Robert Half International Inc

NYSE:RHI

Earnings Call Transcript 2018-Q1

[Operator]

Hello and welcome to the Robert Half First Quarter 2018 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.

[Max Messmer, Chairman and Chief Executive Officer]

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 our comments today contain predictions, estimates and other forward-looking statements. These statements represent our current judgment as to what the future holds and include words such as forecast, estimate, project, expect, believe, guidance and similar or such 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 first quarter of 2018. Companywide revenues were $1.395 billion, up 8% on a reported basis and up 7% on a same-day, constant-currency basis from the year ago period. Net income per share was $0.78. You may recall that in December 2017, we recorded provisional amounts and a reasonable estimate for the one-time transition tax on our foreign earnings and profits, as required by the 2017 Tax Cuts and Jobs Act. At that time, we anticipated additional guidance would be released by the IRS throughout 2018 that would require us to adjust our estimate. The result of additional guidance issued during the first quarter led to our recording a $3 million charge to our income tax provision, or $0.02 per share. Excluding this tax charge, net income per share was $0.80 for the quarter.

Cash flow from operations in the first quarter was $116 million and capital expenditures were $8 million. During the quarter, our Board of Directors authorized a $0.04 increase to our quarterly cash dividend, bringing it to $0.28. We paid the dividend in March at a total cost of $35 million. The board also authorized the repurchase of up to an additional 10 million shares of the company’s common stock. We repurchased 1.1 million Robert Half shares in the first quarter, at a cost of $60 million. We have 11.3 million shares available for repurchase under our board-approved stock repurchase plan.

We were pleased with the company’s performance in the first quarter, including across-the-board revenue growth in our U.S. and non-U.S. staffing and Protiviti operations, and particularly strong growth in our permanent placement division. These gains were fueled by continued small business optimism, a growing global economy and low unemployment rates in professional occupations. We continue to invest in digital innovation initiatives that will seamlessly integrate our customers’ digital experience with our industry-leading traditional professional staffing services. Robert Half’s return on invested capital was 35% during the first quarter.

I’ll turn the call over to Keith now for a closer look at our results.

[Keith Waddell]

Thank you, Max. As just noted, global revenues were $1.395 billion in the first quarter. This is up 8% from the first quarter of 2017 on a reported basis, and up 7% on a same-day, constant-currency basis from the year-ago period. First quarter staffing revenues were up 7% on a same-day, constant-currency basis. U.S. staffing revenues were $895 million, up 5% on a same-day basis, while non-U.S. staffing revenues were $293 million, up 16% when adjusted for billing days and currency exchange rates. We have 326 staffing locations worldwide, including 86 locations in 17 countries outside the United States.

The first quarter had 63 billing days compared to 63.4 days in the first quarter one year ago. The current second quarter has 63.5 billing days, compared to 63.3 days in the second quarter of 2017. Accompanying our earnings release is the 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. Also included in the supplemental schedule is a reconciliation of the non-GAAP net income per share calculation to the most comparable GAAP measure regarding the previously noted tax charge.

Currency exchange rate movements were favorable and had the effect of increasing reported year-over-year staffing revenues by $29 million in the first quarter, which boosted year-over-year reported staffing revenue growth rates by 2.6%. Global revenues for Protiviti were $207 million in the first quarter, with $167 million coming from the United States and $40 million from operations outside the United States. Protiviti revenues were up 5% year-over-year on a same-day, constant-currency basis. U.S. Protiviti revenues were up 1% from the prior year on a same-day basis, while non-U.S. revenues were up 22%. Exchange rates had the effect of increasing year-over-year Protiviti revenues by $4 million in the first quarter and increasing the year-over-year reported growth rate by 1.9%. Protiviti and its independently owned Member Firms serve clients through a network of 76 locations in 26 countries.

Now, let’s turn to gross margin. Gross margin in our temporary and consulting staffing operations was 37.2% of applicable revenues in the first quarter compared to 37.4% of applicable revenues in the same period one year ago. Higher temp-to-hire conversion fees partially offset higher fringe benefit costs. First quarter revenues for our permanent placement operations were 10.2% of consolidated staffing revenues compared to 9.5% of consolidated staffing revenues in last year’s first quarter. When combined with temporary and consulting gross margin, overall staffing gross margin increased 30 basis points versus 1 year ago, to 43.6%. First quarter gross margin for Protiviti was $55 million, or 26.4% of Protiviti revenues. One year ago, gross margin for Protiviti was $53 million, or 27.0% of Protiviti revenues.

