Hello, and welcome to the Robert Half Fourth Quarter 2017 Conference Call. Our host 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 good afternoon, everyone. We appreciate you joining us. I would like to preface today's remarks with a reminder that some of the comments we will make 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. However, 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 the statements made on today's call. For your convenience, our prepared remarks also are available on our website at roberthalf.com. From the homepage, click on Investor Center at the top of the page. You will find the Quarterly Conference Calls link in the Investor Center. Now let's review our results for the fourth quarter. Quarterly revenues for the company were $1.346 billion, up 6% on a reported basis and up 5% on a same-day, constant currency basis from the year-ago period. This is near the high end of the range of our previously provided revenue guidance. Net income per share was $0.38. You may recall that, in December, we revised our fourth quarter guidance for net income per share to take into account the estimated impact of a onetime, non-cash charge to our provision for income taxes related to the recent enactment of the Tax Cuts and Jobs Act in the United States. The actual amount recorded was $34 million or $0.27 per share, and resulted primarily from a revaluation of our deferred income tax net assets as of December 31, 2017.…

Thank you, Max. As just noted, global revenues were $1.346 billion in the fourth quarter. This is up 6% from the fourth quarter of 2016 on a reported basis and up 5% on a same-day, constant currency basis. Fourth quarter staffing revenues were up 5% on a same-day, constant-currency basis. U.S. staffing revenues were $863 million in the fourth quarter, up 2% on a same day basis, while non-U.S. staffing revenues were $269 million, up 15% when adjusted for billing days and exchange rates. We have 323 staffing locations worldwide, including 83 locations in 17 countries outside the United States. The fourth quarter had 61.3 billing days compared to 61.4 days in the fourth quarter 1 year ago. The current fourth - first quarter has 63.0 billing days compared to 63.4 days in the first quarter of 2017. Accompanying our earnings release is a supplemental schedule showing year-over-year revenue growth rates on both a reported and same-day, constant currency basis. These figures are further broken out by U.S. and non-U.S. operations. This is a non-GAAP financial measure designed to provide insight into certain revenue trends in our operations. Currency exchange rates had the effect of increasing reported year-over-year staffing revenues by $17 million in the fourth quarter, which boosted year-over-year reported staffing revenue growth rates by 1.6%. Global revenues for Protiviti were $214 million in the fourth quarter, with $173 million coming from revenues in the United States and $41 million from revenues outside the United States. Protiviti revenues were up 6% year-over-year on a same day, constant-currency basis. U.S. Protiviti revenues were up 2% from the prior year on a same day basis, and non-U.S. revenues were up 23%. Exchange rates had the effect of increasing year-over-year Protiviti revenues by $2 million in the fourth quarter and increasing the…

Thank you, Keith. Robert Half ended the year with record annual revenues. We were encouraged by the continued improvement in our U.S. operations during the fourth quarter and pleased with the strength of our non-U.S. staffing and Protiviti operations, which had another outstanding quarter. Many factors are contributing to a more favorable business environment, including a nice pickup in GDP growth in the United States. Likewise, the most recent Beige Book reported that all 12 Federal Reserve districts saw economic expansion, with most also citing tighter labor markets from late November through year-end. The number of temporary workers as a percentage of the overall U.S. workforce reached an all-time high in the fourth quarter, which suggests a growing reliance by businesses on interim professionals for meeting highly specialized and variable workload demands. Skills shortages in professional occupations remain a concern for many businesses, and this is resulting in a greater need for staffing and recruitment services. The U.S. unemployment rate remains at a 17 year low. We feel good about how Robert Half is positioned right now, including our ongoing technology investments. We have incorporated state-of-the-art technology into nearly every step of our processes, which enables us to provide a seamless online experience for customers. We've also made investments in training to ensure our internal teams are making the best use of our tools. We are continuing to look at ways to provide more online services to our customers. Our competitive advantage lies in the combination of technology and personal service that we provide. Offered in tandem, our customized, proprietary technologies complemented by an easy in-person experience working with our staffing professionals give our clients the best opportunity to find the right person every time for their business needs and avoid costly and disruptive staffing mistakes. I also want to provide more color on Protiviti's fourth quarter results. Protiviti continues to see solid growth in its risk and compliance and internal audit and financial advisory practice areas. Protiviti also is expanding its solutions in areas such as data and analytics and cybersecurity. Other expanding practice areas include digital transformation, business process efficiency and managed business services as well as helping financial services clients manage changes in the fintech and regtech space. We are optimistic about the business opportunities ahead for Protiviti. Now Keith and I would be happy to respond to questions. We ask that you please limit yourself as usual to one question and a single follow-up, as needed. If time permits, we'll certainly try to return to you, if you have additional questions. Thank you.

