Robert Half International Earnings Call Nuggets: The Affordable Care Act and Demand Trends in Europe

Robert Half International Inc. (NYSE:RHI) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

The Affordable Care Act

Mark Marcon – Robert. W. Baird: One question and one follow-up. The first question has to do with the U.S. Specifically, there has been an increasing level of investor dialog regarding the potential ramifications of the Affordable Care Act and how it could potentially influence the penetration rate on a go-forward basis? Keith, I know you’ve done a lot of work on this. There’s obviously been a lot of dialog between the regulatory agencies regarding a look back period. Wondering if you can give us your latest sense for what the potential impact would be?

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M. Keith Waddell – Vice Chairman, President and CFO: Well, the potential impact of – I think you have to look at two sides of it; one is the potential revenue opportunity and the other is the potential internal cost. On the potential revenue opportunity, clearly firms that have 50 or fewer employees that do not presently offer coverage to their employees will be particularly interested in the Healthcare Act which requires those with over 50 to comply. We are already getting inquiries from our client base for companies in and around 50 asking us to help them understand this legislation and to inquire as to how we might be helpful. Our response is that we can legally help them remain under 50 since we are the employer of record for the temporaries we provide to them and that we have every intention of ourselves legally complying with the act on a go-forward basis. As you talked about as to the cost side of the equation for our temporary employees, there is a 12-month period after we first hire them where they essentially audition to be full-time followed by a 12-month period if one’s qualified, we have to pay or pay for coverage or pay a penalty. It’s our intention to offer coverage to those qualifying temporaries. We’ve done a fair amount of work as to what those costs might be. They require us to estimate the percentage that will qualify as full-time, the percentage that we’ll accept and decline coverage, what the cost of that coverage might be as well as the number of months during that second 12-month period where they would remain an employee. It’s our estimate at this early time that the increase to our costs would be a small single-digit percentage increase to the overall pay rates we provide. So, we believe based on what we know today and clearly it’s somewhat early and subject to those assumptions, we think that cost side will be manageable. Back to the revenue side, we certainly see it as an opportunity or in somewhat of an investigation stage by many of our clients we are getting enquiries. We do expect to add the demand. It’s very difficult to project what that added demand would be. It’s estimated that there are 130,000 firms with 50 or fewer employees that over half of them do not provide coverage to their employees. The good part of the new health care legislation would be those employees who have a new place to go called the state exchange to provide coverage for themselves, but again, long story short, an opportunity hard to quantify at this point, on the cost side, we believe it’s manageable based on our current estimates.

Mark Marcon – Robert. W. Baird: And you think the 12 month look back is solid?

M. Keith Waddell – Vice Chairman, President and CFO: The way the regs have currently been written is that we can rely on the regulations that include this 12 month period, and that any changes that might come out in further clarifications would be prospective only and would only apply after 2015 at the earliest. So, I don’t think there’s any question, at least 2000 through 2014. This measurement or look back period and 12 month stability period are solid.

Mark Marcon – Robert. W. Baird: Then what’s your confidence level with regards to being able to pass along the price increase, pass along the additional cost?

M. Keith Waddell – Vice Chairman, President and CFO: Well, because we believe the additional cost to be a small single-digit percentage, we’re confident that with a little time, we can pass it on.

Mark Marcon – Robert. W. Baird: And how about the administrative costs?

M. Keith Waddell – Vice Chairman, President and CFO: The administrative cost, we currently plan essentially to outsource to a third party. We already have a healthcare offer to our temporary employees and totally at their cost and we have, a third party administer that administers that plan. Our plan is that we would stay with them, so they’re used to having to administer that number of employees, so we’re reasonably confident that we can continue to outsource that function in the future.

Demand Trends in Europe

Timothy McHugh – William Blair & Company: First, just I guess more specifically on Europe, but I guess also on the U.S. I think last quarter there was kind of a growing sentiment and at least I felt that you’re kind of feeling a bottom in Europe in terms of the demand trend. Can you update us on how you think about that as kind of the quarter progressed in terms of growth rates starting to get better here in the next couple of quarters?

M. Keith Waddell – Vice Chairman, President and CFO: On Europe, while the year-on-year growth rates are evermore negative, I think, more relevant would be the sequential growth rates. And as I mentioned in our prepared remarks, the rate of decline sequentially has lessened the last three quarters such that for the fourth quarter on a same-day constant currency basis our international operations were down 1% sequentially and that compares to down 2% and 3% sequentially for the prior two quarters. So, those numbers are generally consistent with what we expected. Our guidance on a sequential basis in the quarter that we’re in would be to continue that trend to down a little bit to even flat sequentially. So, I think, as we’ve discussed before the numbers – the data would show that our European operations are bottoming if you look at a sequential basis because of the comps from a year ago that year-over-year growth rates don’t look as good. The post-quarter start, the perm number was particularly negative. I would invite everybody to go back through time and look at how we started a quarter in perm versus how we reported the entire quarter and what you’re going to see loud and clear is that our start in a quarter as we reported in these calls isn’t very indicative of how we end up for the full quarter. So, I wouldn’t be overly spooked by the post-quarter non-U.S. perm number.

Timothy McHugh – William Blair & Company: Is there anything, as we look forward at the gross margin from my follow-up, I guess, excluding the credits you got in the quarter, the gross margin would still be 36.2 for the temp business. Can you talk through us what you’re assuming going forward and I guess underlying bill and pay rate trends, is there any sign that that’s changing that you could see pressure or do you think you’ll be able to continue to expand that number?

M. Keith Waddell – Vice Chairman, President and CFO: The short answer is in our guidance, we’ve clearly taken away the credit we got during the fourth quarter for workers’ comp and other credits which are roughly 25 basis points to 30 basis points. But absent that, I’d say the pay bill spreads are stable. They are constant where we expand them to the extent we did in 2012 maybe not, but we do think they are stable and maybe there is a little bit of upside there. But particularly for the first quarter, you got to model out the credits we got during the fourth quarter which is consistent with what has happened in prior first quarters.