Staffing SG&A costs were 33.5% of staffing revenues in the first quarter versus 33.4% in the previous year’s first quarter. SG&A costs for Protiviti were 19.1% of Protiviti revenues in the first quarter compared to 18.4% of Protiviti revenues in the year ago period. First quarter operating income for our staffing divisions was $119 million, up 10% from the prior year. Operating margin was 10.0%. Our temporary and consulting staffing divisions reported $97 million in operating income, an increase of 7% from the prior year. This resulted in an operating margin of 9.1%. For our permanent placement division, operating income was $22 million in the first quarter. This was up 22% from the prior year and produced an operating margin of 18.4%. Operating profit for Protiviti was $15 million in the first quarter, a decrease of 10% from the prior year, producing an operating margin of 7.4%. Accounts receivable at the end of the first quarter were $785 million and implied days sales outstanding, DSO were 50.5 days.

Before we move to second quarter guidance, let’s review the monthly trends we saw in the first quarter of 2018 and so far in April, all adjusted for currency and billing days. Our temporary and consulting staffing divisions exited the first quarter with March revenues up 6.3% versus the prior year, compared to 6.2% for the full quarter. Revenues for the first two weeks of April were up 7.6% compared to that same period in 2017. For our permanent placement division, March revenues were up 16.7% versus last year, compared to a 15% increase for the full quarter. For the first three weeks in April, permanent placement revenues were up 24.5% compared to the same period last year. This information is designed to highlight some of the trends we saw during the first quarter and so far in April. But as you know, they represent brief periods of time and we caution against reading too much into them.

With that said, we offer the following second quarter guidance: revenues, $1.4 billion to $1.46 billion; income per share, $0.81 to $0.87. The midpoint of our second quarter guidance implies year-over-year revenue growth of 7% on a same-day, constant-currency basis, including Protiviti and EPS growth of 31%. 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.

[Max Messmer, Chairman and Chief Executive Officer]

Thank you, Keith. We were pleased to see broad-based, year-over-year revenue growth in all lines of business in the first quarter. International staffing and Protiviti results were solid, and our U.S. based operations continued to do well. Despite fewer-than-expected new jobs being added to the U.S. economy in March, the job market is strong, with unemployment holding steady at 4.1% for several months now. The unemployment rate is even lower in the professional occupations in which we specialize. Small and midsize businesses remain optimistic about their growth prospects, according to the latest Vistage CEO Confidence Index and the NFIB’s small business optimism index. This favorable business sentiment is fueling job growth in this segment, which is our key customer base.

At Robert Half, we are also optimistic. Our brands are among the industry’s most recognized and respected, our financial position is strong, and our field management teams are experienced and highly capable of growing the business. Our industry is at an inflection point and digital transformation is at the heart of it. We are developing proprietary digital solutions that give our customers multiple ways to interact with us online from submitting job orders to browsing for job candidates. And we continue to test new online services that we believe will appeal to even more customers. Protiviti is also expanding its offerings by complementing its core internal audit and internal controls solutions with a widening suite of consulting services in risk and compliance, technology, data and analytics, and business performance improvement. We believe we are just scratching the surface when it comes to the opportunities for us in the space where Protiviti leverages our staffing resources. Blending the capabilities of both businesses enables Protiviti to provide Big Four-quality consulting services at competitive prices. Global and regional consulting firms that compete with Protiviti generally lacks the flexible resource capabilities of Robert Half’s staffing operations.

Now, Keith and I would be happy to answer your questions. We ask that as usual you please limit yourself to one question and a single follow-up, as needed. If time permits, we’ll try to return to you if you have additional questions. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Mark Marcon from R.W. Baird. Your line is open. Please go ahead.