[Operator Instructions] Your first question comes from the line of Andrew Steinerman from JPMorgan. Your line is open. Please go ahead.

Hi. It's Andrew. I'd like to ask you about the margin difference, operating margin difference, international versus U.S., just because the international business is growing so much faster now. And I just wanted to get a sense of how that's mixing into the margin?

Well, the international margins are somewhat dilutive to the overall margins. We've never specifically broken out one versus the other. But there is some modest gross margin dilution as well as operating margin dilution that results from international growing more quickly than the U.S., although the U.S. is catching up.

Great. And could you just tell me what the bill rate increases and wage rate increases were in the quarter - fourth quarter?

Right. And so somewhat counter intuitively, our bill rates were up 1.9% year-on-year, and that compares to 2.5% last quarter, and the trend in pay rates is similar. We would observe that clients have been more frugal and provided more pushback to increases in bill rates in this expansion so far than we've ever seen. Logic would say, as the candidate market continues to tighten, that will turn around, but it certainly hadn't yet. But those are the numbers.

Okay. Thank you. Appreciate it.

Our next question comes from Mark Marcon from R.W. Baird. Your line is open.

Good afternoon. Thanks for taking my question. One, this is somewhat speculative, but wondering if you could opine a little bit on how you think the tax - the corporate tax rate changes are going to end up impacting demand within Accountemps as well as RH Management Resources and Protiviti. Obviously, but the legislation was passed late in the fourth quarter, so clearly didn't see any impact at that point in time. But just as you're - from what you're hearing in the field, what is your sense of that? And then I have a follow-up. Thank you.

So our sense, Mark, is that, for many reasons, whether it be tax reform, the regulatory relief and the expectation of even more positive GDP growth the last 3 quarters, there's no question that sentiment is better, optimism is better. If you look at our sequential growth for the quarter, if you look at our year-on-year growth, it's a pretty rare quarter where every single line of business, both in the U.S. and non-U.S., where the sequential growth rate this year was better than the sequential growth rate last year, where the year-on-year growth rate in the fourth quarter improved versus the year-on-year growth rate in the third quarter. So again, better sentiment, better optimism, more projects, more sense of urgency, all of which led to some of the best sentiment we've ever experienced.

That's great. And then I want to follow up later on that, but can you - I'm just wondering if you could talk a little bit more about Protiviti as well. Because it - you typically don't talk about - at the end of the comments about expanding the rules. So I'm wondering if you could just elaborate a little bit more in terms of how far along are you in terms of that expansion? What should we expect in terms of headcount additions? Are the headcount additions going to - they were clearly going to precede revenue, so how should we think about that?

Well, so first of all, Protiviti had a particularly good fourth quarter. Operating income grew 28% versus the prior year. If you look into our guidance for Protiviti for the first quarter, we've got low single digit revenue growth, which is the combination of a couple large project ends, offset by a strong pipeline in tech security, cloud, joint projects with Management Resources, lease accounting. Given that expectation, they are investing not only in additional heads, which impacts gross margin, but also in recruiters, training, marketing, again, all in anticipation of a better pipeline such that when you look at our guidance from a Protiviti perspective, gross margin will probably be down 30 basis points year-on-year. SG&A probably up 50 basis points year-on-year. Operating income for the quarter down 80 basis points year-on-year. But our expectation for the full year of 2018 that our operating margins will actually be up 50 to 100 basis points. So the positive sentiment that we're seeing on the staffing side would also apply to Protiviti. In the first quarter, they're making some investments in people and infrastructure that impact first quarter profitability, but we expect to more than make that up the balance of 2018.

