羅致恆富 (RHI) 2014 Q4 法說會逐字稿

Hello, and welcome to the Robert Half fourth-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.

Hello, everyone. Thank you for your time today.

As is our custom at the start of our call, I would like to remind you that comments made on this 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 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-K's, 10-Q's and today's 8-K. We assume no obligation to update statements made on today's call.

For your convenience, we now publish the prepared remarks for this conference call at the same time we issue our quarterly earnings statement. You'll find those remarks on the Robert Half website at roberthalf.com. Just click on the quarterly conference call's link from the homepage of the investor center.

Now let's discuss last year's fourth quarter results. Fourth quarter 2014 revenues were $1.22 billion, up 13% from the fourth quarter of 2013. Income per share was $0.62, up 27% year-over-year. Cash flow from operations was $83 million during the fourth quarter, and capital expenditures were $27 million.

We paid a cash dividend of the $0.18 per share to stockholders of record on December 15, 2014 at a cost of $25 million. We also repurchased 800,000 Robert Half shares during the quarter, at a cost of $46 million. Approximately 4.8 million shares remain available for repurchase under our board-approved stock repurchase plan.

Robert Half finished the year strongly with broad-based revenue expansion across our staffing and consulting businesses. Fourth quarter 2014 revenues from staffing operations increased by 14% compared to the prior year (adjusted for currency), making this the fifth consecutive quarter in which growth rates have accelerated.

Protiviti results also remain very strong with fourth quarter revenues increasing 22% on a constant currency basis over the same period in 2013. While revenue gains were strongest in the United States, our non-US operations once again reported healthy year-over-year growth.

This was Robert Half's 19th straight quarter of double digit net income and earnings per share percentage growth on a year-over-year basis. Unlevered return on equity remained robust at 34% in the fourth quarter. Earnings per share of $2.26 for 2014 is the highest ever reported by the Company.

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

Thank you, Max.

Company-wide revenues were $1.22 billion in the fourth quarter of 2014. This is up 13% from the fourth quarter of 2013 on a reported basis and up 15% on a same day constant currency basis. Fourth quarter global staffing revenues were up 14% on a same day, constant currency basis. US staffing revenues were $816 million in the fourth quarter, up 15% on a same day basis. Non-US staffing revenues were $234 million, up 11% 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 61.7 billing days in the fourth quarter, compared to 61.9 days in the fourth quarter of 2013. This had the effect of decreasing reported year-over-year staffing growth rates by 0.2%.

The current quarter has 62 billing days, compared to 62.4 days in the year-ago first quarter. Currency exchange rates had the effect of decreasing fourth quarter year-over-year staffing revenues by $18 million and depressing year-over-year reported staffing growth rates by 1.9%.

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 that provides information on certain revenue trends in our staffing operations.

Global revenues for Protiviti were $171 million in the fourth quarter, with $142 million in revenues in the United States and $29 million in revenues outside the US. Global revenues for Protiviti were up 22% year-over-year on a same day, constant currency basis, with US revenues up 27% and non-US revenues up 5% from the prior year. Protiviti and its independently-owned member firms serve clients through a network of 74 locations in 25 countries.

Gross margin in our temporary and consulting staffing operations in the fourth quarter was 36.9% of applicable revenues. This is up 40 basis points from the same period one year ago. The fourth quarters of 2014 and 2013 include workers' compensation and other payroll-related credits of $2.4 million and $2.7 million, respectively.

Fourth quarter revenues for our permanent placement operations were 9.2% of overall staffing revenues, compared to 9.1% of staffing revenues in the fourth quarter of 2013. Together with temporary and consulting gross margin, overall staffing gross margin expanded by 40 basis points versus one year ago to 42.7%. Fourth quarter gross margin for Protiviti was $53 million, or 30.7% of Protiviti revenues, compared to $45 million, or 31.8% of Protiviti revenues, one year ago.

Staffing SG&A costs were 32% of staffing revenues in the fourth quarter versus 33% in the last year's fourth quarter. We ended 2014 with 11,200 full-time employees in our staffing divisions, up 9% from the prior year. SG&A costs for Protiviti were 18.3% of Protiviti revenues in the fourth quarter compared to 20.1% of Protiviti revenues reported this time last year. We ended 2014 with 3,300 full-time Protiviti employees and contractors, up 5% from the prior year.