[Mark Marcon, R.W. Baird]

Good afternoon and congratulations on the quarter. I thought the performance in Accountemps was particularly noteworthy and I was wondering if you could give some commentary as to the extent, that perhaps lease accounting or rev/rec or any – or the changes in taxes are contributing to the growth? And then as a follow-up, could you also talk a little bit about what the bill rate expansion was relative to ours and are you seeing a pickup in terms of orders as it relates to ours? Thank you.

[Max Messmer, Chairman and Chief Executive Officer]

Sure, Mark. While each of the items you referenced rev/rec, changes in taxes, lease accounting, they were all helpful for Accountemps. I don’t think any of them dominated the acceleration in growth. The growth was broad-based. It was across geographies. It was across skill levels or functional roles as we would call it. Generally, the backdrop remained high, sentiment, optimism more high, regulatory relief, tax cuts, positive GDP growth, you have got more projects being started by clients, more sense of urgency. As to bill rate increases as an indication that clients are beginning to pay more, they are beginning to acknowledge the supply demand dynamics in the marketplace. Our bill rates were up 2.5% year-on-year for the quarter, so that’s up from the fourth quarter. Frankly, that’s expected and welcomed. It’s been a long time coming. We do see that continuing to rise as we move forward and that’s typically a good thing from a margin standpoint.

[Mark Marcon, R.W. Baird]

That’s great. Just one word, can you talk a little bit about the conversions, because it sounds like that was also a positive?

[Max Messmer, Chairman and Chief Executive Officer]

So, conversions were up 20 basis points which was a nice positive. Coincident with the demand for more full-time hiring, there was demand to convert temporaries that were performing well on engagements. As you know, conversions have lagged in this recovery. It’s certainly another puzzle piece that falls into place and makes sense as the labor market tightens as there is more urgent demand that not only would there be more hiring of people that began as a full-time hire, but also more hiring of those that began as a temporary that performed well and didn’t get converted. So, we were encouraged frankly across the board from an hours billed standpoint, from a conversion standpoint point, from a number of permanent placement standpoint.

[Mark Marcon, R.W. Baird]

That’s great. I will jump back in the queue. Thank you.

[Operator]

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

[Dan Dolev, Nomura]

Hey, thanks guys. Great results. Congrats. Two questions. One on the U.S. perm versus temp, I mean, I look at temp growth in the U.S., it definitely accelerated, it looks great and so is perm, but how should we think about kind of temp growing about 4%ish and then perm growing 15%, how does that compare to previous cycles and how should we think about it going forward? Thanks.

[Max Messmer, Chairman and Chief Executive Officer]

If you look back over time what you will see is that directionally temp and perm moved together that they tend to peak and trough at the same time within the peaks and troughs, there is volatility, there is certainly more volatility on the perm side than on the temp side, but frankly it’s usually a earlier cycle sign that perm outperforms temp. So, we are encouraged that with the pent-up demand for full-time hiring that that’s beginning to happen and that typically bodes well for further temp acceleration down the road.

[Dan Dolev, Nomura]

That’s very interesting. I didn’t know that. And then a follow-up question is in your temp guidance, can you maybe give some color as to U.S. versus international cadence and thank you very much.

[Keith Waddell]

So, our guidance overall is pretty straightforward we have pretty much superimposed our revenue growth rates from Q1 on to Q2. We have pretty much taken our gross margin and SG&A structure and superimposed them on Q2 although maybe there is a touch of upside sequentially in our guidance versus what we just reported. U.S. versus non-U.S. I would say that if anything we show a little acceleration in U.S. and a little deceleration in non-U.S. more because of comps than anything else, but frankly both are strong. As you saw, we started out of the gate in April very strong and that was both in the U.S. and in non-U.S. So, good across the board frankly and our Q2 guidance model looks a whole lot like Q1 actual.

[Dan Dolev, Nomura]

Excellent. Great job. Thanks, again.

[Operator]

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

[Andrew Steinerman, JPMorgan]

Hi. I wanted to ask a little bit about the 7% revenue growth at the middle of the second quarter guide obviously the April start on both temp and perm were faster than that 7% and just wanted to know kind of how you set the 7% at the middle?

