing divisions was $119 million in the third quarter, growing 32% over the prior year and resulting in an operating margin of 11.3%.

Temporary and consulting divisions reported $98 million in operating income, an increase of 28% over the prior year and resulting in an operating margin of 10.2%. Operating income for our permanent placement division was $21 million in the third quarter, up 56% from the prior year and producing an operating margin of 20.9%. Third-quarter operating profit for Protiviti was $19 million, an increase of 40% from the prior year and an operating margin of 11.5%.

Our third-quarter 2014 income tax rate increased to 38.4%, up from 36% in last year's third quarter. This was primarily due to fewer available unused foreign tax benefits. At the end of the third quarter, accounts receivable were $657 million. Implied days sales outstanding were 48.8 days compared to 47.9 days at the end of the third quarter a year ago. Before we move to fourth quarter guidance, let's review the trends we saw in the third quarter and so far in October.

In the US, year-over-year growth rates for our temporary and consulting divisions accelerated in July, flattened in August, then accelerated in September. Also in the US, year-over-year growth rates for our permanent placement divisions accelerated in July, slowed in August then accelerated in September. Outside the US, year-over-year temporary and consulting staffing growth rates accelerated in July and August, and decelerated a little in September.

Permanent placement growth rates outside the US slowed in July, but accelerated in both August and September. For the first two weeks of October, revenues for our temporary and consulting operations were up 13% on a same-day constant currency basis compared with the same period last year, with US temporary and consulting revenues up 15% and non-US temporary and consulting revenues up 8%.

For the first three weeks of October, permanent placement revenues were up 10% on a same-day constant currency basis compared to the same period last year with US perm revenues up 10% and non-US perm revenues up 10%. We provide this information with the caveat that it's difficult to read a great deal into these trends given the short periods of time they represent.

We now offer the following fourth quarter guidance: revenues, $1.175 billion to $1.225 billion, earnings per share, $0.57 to $0.62. 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.

We were genuinely pleased with the Company's performance in the third quarter. Labor markets are stronger now than they have been in several years, particularly in the United States and most notably in the professional segments in which we specialize. We also saw growth rates accelerate in our non-US operations as a result of higher demand for our staffing and consulting services.

In September, the unemployment rate in the United States dropped below 6% for the first time since 2008 and the jobless rate for college degreed workers 25 years and older was less than half that rate. The temp penetration rate, which represents the number of temporary workers as a percentage of total US employment reached an all-time high of 2.1%. As noted earlier on the call, growth in our staffing operations was broad-based during the third quarter with all staffing and consulting divisions reporting solid year-over-year revenue gains.

Competition for experienced talent is intense right now in many cities, and in some occupations, the demand is growing faster than the supply of skilled workers. We are very good at locating hard-to-find talent for our clients, and I believe this is reflected in the higher demand for our services that we are seeing. Protiviti reported another strong quarter with double digit sequential and year-over-year revenue gains on a percentage basis.

Like our staffing operations, Protiviti's growth was broad-based within its various service lines including information-technology consulting, risk and compliance and internal audit among others. At this time we will be happy to answer questions. We would request 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)

Your first question comes from the line of Mark Marcon with Robert W. Baird.

Good afternoon. First of all, congratulations on truly a terrific quarter and great year so far. There are two questions I have. One would basically be around Protiviti. It's the second year in a row where we've seen this really terrific growth out of them. I'm wondering if you can frame for us how you think about the longer-term opportunity for Protiviti as we go out a few years and how we should think about what the potential is there, both in terms of the topline as well as the margin expansion.

Secondly, with regards to the temp gross margins, it sounds like there's lots of positives that are going in your direction and not anything that was truly one-time. I'm wondering if you think there is still lots of room for -- not lots but significant room, for more pay/bill expansion, and can you go into what the temp-to-perm fill rate was for that ratio relative to the normal ratios that you normally see?