Operating income from our staffing divisions was $112 million in the fourth quarter growing 28% over the prior year and resulting in an operating margin of 10.7%. Our temporary and consulting divisions reported $95 million in operating income, an increase of 26% over the prior year. This resulted in an operating margin of 9.9%.

Operating income for our permanent placement division was $17 million in the fourth quarter, up 36% from the prior year and producing an operating margin of 17.8%. Fourth quarter operating profit for Protiviti was $21 million, an increase of 29% from the prior year and producing an operating margin of 12.4%.

Our fourth quarter 2014 income tax rate increased to 37%, up from 35.6% in last year's fourth quarter. This was due primarily to fewer available foreign tax benefits. Accounts receivable at the end of the fourth quarter were $658 million with implied days sales outstanding of 49 days.

Now, turning to guidance. Before we move to first quarter guidance, let's review the monthly trends we saw as we moved through the fourth quarter of 2014 and so far in January. In the US, year-over-year growth rates for our temporary and consulting divisions were flat in October and November, and then accelerated in December. Also in the US, year-over-year growth rates for our permanent placement divisions decelerated in October, accelerated in November, and then decelerated in December.

Outside the US, year-over-year temporary and consulting staffing growth rates were flat in October, accelerated in November, and decelerated in December. Permanent placement growth rates outside the US decelerated in October, accelerated in November, and then decelerated in December. For the first two weeks of January, revenues for our temporary and consulting operations were up 17% on a same day, constant currency basis compared to the same period last year with US temporary and consulting revenues up 19% and non-US temporary and consulting revenues up 11%.

For the first three weeks of January, permanent placement revenues were up 19% on a same day, constant currency basis compared to the same period last year, with US perm revenues up to a 26% and non-US revenues up 2%. 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.

The higher 2015 post-quarter growth rates just noted include a benefit from the absence of harsh weather conditions experienced last year. We estimate this increased our year-over-year growth rates by approximately 2 percentage points.

We offer the following first quarter guidance: revenues, $1.195 billion to $1.245 billion; income per share, $0.53 to $0.58. 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 will turn the call back over to Max.

Thank you, Keith.

As previously noted we saw healthy demand across the board for our staffing and consulting services in the fourth quarter. Revenue growth was broad-based and extended to both our US and non-US operations. The US labor market has strengthened in recent months and skills shortages persist in professional disciplines such as accounting and information technology.

We are seeing similar trends outside the United States, although growth has been less robust. Employers in the United States added nearly 3 million jobs over the course of 2014, making it the best year for job growth since 1999. Secular trends continue to shape the demand for interim talent.

More and more companies are using temporary and consulting professionals as a permanent part of their human resources mix. In the US alone, nearly 3 million people work on a temporary basis every day. The number of temporary workers as a percentage of the total US workforce is also at an all-time high right now.

We remain bullish about Protiviti, as well. As Keith noted, global revenues for Protiviti were up 22% in the fourth quarter. Protiviti has a stellar reputation in the marketplace, and we are very pleased with how this business is performing. Protiviti's service lines include information technology consulting, risk and compliance, and internal audit, among others.

Looking at our business operations as a whole, we are optimistic. We believe Robert Half is well positioned to benefit in the current macro environment. We are making investments in people and infrastructure to support business expansion, and we are extremely confident in the ability of our field and corporate leadership teams to grow the business.

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

Thank you.

(Operator instructions)

Mark Marcon, RW Baird.

Good afternoon and congratulations on a great quarter and a great year. I have a question and a follow-up. I am wondering if you can address a couple of areas where the macro environment has been weaker or might seem to be tipping over. Specifically, what are you seeing on the Continent as well as within the US within the oil patch, Texas, et cetera?

And then, secondly, how are you thinking about your expansion of your internal headcount relative to what we ended up seeing at the end of 2014? You had 5% growth in Protiviti headcount with really strong revenue growth and obviously you over-indexed also in the other division. So how are you thinking about that? How much capacity do you have? Thank you.

Sure. On the first question about Continent, we had a very solid quarter in the international zone generally. On the Continent, we actually accelerated in Germany and in France. The UK stayed very strong, which it has for many quarters. It had tougher comparisons. But generally speaking, we were very pleased with our international operations including the Continent, where not only did it not decelerate, the growth rates actually accelerated during the quarter. And our outlook for the first quarter that we are in for international operations is solid as well.