[Max Messmer, Chairman and Chief Executive Officer]

Well, I’d say first we look at how did we exit the first quarter and we exited the first quarter growing about what we grew for the entire first quarter. So, that’s one input. Clearly, we had a stronger start the first couple of weeks of April than our exit to the first quarter and the first full quarter and so to the extent the April start plays out over the course of the quarter that would certainly be upside relative to our guidance. We hope it’s conservative, but it essentially flows through into the second quarter, the year-on-year growth we had in the first quarter, the comps get a little bit tougher in the second quarter than the first, but not significantly.

[Andrew Steinerman, JPMorgan]

And then just a second question on bill rates, you are very clear to say that you welcomed the acceleration of 2.5% growth in the quarter, could you just give a comment on domestic versus international? Are you seeing this acceleration in both markets? Is it a mix thing? Just give some color on domestic versus international on the same question of what’s happening with bill rates?

[Max Messmer, Chairman and Chief Executive Officer]

I would say that most of the acceleration that you see this quarter is in the United States. They are stable outside of the United States, but the acceleration that you saw is principally a U.S. phenomenon.

[Andrew Steinerman, JPMorgan]

Thank you.

[Operator]

Your next question comes from George Tong from Goldman Sachs. Your line is open.

[George Tong, Goldman Sachs]

Hi, thanks. Good afternoon. In the temp staffing business, gross margins compressed about 20 basis points due to higher fringe benefit costs, can you discuss how you expect these costs to evolve and what your views are broadly as it relates to gross margins on just wage growth and bill pay spreads over the next 2 to 4 quarters?

[Keith Waddell]

So they did compress 20 basis points and if you take out the 20 basis point improvement in conversions they compressed 40 basis points due to fringes and we are talking about holiday pay, we are talking about mandated sick pay. To some extent, we are talking about medical benefits that we pay to certain of our temporaries. Our plan is to raise our pay bill spreads as we move forward to recover those additional costs. The fact that pay rates are rising and clients acknowledge they are having to pay more gives us cover not only to pass through the additional pay rate, but also to recover those additional fringes as well. We made sequential progress in the first quarter versus the fourth in our pay bill spreads. We had credits in the fourth quarter that didn’t repeat that camouflage of that progress. So we are cautiously optimistic that as we move forward throughout 2018 that we will see some relief on the gross margin side. Hopefully, conversions will continue to remain strong. Also, the comparisons get easier as we move forward into 2018. So for all of those reasons, we are cautiously optimistic that come the second half of 2018 we won’t have temp gross margin dilution compared to the year ago period.

[George Tong, Goldman Sachs]

Very helpful. Thank you.

[Operator]

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

[Jeff Silber, BMO Capital Markets]

Thank you so much. In your prepared remarks, you talked about that the bullishness of your clients in terms of their hiring I am just curious how you are feeling about that. Have you accelerated your own internal hiring since the beginning of the year and if so when?

[Keith Waddell]

So, we are bullish about our clients’ bullishness. That said, we had front-ended internal hiring of recruiters and salespeople a few quarters in advance of the acceleration we have seen in the past couple. We have begun to add to our internal staff again. Our plan is to keep those additions in line with the revenue growth rates that we are seeing. So to some extent, we hope to get some leverage of the front ending of the adds we made the last couple of years. On the other hand, we want to continue to feed the hot hand and we want to continue to have adequate recruiters and salespeople as things continue to accelerate. So, we will add the staff, we have added to staff, but not disproportionately to the revenue growth rates that we are seeing.

[Jeff Silber, BMO Capital Markets]

Okay, that’s helpful. And then Max, in your remarks towards the other markets, you talked about some of the proprietary digital solutions that you are developing for your customers. I am not expecting you to give away the secret sauce. But can you give us some high level examples of the kind of things that you are working on? That would be helpful. Thanks.

[Max Messmer, Chairman and Chief Executive Officer]

Well, I am watching Keith here give me the signal that I have got to be careful of what I say, because it is proprietary. As you know, we have done a lot to date that’s obvious in terms of enabling clients to search our databases in different markets and so forth. We have done a lot to make it easier for applicants to apply. All of those were probably expected. I am a little reluctant to say much beyond that, but I will see if my partner here has anything he wants to add.