Sure, Mark. As to the long-term opportunity at Protiviti, both revenues and margins, we are quite optimistic. They are very well-positioned in financial services, risk and regulatory, in IT consulting. Around controls, internal audit is also very strong, particularly with the PCAOB and COSO opportunities that they currently have. We think those have legs long into the future.

From a margin standpoint, we were very happy they got to double-digit operating margins this year one quarter sooner than they did last year. We've long stated that we believe on an annual basis they can get to double-digit margins on a consolidated global basis and we're still optimistic that they can get there sooner rather than later so we remain very positive about Protiviti.

And further, Protiviti's going to market together with staffing, particularly with Management Resources, we believe we have a very unique competitive advantage by having the ability to offer the continual services all the way from staff augmentation on one end to full outsourcing with deliverables on the other end in a way that no other staffing or consulting firm can do, quite frankly. On the temp gross margin point, as to what opportunity for expansion do we think we have beyond here?

We would make a couple of observations that while our conversions have improved a little bit year-over-year, we're still at the low end of the 3% to 5% traditional range. I think we were 3.1%, 3.2%, something in that category this quarter. Even at the midpoint of a typical range you have got almost 100 basis points of virtually pure margin there.

Further, the payroll tax, more specifically the unemployment payroll tax load that we are carrying is still 30 to 40 basis points higher than what we would see in the sweet spot of a recovery scenario, and therefore, we believe as this recovery continues that naturally our state unemployment rates will come down. Offsetting that to some degree, we do have ACA to deal with next year.

We think that's a very small single digit percentage headwind that we hope we can deal with bill rates, but that might provide a little bit offset to the upside we otherwise have from state unemployment rates. So net-net notwithstanding, we reported very strong temp gross margins this year, this quarter. We're still optimistic that they can expand further.

Terrific, thank you.

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

Thanks, good afternoon. The revenue guidance for the fourth quarter of 8.4% to 13% growth represents very strong growth, but not as strong as the third quarter. I wanted to get a sense of how you're thinking about the currency impact in guidance and whether you are expecting international to slow in the fourth quarter, if there are any other reasons for the slowdown? I'm trying to get a sense of the conservatism that's in the topline.

Right. We do believe that the midpoint of our guidance still shows strong growth for the fourth quarter. Officially we have taken the US and we've, at the midpoint, assumed that we continue the third-quarter growth rates intact with one exception. We had a large project just in which would negatively impact those growth rates just under one percentage point, but generally speaking a continuation of Q3 growth.

Non-US, we've conservatively assumed some constant currency deceleration, still have growth but not quite as much growth as we had in Q3, not for anything we've already seen out of the gate. We have done pretty well non-US. But instead, for things that you worry about given all the mixed sentiment signals that are out there now about Europe. As to currency, our reported year-over-year growth rates will decline by about two points if currency exchange rates stay at their current level.

When you put everything back together again, the reported deceleration in growth that you referenced is principally due to currency and further due to some conservatism for the constant currency growth rates outside the US. Just a few other comments on guidance while we are talking about guidance. For temp gross margin at the midpoint, there's still 30 to 40 basis points of year-over-year improvement.

That's not as much improvement as we just reported because, remember, a year ago we had a $2.7 million workers' comp credit that gave us a 30 basis point lift in fourth quarter a year ago gross margins. This year we have assumed no credits or debits in workers' comp. The actuaries are doing their work, and we don't know what the outcome of that is. Further, as to SG&A, because the fourth quarter is a shorter quarter, there is some negative leverage on operating costs.

That happens every year in the fourth quarter. Further, we turned the spigot up hiring-wise in the latter part of the third quarter which continued into the fourth quarter. So we will have a higher load for staff costs in the fourth quarter than we would otherwise have such that, again, at the midpoint on a sequential basis, you're going to see SG&A up 60 to 70 basis points but on a year-over-year basis, it's going to be down 40 to 50 basis points consistent with what you've seen lately.