As to the oil patch, we did see some slowing during the fourth quarter, which is logical. That said, that was more than offset by acceleration in other locations, notably places like New York accelerated nicely. So that taken together, we are not overly concerned about the impact of oil prices specifically as it relates to Oklahoma, Texas, Calgary, et cetera.

On the headcount front, during the second half of 2014, we pretty aggressively added to headcount that included the fourth quarter just ended. It is our plan to aggressively continue to add to headcount during at least the first quarter of 2015 and probably the first half of 2015 given the strong results we are seeing and given the outlook and momentum that we are experiencing.

Then relative to revenue growth on the staffing side for 2014 for the full year, headcount growth lagged revenue growth by a little bit. Protiviti is a little more nuanced. In the US, the headcount growth and revenue growth are more closely aligned. Outside the US, we've been more aggressive, cutting headcount [more] than what we have experienced with revenues. So, as to unused capacity, while we do have unused capacity, given the growth we're experiencing, we are planning to add aggressively to that capacity but not necessarily significantly faster than the revenue growth that we are seeing.

Great. Thank you. Can you just say how much of that oil patch is -- what percentage of the US that comprises? I imagine it's relatively less than 20%.

It is clearly less than that. We have never broken things out by state but generally you can look at relative population.

Sure.

And our relative revenues map pretty closely to that.

Great. Thank you.

It's not like that's the only thing going on in Texas either. So I wouldn't even take all of Texas and say well there is an oil patch issue there. Places like Dallas particularly are much more diversified. There are a lot of small businesses there. Healthcare is quite strong. Our people are optimistic that there are opportunities in the healthcare industry, which will help offset some of the softness that's expected in oil and gas.

I fully appreciate that. Thank you.

Andrew Steinerman, JPMorgan.

Hi there. I just wanted to ask you, Keith, to go through a comparison of the first quarter EPS guidance, the $0.53 to $0.58 to the just reported fourth quarter $0.62. Obviously, I know there is a seasonal factor, there's an FX factor, but if you could walk us through the $0.62 just reported, to the range of $0.53 to $0.58, and how you came up with the range? That would be helpful.

So, if we're talking fourth quarter actual versus first quarter guidance, I think that's what your question is.

Right. Yes.

So let's kind of take a tour down the P&L. From a revenue standpoint, on a same day constant currency basis at the midpoint, we've dialed in a touch of additional acceleration. As you can see, even adjusted for weather, we started January very strongly, which we're encouraged by. We didn't dial that much acceleration in, but we did while in a little bit of acceleration.

Protiviti, given its 22% growth in the fourth quarter, we dialed that back just a bit, in part because they had a couple of really good projects that are winding down a bit. And in part because it is 22%, and in part because they've got tough comps. But when you put the package together, revenues at the midpoint are still accelerating a percentage point versus what we just reported.

On the gross margin side, the fourth quarter's always noisy. Not only in the fourth quarter do you have the workers' comp true-ups that we talk about very specifically, but we're also truing-up estimates for state and federal unemployment taxes, for estimates on FICA, for estimates of the temporaries who qualify holiday and vacation pay. So the fourth quarter standalone is always a bit noisy.

That said, year over year, our temp gross margins did expand 40 basis points. We do expect further year-over-year expansion of gross margins into the first quarter, which is dialed into the guidance. And that expansion is the typical -- some pay bill expansion, some relief from state unemployment taxes, conversions are up about 20 basis points year-over-year, and we hope that trend continues. So, again, on a year-over-year basis, we do expect to see continuing gross margin expansion that we've seen for several quarters.

SG&A -- because of the investments we're making in headcount early in 2015, and remember early in 2014 we weren't investing very aggressively in headcount. So year over year as a percent of revenue, 2015 ought to look a lot like 2014 if we are talking at the midpoint.

Protiviti year over year, we do expect margin expansion sequentially. Protiviti always is more challenged in the first quarter than the prior fourth. That will be particularly so sequentially this year because of the big projects they had in the fourth quarter.

The other comment I would make is that the tax rate for 2015 we expect to be higher, more in the 39% range. The foreign tax benefits that we benefited from the last couple of years have progressively gotten smaller and smaller and smaller and will do so again in 2015. Maybe that's more than you wanted to hear, but that pretty much went from top to bottom.

I also asked about FX.