[Keith Waddell]

Well, we have talked now for several quarters about we intend to be as world class in the digital experience our clients have. As the offline traditional experience that they have had with us, we continue to build out ways that we digitally interact with our clients. And importantly we think it important that, that be integrated with our traditional service, so that there is transparency whether you are a client, whether you are a candidate or whether you are an internal staff person that they get – they see it all no matter how they interacted, because frankly the same client for the same candidate might sometimes interact traditionally and sometimes interact digitally and it all needs to be understood, analyzed and optimized without regards to how the interaction occurred. So, it’s not just about building digital interactions, it’s about doing in a way that’s integrated with what you already do. As Max talked about, we have had what we call candid browsing for some time, we are the first major staffing firm to allow anybody to go online and see our candidate database anybody can go this second to roberthalf.com and do that, but anyway, we are on a multi-quarter journey here to further optimize, to further make available to clients and candidates and to make it easier to interact with us digitally as well as traditionally.

[Jeff Silber, BMO Capital Markets]

Alright. Thanks so much.

[Operator]

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

[Tim McHugh, William Blair & Company]

Thanks. Just Keith, you usually walk through the margin, I know you said at a high level it looks similar to, I guess what you saw in the first quarter, is there any distinctions does that play out through all the kind of pieces?

[Keith Waddell]

All the pieces will be a little bit different, but generally, the margins won’t look that different and certainly in our guidance aren’t that different from first quarter actual. Protiviti tends to do a little better sequentially in the second quarter than the first from a margin standpoint. So, we would expect there to have higher margins in the first quarter, particularly since they had a couple of one-off items that reduced their margins in the first quarter, but generally speaking, margins for Q2 guidance are about the same. They are a little bit higher. The little bit higher is principally because of Protiviti seasonal and absence of one-offs that they had in the first quarter.

[Tim McHugh, William Blair & Company]

Okay. You mentioned someone asked earlier about kind of hiring plans internally and you talked about growing inline with I guess or at least not disproportional to revenue. I guess connected to that, can you talk about SG&A leverage for the staffing business as we go forward from here? Are you looking to lever that line in the next 6 to 12 months or I guess are you thinking about you are bullish enough that you are more focused on adding headcount than trying to find leverage out of that line in the near to medium term?

[Keith Waddell]

Well, we are very bullish. We do intend to add, but not disproportionately so. We still think we can get a little leverage on the front-ending of the heads that we did the last couple of years. Also keep in mind that the digital innovation spend is directly charged against SG&A and we do not see that subsiding over the next 6 to 12 months. So, while we might get a little overall SG&A leverage, I wouldn’t expect it to be huge in the next 6 to 12 months.

[Tim McHugh, William Blair & Company]

Okay. And then lastly the April trends, can you dissect how would this Easter impact that as we look at those numbers I guess the timing versus I guess 2017, did you try and cut it that way at all?

[Keith Waddell]

Well, we looked at it. Everybody as a theory both as to Easter as to how weather hit and impacted, frankly it’s all noise. I wouldn’t get too carried away about Easter impact or weather impacts. The facts are we had a very solid start notwithstanding both of those matters and we feel great about it, but as far as the guidance we gave at midpoint, we didn’t dial that further acceleration up, we hope it continues.

[Tim McHugh, William Blair & Company]

Alright, okay. Thank you.

[Operator]

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

[Ryan Leonard, Barclays]

Hi, this is Ryan Leonard on for Manav. I guess just on that last point, you had called out of snowstorms when you gave the 1Q guidance, I guess was there an impact to the first quarter numbers?

[Keith Waddell]

Right. But one of the reasons we called out the storms because relative to a couple of weeks it has a bigger impact than it does relative to a full quarter. We typically don’t talk a lot about weather, because every year you have got some kind of weather impacts, but when you are talking about a very short post quarter period, weathers can have disproportionate impacts. It’s the only reason we called it out.

[Ryan Leonard, Barclays]

Got it. And then so I guess excluding that tax – the one-time portion of the tax charge, the rate obviously came in towards the lower end of the range. I guess from your understanding do you think we are kind of behind any of the one-time tax charges and is the 26% to 28% range still a right way to think about it?

[Keith Waddell]

Absent further clarifications from an IRS on the transition to the tax code we do think we are behind them. The 26% to 28% estimate that we gave a couple of quarters ago was still intact. The midpoint of our guidance uses a rate of 27% which is right in the middle of that range. So absent further guidance, the one-times are behind us and the rate we see going forward is consistent with the rate we expected it to be.