Protiviti, the growth rates seem slightly lower due to tougher comps. Gross margins seem slightly lower as they have aggressively added campus hires during the third quarter, plus they've added some MDs. We still believe we can maintain double-digit margins in the fourth quarter as we have in the past.

Finally, as to the tax rate, we would expect the fourth quarter tax rate to be down 75 to 100 basis points to the mid 37 percentages plus or minus 50 basis points principally due to foreign tax benefits. And again, when I was saying down 75 to 100 basis points, I was comparing to the third quarter of 2014, not to a year ago. That is some color on the midpoint embedded into the guidance we've given.

All right, thank you. One quick follow-up question on the incremental hires that you started toward the end of the third quarter. Could you give us some more detail about where those were?

It was sprinkled across all our divisions. We talked last quarter about we felt like we got a little behind hiring recruiters in Robert Half Technology. Throughout the third quarter we added recruiters in Robert Half Technology. In fact, we felt like we got some payback from that pretty quickly and our technology growth rates actually accelerated during the quarter. We also did perm hiring and accountants hiring, in part because we hadn't added to the headcount there in the last few quarters that we otherwise could have. So pretty broad-based with a little focus on Robert Half Technology.

Thank you.

Your next question comes from the line of Andrew Steinerman with JPMorgan. Please go ahead.

Hi, it's Andrew. I wanted to ask a little bit about Accountemps. This is really a division, our largest division that really kicked into place in the third quarter. What do you think the timing is now for Accountemps looking at the third quarter and then seasonally speaking, Accountemps is usually strongest into the fourth quarter on a same-day basis. Could you just give us a sense of how Accountemps has entered the fourth quarter?

Accountemps enters the fourth quarter with nice momentum. Across-the-board, across our temp divisions, we saw acceleration in the third quarter as the macro for our small-to-middle-size business clearly improved. It was broad-based. It wasn't just California, it wasn't just Texas.

It was much more broad-based than it had been in prior quarters so it is no one thing, which is a good thing. But it is net broad-based and we do take momentum into the fourth quarter which is why the midpoint of our guidance assumes we take the same growth rates that we experienced in the third quarter into the fourth quarter as well.

And that was an Accountemps comment or that was an overall comment?

That was an Accountemps comment, but we make virtually the same comment for all the divisions. As I alluded to earlier, our Management Resources division grew much faster than the other divisions because it benefited from a large project and that large project has now ended. It impacted the Management Resources division by about 6.5 growth points, but overall that is less than one growth point, and we think that's easily absorbed just in the ordinary course with what is going on in the fourth quarter.

Right, and with Accountemps you expect normal seasonal uplift in the fourth quarter?

Again, on a same-day basis, yes, but understand it's a short quarter so the two tend to negate each other on a reported basis.

I got it. Thank you so much.

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

Hi, guys. Good afternoon. I want to dig a little bit into the international business. Very strong acceleration sequentially and that's a bit surprising relative to what a bunch of the other global staffing companies have mentioned in terms of softening in the last six weeks. I know your mix is better on a bunch of levels, but anything you can point to for driving that strength? Or is it really continuation of the comments you made in the past few quarters? Thanks.

We typically talk about our largest six countries outside of the US and every single country accelerated in growth versus the second quarter. Further, Germany and France showed the most acceleration, but the UK had the strongest absolute growth rate, which has been strong for many quarters in a row.

If you further look at their outlooks for the fourth quarter, to a country, they are strong. That said, particularly continental Europe, their confidence in their forecast was shaken a bit by all the German export declines, German manufacturing declines. So the headlines tempered their enthusiasm for their forecast a bit, but both their post-quarter results and their own forecast would remain strong, everybody is just being more cautious.