FX. So, during the quarter just ended it negatively impacted our growth rates by two percentage points. In the first quarter, we expect our growth rates to be negatively impacted by 3 percentage points or about $30 million on a year-over-year basis. From an EPS standpoint, that converts to about $0.01 per share and that's been reflected in the guidance that we gave. So while there's some drag from currency, it's certainly more at the revenue line than it is at the EPS line.

Perfect. Thank you.

Jeff Silber, BMO Capital Markets.

Thanks so much. I'm sorry. Just to go back to some of the investing in people that you have done. Is it possible to get an understanding which specific verticals did you do that investment in? Was there one more than others?

I'd say during 2014, Robert Half Technology probably got more than its share. We got broader during the second half of 2014. For 2015, it will be more broad-based than 2014. That said, our Management Resources division and our perm placement division seem to be doing particularly well. And, if anything, we'll be investing more headcount there than we will the other. But overall, it will be more broad-based than it was in 2014.

Okay. Great. That's helpful. And just a few numbers questions. Going back to your international exposure, can you just remind us which countries you have exposure to? And also what you're expecting for capital expenditures in 2015? Thanks.

Sure. So overall, international is about 24% of revenues; 12% of that's Europe, 4% of that's the UK, 4%'s Canada and the balance of 4% is Asia-Pacific. So Europe broadly defined is 16% of the total. Europe the Continent, is split pretty equally between Germany, Belgium and France.

And, CapEx for the year?

CapEx. We ended 2014 at $62 million. We do plan to dial that up some in 2015. The range we would give would be between $70 million and $80 million. We have more lease expirations falling in 2015, which require more tenant improvement dollars. Plus, we're continuing to spend money and make investments in internal IT initiatives, both from the standpoint of building tools for our recruiters and sales people and to improve the client and candidate experience on our website and across devices including mobile.

Okay. Great. Thanks so much.

Sara Gubins with Bank of America.

Hi. Thanks, good afternoon. I was hoping to ask some questions about gross margins. Protiviti gross margins were down year-over-year. You talked last quarter about making some investments in hires, particularly at the managing director level, so that may have been impacting the operating margins, but could you just talk in general about what you're seeing in pricing? And Protiviti, kind of the general cost at the margin level and then at the operating margin level.

So, first of all, let me say that we were elated that we almost for a full year got to double-digit margins for Protiviti. We got to 9.7%. We've talked now for a couple of years that our objective was to get double-digit operating margins in Protiviti. We have certainly gotten there on a quarterly basis. For the fourth quarter we were above 12 in Protiviti. Again for the full year just under 10. It would be our hope in 2015 that we get over 10% on a full year basis.

When we focus just on the gross margins, you are correct, there was a little contraction in the gross margin. Given Protiviti's revenue growth rates, which have been in essentially the highest in the company now for several quarters, they're making the most people investments. And their people investments tend to be higher cost people investments with managing directors. We continue to make those types of investments, and it's a trade-off we're happy to continue to make given the expanding operating margins and the expectation of that continued expansion.

Great. Thanks. And then there are a number of components that have been helping drive gross margin improvement in staffing, bill pay spreads, temp to perm conversion, et cetera. Could you talk about bill pay spreads and then also where you see the most potential from the various drivers going forward? Thanks.

Sure. So, on a year-over-year basis, for the fourth quarter, our spreads were pretty much level with the prior year. Conversions were up roughly 20 basis points versus the prior year. But still, on the low end of the 3% to 5% of revenue range. So it's our hope that there is still 100-ish basis points of upside with conversions to get back to more normal cycle, 4% of revenue much less 5% of revenue, which we have seen in prior cycles.

The payroll tax and fringe area, year-over-year, is also down about 20 basis points. That is primarily less state unemployment tax as we've talked about as the cycle improves. There's a lag as to when you see the benefit on the state unemployment taxes, which typically are a three year moving average calculation at the states.

Our expectation is that moving into 2015, we'll continue to see some further improvement in state unemployment taxes. 20 to 30 basis points would be our expectation over the next two or three years. How quickly we get there in part will be a function of how robust the recovery is. We're still bullish on gross margins as I said earlier. We expect that, at our midpoint guidance, we have dialed in further year-over-year expansion. of temp gross margins, in, frankly, each of the three elements that you described.

Great. Thank you.

Tim McHugh, William Blair & Company.