[Ryan Leonard, Barclays]

Fair enough. Thank you.

[Operator]

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

[Tobey Sommer, SunTrust]

Thank you. Wanted to ask you a question about market share, do you expect increased market share in core domestic S&A staffing and if so how important in integral are your online initiatives as well as something you referenced in your prepared remarks the cross-selling to consulting customers? Thanks.

[Max Messmer, Chairman and Chief Executive Officer]

Well, we are always looking to increase market share domestic and international. Online is a piece of it, something we haven’t talked a lot about, which we are getting a lot of traction with frankly is our staffing operations particularly in the accounting and finance area, Accountemps management resources going to market together with Protiviti. We have had some very significant joint wins where they go to market together. Protiviti manages the project much of the staff that work on those projects come from our staffing operations. So, we have clearly taken those joint activities to a new level. It’s starting to be meaningful. It’s starting to move the needle. We are delighted by that. We believe we have competitive advantage by having under one roof both a world-class consulting operation, Big Four consulting operation in Protiviti as well as the undisputed leader in accounting finance staffing with our finance and accounting brands. So, it’s a wonderful thing and it’s been a long time coming, but we are getting more and more traction, we are getting more and more wins. We are having meaningful wins as we go to market together between staffing in Protiviti and I think that ultimately helps our market share not only on the staffing side, but on the consulting side as well.

[Tobey Sommer, SunTrust]

How much of the growth in Accountemps, in Management Resources, the two units you cited is a result of cross-selling in going to market together with the consulting of the Protiviti business?

[Max Messmer, Chairman and Chief Executive Officer]

Well, we clearly don’t break it out. I’d say it’s more dramatic in Management Resources than it is in Accountemps, but it’s not insignificant with Accountemps either.

[Tobey Sommer, SunTrust]

Thanks.

[Operator]

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

[Mario Cortellacci, Macquarie]

Hi, this is Mario Cortellacci filling in for Hamzah. Want to get a sense of whether you see Robert Half been versus buying further whether it be organically or through acquisition out of accounting and office in admin. As you have in the past in say areas like tech and maybe you can give us a quick update on your M&A pipeline?

[Max Messmer, Chairman and Chief Executive Officer]

Well, I’d say we are already in tech. Tech is beginning to show signs of life for us. We finally had positive year-over-year growth. If you look at the late quarter and early April trends, tech participated quite nicely in the acceleration. We are very pleased with that. As far as M&A pipeline based in Silicon Valley, we see a lot of online centric start-ups related to human capital staffing to gig economy. We have looked at many of those opportunities as we have said before given the opportunity to buy computing capacity in the cloud given the number of applications in the cloud that are available we think there is a stronger opportunity to build versus buy than ever. And as we talked about earlier in the call, we are hard at work building and we have had early success with what we built and we continued to leverage that as well.

[Mario Cortellacci, Macquarie]

Thank you. And just a quick follow-up and then I will turn it over just kind of relating to what you just said regarding new entrants. I know there has been a divergence obviously minus this quarter and your bill pay and then also wage inflation in, wanted to see I guess what your thoughts were on its new entrants maybe it could be affecting those trends or what you see or what you have been seeing going forward?

[Max Messmer, Chairman and Chief Executive Officer]

Well, I don’t think new entrants have had much impact on pay bill trends or pay bill spread trends frankly. There has been a very spirited debate for many quarters about how much slack has there been in the labor force throughout much less the professional segments. We have long said that we thought there was more slack than the overall numbers would indicate, that slack is beginning to tighten and we are seeing wage inflation again beginning to see it anyway. And typically that’s a good thing for us. We can – typically that’s a margin expansion opportunity for us and new entrants that frankly in the temporary help business aren’t that prevalent – aren’t really moving the needle in that way.

[Mario Cortellacci, Macquarie]

Got it. Thank you so much.

[Operator]

Your next question comes from David Silver from Morningstar. Your line is open.