Okay, great. The follow-up question, back to the Protiviti margins, you're obviously driving terrific topline growth and getting SG&A leveraged. I think for the last six months the gross margin has not gone up a lot. Is that indicative of you getting utilization back to a level that's a reasonable level for growth and investment or is there still room over time to increase gross margins in that business as well? Thank you.

As we've talked before, there are really three levers in gross margin. It's your bill rates, it's your leverage ratios, how many managing directors do you have versus lower-level staff people and it's your utilization. Our utilization rates are good. We have hired, on an investment basis, a lot of managing directors at the top of the pyramid in the hot solution areas. We also added more campus hires this past fall than we typically would because of our very strong growth rates.

So in the short terms, those have impacted our gross margins, but notwithstanding that, we've still gotten to the double-digit operating margins that we have been shooting for, for some time. So we are pleased with the operating margin level that we've achieved with Protiviti, notwithstanding the people investments that we have made for future growth which we're very optimistic about.

Great, thank you.

Your next question comes from the line of Paul Ginocchio with Deutsche Bank.

Thanks. As I look through all those constant currency, same-day billing-day growth rates, the only thing that slowed down into the third quarter from the second was international perm placement. What markets slowed? It sounds like that kind of corrected itself toward the end of the quarter? Is that the right way to think about it and do you often see divergences internationally between perm growth and temp growth? I was surprised that perm was strengthening a little bit as you read about it, but then it seems like temp was decelerating. Thanks.

I would say it's not uncommon to see divergence between temp and perm growth rates, particularly quarter to quarter. If our country leaders were on the call, they would say that for perm, they would like to have more headcount than they have been given and that's had the effect of constraining their growth. But they would also probably tell you that every quarter since the beginning of time.

The point is perm versus temp is going to ebb and flow quarter on quarter. We don't believe there is any message there, any signaling message as to the future by looking at temp versus perm and we are looking hard at the headcount, we're allocating to perm outside the US, particularly in the UK where they have been very strong.

Great. What perm markets slowed down in the third quarter relative to the second internationally?

Paul, we typically don't get into country by country perm versus temp. We have given you a lot of data country by country as it is.

Okay, great. Thanks.

Your next question comes from the line of Tim McHugh with William Blair & Company. Please go ahead.

Yes, thanks. I just wanted to ask on the gross margin, you said conversion fees were still at the low end of the range. What changed, is the question I still had. I heard your explanation earlier, but is it just the bill rate increases -- the bill/pay spread has widened even further as you have executed that?

If you look at the 70 basis points of improvement year-over-year, while not exact, but it is pretty evenly split between the three components I talked about: pay bill spreads, conversions and the payroll tax/fringe load. On a year-over-year basis, it's not exact, but it's pretty evenly split between those three.

Okay. On the technology side, you talked about you saw a quick payback and I know you are adding people. Do you still feel understaffed in that area relative to being able to find people or are you back to a good spot in that market?

We remain bullish on the technology staffing market. It is still a candidate-driven market for which you need more recruiters. To continue to grow that business at the rate we're growing it, we will need to continue to add recruiters, which we plan to do so. But clearly, it is easier to get orders than it is to find candidates, and that is particularly true at the development side: app development, web development, software engineers, the higher-level tech skills.

Okay, thanks.

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

Good afternoon, it is Henry Chan calling in for Jeff. I'd like to dig in a little bit about your comments around healthcare costs. Do you have a sense of when you might pass along some bill increases or when you might see some increases in costs as a result of healthcare? Thanks.

We will have to comply effective January 1, 2015, and that will be based on a one-year look-back of who met the thresholds during 2014.

Got it.

We estimated many months ago what that cost would likely be and it's scary how close we still believe the cost to be virtually the same as what we early estimated.

And it's still a very low single-digit percentage increase to our cost, which we are cautiously optimistic that we can pass through to our clients. And frankly, it is a lesser cost increase then we've dealt with in years past as unemployment rates increased, which gives us even more confidence that we can manage through the additional cost for ACA.