That's great to hear. Thank you.

Your next question comes from Kevin McVeigh from Deutsche Bank. Your line is open.

Great. Thanks. Just a follow-up. We're kind of in the year, not in the cycle, but it really feels like a new cycle, given where kind of the demand trends are and the pricing environment. Is that a function of kind of the GDP, the tax? And then just as it relates to tax, any thoughts on what you'll do with the proceeds given the lower effective tax rate you'll have overall?

Well, it also feels to us like it's certainly a reenergized cycle. Exactly what inning that says we're in, we don't know. But there's no question there's renewed energy, there's renewed demand, there's a renewed sense of urgency with our clients, all of which benefit our fourth quarter and are expected to continue into 2018. As to the use of tax benefits, first, let's say, we already have very strong free cash flow, we already have a very strong balance sheet. We always prioritize investments that need - that we need to grow our business, whether they be capital or expense. Further, we're committed to attracting, motivating and retaining our very best people. Our long-term retention rates of our people are unquestionably the best in the industry. Our view is it's not wise to directly tie compensation plans to tax rates. And that ultimately, our capital allocation policy of many years will stay in place, which means, likely, there will be more cash flow for buybacks and dividends.

Super. And then just, Keith, can you run through the billing days for '18?

Sure. So first quarter 63.0, second quarter, 63.5, third quarter, 63.3, fourth quarter, 61.7. Overall, 251.5.

Thank you.

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

Thanks so much. Focusing on the operating margins in your temporary and consulting business, it did go down year-over-year. I know you had less of a benefit on the workers' comp side relative to a year ago, and you mentioned the ramp-up in headcount. Are those the two reasons? Or is there anything else going on in that unit?

Okay. So let's first talk fourth quarter, and then let's talk first quarter guidance. So clearly, fourth quarter, we had the headcount deleverage from front-ending headcount that we've talked about for several quarters. In addition to that, which we've also talked about in the past, this transition from - in the IT space, internal IT investment space, going to Software-as-a-Service platforms, which for us means Salesforce, which for us means Workday, the cost we incur for implementation around those get expensed, whereas traditionally they would have been capitalized. So if you look back a few years, our capital expenditures were ranging $70 million to $80 million a year. Now they're more in the range of $40 million to $50 million a year. And quite frankly, the differential is all in expense, it's all in SG&A. Our guidance range for 2018 is $45 million to $55 million in CapEx, which is consistent with that trend. But the point is, it puts pressure on SG&A because of those costs or expense. So while we're talking about guidance generally, let's talk about staffing guidance because we've already talked about Protiviti. We basically got down [ph] into the guidance from a revenue standpoint a repeat of the fourth quarter, notwithstanding we ended stronger. We have had weather impacts during the month of January. We would estimate that would add 1 point to another 1.5 points of growth had it not occurred. From a gross margin standpoint, while we think sequentially we'll be flat year-on-year, we'll be down 30 to 50 basis points because of higher fringes, lack of credits and because of the larger IZ mix, which we talked about earlier. At the SG&A line, again, for the reasons of headcount and tech investments, we expect to get some leverage from the higher revenues, but for SG&A to only be down 10 to 30 basis points sequentially but year-on-year up 50 basis points, which, when you go to operating margin, will be up 30 to 50 basis points sequentially because of the higher revenues. But year-on-year will be down 50 basis points because of the lower gross margins I talked about and because of the higher SG&A I just spoke to. Further, from a tax rate standpoint, while we expect for the full year to be near the midpoint of the range we gave, which is more like 27%, for the first quarter it'll be higher, 28.5% to 29%, because of discrete items we'll have related to stock compensation. So that's some color on our guidance generally, inclusive of SG&A. But headcount and expensed tech implementation cost are the two drivers of SG&A.