[David Silver, Morningstar]

Yes, hi, thank you. So, a lot of the questions on this call has been posed maybe to the managers of this company, but I would like maybe to change the perspective to the largest owners of the company. So, you have always been a cash-rich company and I am starting with this quarter I see a pretty big permanent maybe 10 percentage point decline in your effective tax rate. Last year, your pre-tax income was over $500 million, this year it’s probably going to be closer to $600 million. So that 10 percentage point drop is basically increasing your already sufficient financial flexibility. So, was the major owners of this company, what is the highest and best use of that incremental cash flow in other words, will we see a significant increase in cash return to shareholders or might we see increased investments going forward. So just if you could comment on what you see as the optimal way to deploy what’s going to be a significant step change upward in your free cash flow and financial flexibility? Thank you.

[Keith Waddell]

Well, I guess the first comment I would make that individually we are very large owners of the company as well and in fact by far and away the largest asset we own is the stock of Robert Half. So, we would like to think that not only can we think like managers we can also think like owners. Further, we have a long history of returning our free cash back to shareholders through a combination of buybacks and dividends. We started it in 2004. We have raised it every year since I think the compound growth thereafter is around 12%. Dollar cost average on the buyback we don’t try to market time, I think if we reduced our outstanding around 25% in the last 10 years if you look at the average price we have paid over that period of time, it’s around 31%. So, we have done okay. But when we think of capital allocation generally, we first look to what does the business need to thrive and to grow given the cash flow characteristics of our business, we can not only do that, but we also have free cash flow and our capital allocation is what I just described, we are very proud of our return on invested capital, which I believe was 35% for the quarter. That’s high not only for staffing firms, but any service company frankly. So, we are proud of our capital stewardship of our capital allocation over long periods of time and we think it served the owners quite well.

[Max Messmer, Chairman and Chief Executive Officer]

Yes, I completely agree with everything Keith just said. So, well, I’d just add that much of our capital expenditure and other investments are designed as we tried to note I think the many conference calls and certainly in our annual report, we are trying to develop proprietary solutions that we think will give our customers multiple ways to interact with us. We also think that by being very careful as it were concerning M&A activity that we have an expectation that, that path will carry less risk and better opportunities for return, because we think the opportunities are significant and we can develop many of our own proprietary solutions. So, there is a rationale to what we do. We do like that high return on invested capital. It feels like a nice hot shower in the morning. Some people have urged us to lever up and so forth, but that has seen prudent to us given our goals as Keith articulated it in terms of returning your excess cash flow to stockholders through buybacks and of course through increasing dividends.

[David Silver, Morningstar]

Thank you very much for that. And just to clarify I know Keith’s point was the one I was trying to make was that you are both leading from – leaders from an operational point of view, but you are also the largest shareholder. So, I was kind of asking you to wear both hats for a moment and share a slightly different – potentially a slightly different perspective? So thank you for that. Appreciate it.

[Max Messmer, Chairman and Chief Executive Officer]

Thank you for the question. Right. We are very grateful to be able to wear both hats.

[Operator]

And your last question comes from Jeff Silber from BMO Capital Markets. Your line is open.

[Jeff Silber, BMO Capital Markets]

Thanks so much for letting me sneak back in. I am not sure if you talked about this, but if you look at the operating profit for Protiviti, operating margin was down a bit year-over-year, it looks like it was all SG&A related. Can you just give us a little bit more color what happened there is that something you expect to continue? Thanks so much.

[Keith Waddell]

Right. So, as we talked about on last quarter’s calls, they have been doping some investing as their pipeline heats up further for the quarter. They had a couple of one-off items that won’t repeat such that we believe for the second quarter you will see better profitability from Protiviti than you saw in the first quarter. Their pipeline is very strong across their solutions, FSI, tech security going to market was staffing. They have now fully absorbed some prior project ins which are now anniversaried and the investment hiring that they have done is getting traction. We are very bullish on Protiviti for the second quarter and the second half of the year, but they did have some one-offs in the first quarter that impacted their profitability.

[Jeff Silber, BMO Capital Markets]

Okay, great. Thanks so much.

[Max Messmer, Chairman and Chief Executive Officer]

Thank you very much. That was our last question. We appreciate your interest.

[Operator]

This concludes today’s teleconference. If you missed any part of the call, it will be archived in audio format ion 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.