Got it, okay. That's great. Thank you.

Your next question comes from the line of Randy Reece with Avondale Partners. Your line is open.

Good afternoon. I was wondering if you are looking at your markets on the demand side, what is good, better than it has been, beyond demand that's sparked by regulatory compliance? Are we seeing the long-awaited small business hiring recovery in your business?

I would say you put your hands on it, Randy. We do believe the macro for our small business, middle-sized business clients is improving and the demand is broad-based. Further, if you look at accounting operations versus financial positions, we're seeing strength in accounting operations which is more volume driven on the part of our clients.

As our clients have more transactions to process, they need more accounts payable, accounts receivable, payroll, and it is those positions that we're seeing near-term strength in, which is further indicative of our clients seeing increasing demand on their side.

Thank you very much.

Your next question comes from the line of Anj Singh with Credit Suisse. Please go ahead.

Hi, thanks for taking my questions. I just wanted to ask on the ACA question earlier again, you said that the single-digit headwind is in line with your estimates. If you can offset it with bill rates, I'm wondering if you have already had any discussions around that with your clients and if you do think you can pass it off, how many quarters do you think it might be till that headwind can be offset by the bill rate increases?

As to discussion with clients, we typically would not start those discussions at this time, although we are certainly beginning to. Frankly, given the turnover and the duration of assignments, it's with the next new assignment that you pass through the new mark-up percentage rather than necessarily repricing the assignments in process. For that reason, it might take two or three quarters to get there fully, which is not unusual if you look back on how we dealt with unemployment cost increases which we've had to pass through in the past.

Got it. On Protiviti internationally, I was wondering if you can call out what drove the big step-up in growth in Q3, if there's any particular practices that are driving the growth? I realize you are seeing tough comps at Q4, but wondering if you can give us a sense of how sustainable that is for your international business?

I would like to tell you that we have got double-digit growth rates in Protiviti non-US and those are here to stay, but the truth is if you analyze the numbers, they had particularly weak comparisons a year ago in the third quarter and those weak comparisons get stronger in a hurry such that for the fourth quarter, I wouldn't expect anywhere near those kind of growth rates for Protiviti non-US. That said, Protiviti overall, those growth rates are wonderful.

All right, that's it from my end.

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

It sounds like for the numbers you laid out between conversions and payroll tax relief, there is about 150 basis points of incremental margin on the temp side. Is that a way to think about it over the course of the rest of the up cycle? I wanted to make sure, when you talked about the workers' comp accrual, if there is a benefit, we'd see that in Q4? I'm assuming that's not in the guidance, right?

Okay, on the temp gross margin upside, 100 to 130 basis points, we can round up to 150 if you would like, would be a reasonable expectation over the remainder of this up cycle and whether that's a couple, three years or precisely how long that is we could all conjecture. It is in that order of magnitude and the math's very simple. It is about 100 basis points from conversions and the balance is from a smaller load for payroll taxes, primarily unemployment.

As to workers' comp, we will record in the fourth quarter once the actuaries do their accrual evaluation, whatever they say we need to mark that to market. We do that twice a year, we've done it twice a year for many years. A year ago we had a very nice credit. This year we don't know whether we're going to get a credit or a debit. But whatever we get, we will book it in the fourth quarter. It's not in our guidance and we will tell you what it is or what it was.

Super. I don't know if you will give this or not, but how many basis points of investment were sapped within Protiviti for the year through these hires and incremental, campus hires, things like that. To put it another way, if you didn't make those hires, what type of margins would we be settling in on the Protiviti side?

Quite frankly, the best thing that can happen is that for the foreseeable future, we remain so optimistic about our future that we continue to make those investment hires and you see the kind of margins into the future you see today. Again, for the last two quarters now, we have had double-digit operating margins notwithstanding those investments and to be growing between 15% to 20%, which they are growing. And to have operating margins in the low double-digit rates, we are quite happy to have for quite a while.