Yes. Thanks. When you talk about gross margin you didn't mention, I noticed, the healthcare costs of fully adopting healthcare reform. Is it just not noticeable at this point, not even just first quarter but 2015 and I guess '16 to have that fully rolled out?

So, we've gone through an open enrollment period where all of the temporaries who qualify based on their 2000 performance that met the threshold were offered coverage, and the sign-up rates we got were, if anything, somewhat less than what we had modeled. What you don't know is what the cost per person is going to be.

So based on everything we know, what we modeled is more than adequate and that additional cost was a single, a small single digit percentage that we can pass through. So no surprises there based on actually going through an open enrollment period using actual numbers based on 2014 experience.

Okay. Great. As we think about Protiviti for next year, is the opportunity still on the international margins or do you cut enough there that that profitability is where you're at? I guess what's the next leg? I imagine US margins are pretty strong?

Well, I think the next leg is twofold. We do not think we have peaked out with our US margins. And we think there's an opportunity to expand the gross margins at least 100 basis points from where we are today, to the extent the relative impact of the investments get smaller as it gets larger.

Further, there has been dilution from the international margins. That dilution has declined and we do expect it to continue to decline. We have done much better in Europe. Asia is more of our focus area, and it has been for several quarters and it will continue to be. But we far from believe that we've gotten to peak margins in Protiviti US, and then to the extent that there's less dilution outside of the US, that's additive as well.

One follow-up is just for Protiviti. The large projects that are ending, what type of projects are they? Just trying to gauge the potential for other large ones to come up.

Well, it's a little nuanced in that we have a couple of existing accounts, long-term relationships, where they had some special project requirements in the fourth quarter. We continue with those accounts, they continue to be sizable accounts. It's just that they had a couple of special projects that were concentrated in the quarter.

So I don't want to make too big a deal about it, and it's nothing like some of the other big projects we have talked about in years past as it relates to the staffing side. But they did spike our growth rates in the fourth quarter beyond what we expected. And we would expect the growth rates in the first quarter to moderate, but let's be real, moderate at really high double-digit rates, which we're very pleased about. So, there's no theme there that you need to worry you have to extract or extrapolate across other pieces of that business.

Okay. Thank you.

Paul Ginocchio, Deutsche Bank.

I just want to follow-up on Tim's last question on ACA. Is that the small single digit increase, are your clients pushing back on that at all, are they happy with that? And then what do you think that is relative to what maybe some of your competitors or players -- the other players in the market, are doing? Does it seem about right? And then just a quick follow-up on temp to perm conversions, where are we in that 3% to 5% range? Can you tell us? Thanks.

Well, clients are never happy when you ask for more, and clients always push back somewhat. So I would say we have mixed results in passing through on new assignments, the impact of ACA. But again, because the impact isn't that large, and frankly, it's smaller than increases in state unemployment taxes we've had to deal with in years past. It's just not a huge, huge matter, which is why we are cautiously optimistic we'll be able to digest that without much notice to the overall gross margin rate.

Temp to perm, we are still at the low end of the 3% to 5%. I think we've hovered at 3.1% for two or three quarters in a row. So there's not a lot of movement there. It's better than it was a year ago. And it would be our expectation, and history would say, that it will get better from here. And to be conservative, we're saying let's take half of the upside that we might typically see, and that is still 100 basis points.

Great. And you were kind enough to mention OfficeTeam benefiting a little bit from more admin around ACA. Are you seeing any other demand drivers from companies around 100 employees?

Yes, other than the kind of open enrollment impact of ACA across clients generally, we've seen very little benefit from the under 50, the under 100, there just hasn't been much benefit from that. So the good news is if there is any it's ahead of us, and we don't have any of that at risk.

Great. Thank you very much.

Anj Singh, Credit Suisse.

Hi. Thanks for taking my questions. My first one: would you say that the pickup growth, pickup in growth rates in tech have been mostly due to your headcount additions? Or are there any other drivers besides the strong end market that you would care to call out?

I would say because of strong demand, we've added recruiters. And because we've added recruiters, we have more capacity to recruit, to fill that demand. So clearly, they're related. But in the tech development area, app developers, web developers, we've called that out before and this quarter was a continuation of what we've seen in the past, except this quarter was even better. And that's pretty much true across our lines of business.