Okay. That's really helpful. My follow-up, I wanted to focus on RH Technology. Still going down, although slightly year-over-year. Can you just talk about a little bit what's going on there and what you might be doing internally to try to improve that trajectory? Thanks so much.

Well, while it's true year-on-year we're down slightly 2%, the facts are, sequentially, we did see growth versus the third quarter consistent with the other divisions, and we had more sequential growth in tech this fourth quarter than we did a-year-ago fourth quarter. So given that we've been down the last few quarters year-on-year we're still negative. But the good news is for the first time in several quarters, we've actually got sequential growth in tech that we're very happy about.

Okay, great. Thank you so much.

Your next question comes from Tim McHugh from William Blair & Company. Your line is open.

Thanks. I guess, Keith, just following up on some of the comments about the puts and takes on SG&A leverage, would you be willing to kind of talk about for the full year? Would you expect to get leverage? And is there a growth rate you have in mind where you would start to overcome kind of the investments you've made and then other factors with regard to capitalizing cost versus expensing it?

Right. And so while we don't give full year guidance overall, we would observe that, from a headcount perspective, we would start to leverage the front-ending of heads that we've carried now for a couple of years such that, on a full year basis, we would expect our heads to grow no faster than revenues that grow in 2018, and hopefully, they grow less than that so that we'll see some nice leverage there. From a tech investment standpoint, I think that's a full year 2018 phenomenon. And by the way, the FASB accounting types are actually re-reviewing the accounting for implementation costs relative to Software-as-a-Service. And we're told they're leaning to capitalizing those just like traditionally you did when you license the software, but that hasn't happened yet.

Okay. And then can we just circle back to the temp gross margin? I guess, can you elaborate on some of the - I guess, excluding the workers' comp cost, but the underlying issues there, you're down 50 - yes…

So U.S. underlying pay/bill spreads are good, they're solid. You've got fewer credits against workers' comp. We had fewer credits as we adjusted our unemployment and other taxes to actual during the fourth quarter. More and more cities, states are requiring mandated sick pay. That's impacting our fringe rates. So if you just purely look at our bill/pay spreads irrespective of fringes, it's solid. We've got higher fringes for the reasons we've discussed that we need to recover. The environment currently is that we're seeing some resistance to doing that in the very short term, but we're working on it. And further, the mix between U.S., non-U.S. also put some pressure on global gross margins. But underlying U.S. pay/bill spreads are good, they're solid. But we need to improve them to recruit the higher fringe cost, and we're working on it.

Okay. Fair enough. Thank you.

Your next question comes from Manav Patnaik from Barclays. Your line is open.

Hi. This is Ryan Leonard filling in for Manav. Just a question, I mean, you talked about not necessarily wanting to tie compensation plans to tax rate. But you are hearing some companies are obviously making announcements on that and increasing wages as a result. I mean, can you just talk about your conversations with clients around that wage inflation piece of this legislation?

Well, every company is different. The vast majority of our clients aren't tying tax cuts to compensation either. So I think many/most companies are committed to doing what they need to do to be competitive with their people, us included, full stop. So independently, we're going to do what we have to do to attract, motivate, retain our best people. Tax rates are independent of that. And as I said earlier, our capital allocation policy is not expected to change.

Fair enough, makes sense. And then, I mean, you mentioned you're seeing a sense of urgency, increased optimism among the clients, but they're also - still push back on some of the pricing. I mean, what do you think is necessary for your clients to really kind of expect the demand and, therefore, look to increase the hiring? Is there something they need to see? Or is it just too early in the stage of this CM [ph] post…

Well, we're already seeing the demand. The issue is what they're willing to pay. And there's still a bit of disconnect between what clients are willing to pay and the supply-demand dynamics for candidates. And over time, history would say the two will catch up. So we fully expect to see more wage inflation, more bill rate inflation, and typically, that's a good thing for us.