Understood, thanks.

(Operator Instructions)

Your next question comes from Tobey Sommer from SunTrust.

Thank you, I was wondering if you could update me on the bill rate growth in the quarter and maybe the sequence of how it has progressed so far year-to-date?

For the quarter on a global basis, bill rates are up 3.4% and at first blush that looks like it is less than last quarter's 3.5%. There is a currency impact there and adjusted for currency, the bill rate increase would be 30 basis points higher, not 10 basis points lower. Said differently, if you just focus on the US, we are continuing to see pay and bill rate increases.

Those are most noticeable in Robert Half Technology and in Robert Half Management Resources, but we are seeing it to some degree across the board which is yet another indication to us that this recovery is beginning and continuing in earnest, which we are pleased about and is reflected on all our growth rates.

Thank you. You cited internal hiring in picking up the pace in Protiviti and other areas. Does the market opportunity cause you to think about any inorganic means to spur growth? I'm curious particularly on the perm side where you've done a real good job, I think, of growing that business.

Well, we often look at small acquisition opportunities and it typically boils down to our evaluation of the quality of their people and to the extent to which they would assimilate well into our cultures. We have long focused on organic growth and internal growth, but over the years we have done many small acquisitions.

Protiviti did a couple last year in the SharePoint area, which continues to do well. We are not anti-acquisition, but we are very selective and given our 35% return on equity, which we are also very proud of, we believe over time our focus on primarily organic growth has paid off. That being said, we are always looking for good deals.

Thank you very much.

Your next question comes from the line of George Tong with Piper Jaffray.

Good afternoon. Digging deeper on margins, could you comment on how you think about the structural ceiling to margins, if that's changed versus prior cycles and what potential factors could drive gross and operating margins above prior peaks?

If you walk up and down the P&L, as we've talked about, we think there is 100 to 150 basis points of margin expansion for temp-to-hire conversions for smaller payroll tax loads. We further believe, from an operating leverage standpoint, as we grow our topline, our fixed costs will be better levered not only on the staffing side but on the Protiviti side.

So as we are approaching all-time high margin percentages, we would be very disappointed if we don't go well beyond those, although we are hesitant to give any forecast as to how much beyond prior peaks we'll take them. We'll take them to where we think they make sense, and we will balance reporting in our quarter-by-quarter operating margins against making investments for future growth that we do every quarter.

That's very helpful. Could you talk about your performance in Europe, specifically as it relates to the UK, Germany and France, whether the strength there was due to market share gains or generally improved market conditions?

It's hard to pinpoint the precise answer to your question. That said, it is our belief that it's some of both. If you look at our growth rates and if you look at the growth rates in those markets overall, we're growing faster. You could easily then deduce that we are gaining market share. That said, those markets have been recovering the last few quarters, the extent to which that continues is obviously the debate of the last several weeks.

Thank you.

Our last question is a follow-up from Paul Ginocchio.

Thanks for taking my question, my follow-up. A while back I thought about ACA driving some demand. We're certainly seeing that in the PEOs. I'm wondering if you have had any updated thoughts as we move into 1/1/ 2015.

We are not seeing any hard demand from clients where they're explicitly trying to avoid the thresholds to comply with ACA. That said, we are seeing a fair amount of demand for companies' open enrollment where they are tweaking, changing their internal benefits plans in part because of ACA. As an example, many companies are going to these private exchanges to offer health coverage to their own employees and there's a lot of change management attached to that.

If you look at OfficeTeam, which has been growing very nicely and faster than many of our other divisions, if you had to look at one thing, it was the demand related to open enrollment, which at least indirectly relates to ACA. But it's not the very direct, where the client wants to avoid the number of employee threshold and therefore that's driving the ordering from us.

Thank you very much.

That was our last question. Keith and I thank you 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 this conference call replay. Dial-in details and the conference ID are contained in the Company's press release issued earlier today.