Got it. And if I caught it correctly, I think there was some slow down in the perm growth internationally in the first three weeks. And I realize it is a very small sample, but is there anything that you attribute that slow down and growth to? Is there anything they'd call out in these early days?

As I said before, and having done this for a long, long time, the early quarter start in perm isn't very well correlated with how we do for the full quarter. And that's always been true. It's always been more volatile. And it is particularly true in perm. We started disclosing that information. It's more meaningful in temp, so it was easier to continue it than to discontinue it. But that said, we've disclosed it forever and you can prove to yourself it is not very [correlative].

Understood. One final one and I know you guys said that there's a positive impact from the comp due to weather conditions last year. Wondering if there's anything from the weather impact from the recent blizzard in the Northeast or was that really insignificant?

Well, there'll be an impact. So remember for the full quarter a year ago, there was about a 1% negative impact. So, we have that as a cushion if you will for first quarter 2015 impacts, of which this latest Northeastern storm made a dent in. So did it have an impact? Yes. Did it have an impact to the extent of the prior year? No. But the full impact of even a prior year on a full quarter basis only impacted our growth rates by one percentage point.

Understood. Thanks. Thanks for your help.

Gary Bisbee, RBC Capital Market.

Good afternoon. Just looking back at the history, it seems like in the past few employment cycles, in the second half of the up cycle, the perm business is frequently accelerated to maybe closer to twice the growth rate of a temp. I know it's growing faster and doing well but anything you see that's different this cycle? Or that feels like that same pattern could happen? How are we thinking about it over the next year or whatever relative to what we've seen in the past? Thanks.

Well, because perm falls more in a downturn, it accelerates more in an up cycle, I would say for the last several quarters, perm is feeling pretty classic relative to history. Candidates are getting tighter. Candidates are getting multiple offers. Candidates are getting counteroffers by their existing employer. Clients are beginning to take their second choice when their first choice takes another position somewhere else without starting the search over again.

All of those things are very classic signs that the labor markets are heating up, that candidates are getting tighter, that a larger and larger premium is placed by our clients on recruiting of candidates, which is our strong suit and our sweet spot. So it feels very classic. And we would expect acceleration. And as I said earlier, we're going to invest disproportionately in headcount in perm and in Management Resources.

Okay. And then just a follow-up. Protiviti's obviously been exceptionally strong, really for two years now. Looking back on that period what has been more important in terms of driving that? Has it been expanding the areas of focus you work on? Or is it really just rising demand everywhere? And how much is it the market versus your execution in hiring?

Well, I'd say there are three principal demand drivers. There's internal audit, where the AICPA will be insisting on more work, more documentation by the outside audit firms, which is trickled-down to internal audit and has been very helpful. With the strengthening of the IPO market, there's a lot of pre-IPO companies that have to get their controls in order. That's benefited internal audit with Protiviti.

In financial services arena, risk and compliance, anti-money-laundering, the regulatory actions that typically follow with some kind of remediation and monitoring have benefited Protiviti. And then in the IT space, IT controls, IT security are pretty much top of mind at most companies, so the combination of more internal audit demand, more financial services risk and regulatory demand, and in the IT controls and security area, those three things have all been strong and they have all been strong for a couple years. They were all strong in the quarter just ended and they are all expected to be strong in the first quarter that we are in.

Great. Thank you.

Tobey Summer, SunTrust.

Thank you. I was wondering if you could give us the bill rates in the quarter? And maybe, given the fact that you are hiring quite a bit, where do you think, in this kind of context, particularly US bill rate growth could go in 2015? Thanks.

So bill rates in the quarter adjusted for currency were up 3 1/2%, which is pretty consistent with what it has been, maybe a touch better, than the last couple of quarters. As to where it might go, usually in the middle robust part of a cycle, you see 5%, 6%, 7% bill rate growth. We haven't seen those rates.

If you look back to history to say, what do you typically see, you typically see those. And there have been, as everyone knows, there's tons and tons and tons and tons written about wage inflation, the absence of wage inflation, whether this cycle is different, whether the baby boomer retirement aging, demographics, labor force participation, you can say it a thousand ways. There are a lot of theories out there about whether this one is going to be different. But it's feeling more classic than not. And that would say rather than mid-3%s, you are headed to mid-5%s or 6%s and whether that's a 2015 thing or a 2016 thing, your guess is as good as ours.

Thank you very much.