Ryan, the only thing I would add is the latest NFIB report showed the highest level of optimism in many, many years with the small to midsized businesses that make up that group. It's barely been a month since the new tax law was enacted. I think that just lends weight to what Keith said. My guess is you're going to see a pickup in demand, optimism and activity as we go forward, but we'll see.

Fair enough. Thank you.

Your next question comes from Gary Bisbee from RBC Capital. Your line is open.

Hey, guys. Good afternoon. I guess, I wanted to ask, first question, just on - can you give us an update on candidate availability, both in the temp business and also in the perm business, given a lot of indicators of fairly full employment in much of the U.S. economy? Is that - or even in Europe, we've seen strength. Is that getting more difficult? Or are there any areas where you're having a hard time finding the right people? Or are we in a sweet spot where demand's picking up and you still feel like you've got the ability to find all the right folks? Thanks.

Well, there's no question the labor markets are tightening. It's not easy to find anyone. We've been successful at sourcing candidates. So far, we're confident in the near term. We continue to source candidates. As we just discussed, the underlying wage inflation still hasn't picked up to what one would expect, which is some indication that the supply isn't so tight that it's growth-constraining. So we would say candidate market tightening, but we've been successful given our experience, given the skills of our people, our recruiters. We've been successful in finding who we need and closing them relative to all the alternatives they all have.

Okay. And then just a follow-up question, given the competitive nature of the staffing industry, how do you think about the potential for portion of the tax benefit that players are getting to be competed away? And over what time period could that happen if that were to happen?

Well, so understand that our businesses, you know, market focused [ph] we put 1 or 2 people at a time with our clients. And frankly, when you're talking that small number of people for 2 to 6 months, your tax rates - our tax rate and our client's tax rate typically isn't much of the discussion. The question is whether they can do the job, whether you can avoid making a hiring mistake. And given the small number of units we deal in, it's just not that relevant. If we were principally providing to Fortune 1000 companies and we were doing hundreds at a time and the buyer was procurement versus in our case, it's more a line manager, it's a very different thing. But when we're dealing with line managers and small numbers of units for relatively short periods of time, it's just not a big part of the discussion.

Fair enough. Thank you.

[Operator Instructions] Your next question comes from Hamzah Mazari from Macquarie Capital. Your line is open.

Thank you. I just wanted to go back to the bill/pay rate differential. Can - maybe if you could frame for us, are you seeing any change in the competitive environment in terms of competition for candidates? A couple of years ago, you had a slide on LinkedIn. Just curious if there are start-up companies impacting clients being more frugal because they may have more options. Or maybe that's not the case?

And so I would say that we're not seeing any meaningful new competition from digital-only competitors. It's amazing we're sitting here in Silicon Valley, we get the opportunity to talk with a lot of these start-ups in our space. And it's amazing the number that have a business plan and start with a digital-only strategy that ultimately morphs to learning what we've long known is that you ultimately need a human being to close the deal. And in today's world, that means convincing a candidate that the opportunity at hand is the best opportunity for them based on our knowledge of the market and not to hold out for yet a better opportunity. So clearly, there are a bunch of digital-only start-ups and staffing, there's no question, but they certainly haven't moved the needle, and they certainly haven't changed that in today's world, you've got to get a candidate to make a move for the job in question based on its geography, its compensation structure, its career advancement opportunity versus the many other opportunities that they have.

That's very helpful. Follow-up question, I'll turn it over. Maybe just frame for us how you think about M&A. I know you have a pretty good return of cash strategy. But as your market evolves, do you - what does your M&A pipeline look like? Do you look at deals or not? It looks like the last significant deal that you did in terms of value purchase price was quite a long time ago?

Well, we're always looking at deals. And as I said, we sit right here in Silicon Valley. We see a lot of start-up companies. Frankly, the whole build versus buy dynamic, to me is actually changing more toward build than buy than ever with computing capacity on demand, with the cloud-based Amazon Web Services and other, with all the cloud-based apps that are out there. The struggle we have as we talk to many of the firms, particularly tech-related, in our space, is that we could build much of their capability for cents on the dollar relative to the ask on the buy side. So while we never say never and we're quite interested, particularly as the staffing world gets more and more digitized, we always look at build versus buy. And I would just observe that with all the technology tools that are on demand today, if anything, it advantages building versus buying relative to that traditional dichotomy.

Got it. Thank you.

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

Thank you. Just a couple of contextual things relative to tech. Have the bill rates trended similarly to the overall book? And in terms of kind of your internal hiring on the temp side, has that particular area been a greater or lesser focus than the firm as a whole?

I'd say, the bill rate trends are stronger in tech than overall, particularly tech development. So whereas there was a deceleration overall in wage inflation and bill rate growth, tech development particularly would go the other way. And on our own internal staff, recruiters and salespeople, I would say we front ended that more than we did the other divisions, so that the last few quarters, there's been less movement there because we had done more front-ending.

Okay. And as a follow-up, do you think that the firm is growing at its end market growth rates, above or below?

End market, when you're dealing with middle market companies, our end market is virtually every business in America, from Fred's Tires to Acme Manufacturing. Clearly, we're a growth cyclical company. The fact that we've now had three straight quarters of 2.5% GDP growth or greater, a couple of those were over 3%, there's been a reacceleration of our growth rates that track nicely to that. So I think we're participating, we're beginning to participate in a U.S. macro recovery and the U.S. macro hasn't seen three consecutive quarters just like we've seen in the United States, which bodes well for us.

Okay. Thank you.

Your next question comes from Dan Dolev from Nomura. Your line is open.

Hey. Thanks, guys and congrats. Two quick questions. I probably missed it, what was the bill rates and billable hours for this quarter? And I'm sorry if I missed it.

Bill rates were up 1.9% year-on-year.

Got it. Okay. So nice improvement. And then we've done some work here that shows that there's a huge correlation between your growth organically historically and CapEx spend for U.S. companies. I mean, have you seen any of that trend? And can you maybe update us on what you're seeing in terms of kind of the uptick in the fourth quarter, and if it's even related to that? Thank you.

Well, it's no surprise to us that companies capital spending is highly correlated to their growth spending generally, which it - which would include labor and which would include contingent labor. So we would agree, and I think the data would clearly say, that between correlating GDP, unemployment rates and capital spending of a broad section of companies that we most correlate to the CapEx because it directly reflect a company's appetite to spend for growth. And labor is just a derivative of that.

Got it. Thank you so much. And congrats again.

Your last question comes from Mark Marcon from R.W. Baird. Your line is open.

Just in light of the optimism, it sounded like perhaps you may not necessarily add a ton to the headcount on the temp and perm side, but was wondering how we should think about that. Like if the current pace of GDP growth continues and if you continue to see order trends the way you're currently seeing it, how should we think about that just on the temp and the perm side?

So we have some unused capacity for the front-loading that we talked about. The new growth rates themselves will support adding the heads on - just from a Protiviti standpoint.

Sure.

So we will add the heads, it will be revenue justified. The fact that we should leverage our previous investment says, on a full year basis, we would expect to get some leverage on the compensation line. But it's going to happen over the course of 2018 and not necessarily in the first quarter 2018. But if you just look between - if you look sequentially between the fourth quarter of '17 and the first quarter of '18, you already got some SG&A leverage there alone, and there's already evidence that you're leveraging some of your existing headcount and that you're not adding to the headcount at the same pace that your revenues are now growing, including in the U.S.

I clearly recognize that. It's just the optimism in your voice and in Max's voice is comparable. And so just trying to think of should - is it possible that we may end up reaccelerating the headcount growth? You're a little bit - or you're pretty - it sounds like you're - from what you're just saying now that you're pretty committed to growing headcount at a lower rate than revenue?

Well, just the fact that revenues are growing to the extent they are, and in fact accelerated in the fourth quarter, that alone supports headcount. That alone supports headcount.

Sure. Got it. Thank you.

That was our last question. We would like to thank everyone again for joining us on today's call. We appreciate it.

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.