Manav Patnaik, Barclays.

This is Ryan filling in for Manav. A lot of my questions have been answered, but I've heard you say classic a few times and obviously the jobless claims today and just the temp penetration rate reaching new highs. I was wondering if you could kind of give some sense on the temp penetration rate and where you see upside there and, relative to the prior cycles?

We've talked about for some time in the early part of this cycle, we benefited primarily from a secular shift to using more temporaries. Those jobs that were created were about three times more temp oriented than in prior cycles. I think it's 9% of the jobs created in this cycle have been temp jobs, that's typically 2% to 3%. So until a few quarters ago, we pretty much benefited exclusively from secular growth because there hadn't been much cyclical growth.

In the last two or three quarters, we have clearly seen the labor markets improve. Our middle market clients have more processing-level demand, which ties very directly to the health of their own businesses such that now we see the more typical cyclical demand starting to kick in as well. So, we believe given that the temp penetration rates are already at all-time highs, that pretty much happened in the absence of much cyclical improvement. And, therefore, we would believe and expect that those penetration rates go higher. And the other things you quote, jobless claims, those also are coming down. Not in a straight line but showing improvement, which is also a classic sign that the labor markets are improving.

Great. Thanks a lot.

Randy Reece, Avondale Partners.

Afternoon. Did you say that Protiviti grew its internal and contractor headcount 5% year-over-year?

We did. We said that it's a tale of two cities in that you have to split out US and non-US. And US, the headcount grew more in line with revenue growth. And the disparity is more on the non-US where we've reduced headcount, yet the revenue still grew a bit.

So, that 40% increase in operating profit you had in Protiviti would be a pretty tough comp for 2015; is that correct?

It would be, but they've had tough comps now for a while. I mean they've done well for two years. So they've already had to anniversary some tough comps.

Now clearly, they get even tougher. But that said, we continue to make headcount investments. The growth rates have stayed nicely in the mid-double digits. Our expectation is that would continue. And while you might not see 40% year-over-year growth, you're going to see year-over-year growth that should exceed topline growth. And therefore, get their full-year operating margins above 10%, which is what we've been shooting for now for a couple of years.

So, when I look at the fourth quarter growth number for Protiviti in the US, it's a bit of a weaker comp but it was still blooming strong. What is the strength concentrated in; if you were just to normalize it?

Well, it's actually pretty balanced across the three areas that we've talked about: internal audit; financial services, risk and compliance; IT controls and security. In the fourth quarter, we had a couple of large projects from existing clients that spiked a growth rate somewhat but even in the absence of that, it did great.

Very good. Thank you very much.

The final question comes from George Tong, Piper Jaffray.

I'd like to dig in more on gross margins on the temp side. Where would US wage growth need to accelerate to for bill pay spread to show the kind of gross margin improvement you're targeting in the near and intermediate term?

Well, if we are talking US wage growth from a macro standpoint, there are too many moving parts there that I can figure out. But, as we just talked about, we've been seeing mid-3% wage growth for the last few quarters. Typically as labor markets improve, that would go to mid-5%, mid-6% wage growth. We've expanded our spreads to some degree already, even in an environment where we're talking mid-3% growth. We would hope we could do even better than that as we move to 4% and 5% and a 6% growth.

Again, we deal primarily with professional-level, college-educated people. The unemployment rate for those people is about half what it is overall. An so as those labor markets tighten, we'll have to pay those people more. We're already seeing that, which then gives us an opportunity to pass that on with a little more spread.

Right. And I'd like to get your views on the sort of timing perspective for gross margins? How far do you think you are from peak? Just your view. And how do you bridge there given the three buckets you've already outlined in terms of sources of gross margin expansion?

So, we're about 30 basis points below peak. If you look at the most recent quarter, 36.9. I think we peaked out, at least on a full year basis, at 37.2.

So we're about 30 basis points below. And between pay bill spread expansion less state unemployment cost and taking temp to perm conversions more to the midpoint of the range, we would be very disappointed if we don't make new highs in gross margin in this expansion, in this cycle.

And where do you think those new highs can possibly get to based on the trends you're currently seeing?

We're not going to speculate. But we're very pleased with where we've gotten gross margins to this point in this cycle and we are quite optimistic that we have the momentum that we can take those higher.

Great. Thank you.

Thank you very much. That was our last question. We appreciate you joining us on today's call.