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Paul Ginocchio, Managing Director, Business Services and Education Equity Research, Deutsche Bank
Concurrent Session: Operations & Finance Track
TUE, FEB 26 10:15 AM CONGRESSIONAL
Sponsored by:
Deutsche Bank
Wall Street Eyes Staffing ReboundPaul Ginocchio, CFABusiness Services & Education Equity ResearchDeutsche Bank SecuritiesSIA Executive Forum 2013, Orlando
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 072/04/2012
February 26, 2013
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Source: Deutsche Bank Securities
Key Takeaways and Agenda
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2010 DB Blue template
KEY TAKEAWAYS FROM MY PRESENTATION1. Learn how Wall Street thinks about Staffing2. Understand what investors look and pay for in a staffing company (growth &
efficiency)3. Key operating metrics which are correlated with efficiency
AGENDA1. Introduction and Jargon2. Staffing stock performance for the last 7 years in 4 slides3. Where are we in the staffing and economic cycle4. How this cycle is different from the last cycle + ACA5. What investors look for and pay for in staffing companies6. The conversion ratio7. Drivers of staffing agency efficiency
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Part 1: Bio and coverage universe
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2010 DB Blue template
Paul Ginocchio started with Deutsche Bank in London in November 1998 to initiate coverage of the Business Services sector on a pan-European basis. During Paul's over four years in London, he was consistently ranked in the top 3 individually by Reuters and also received runner-up recognition in Institutional Investor's survey. Paul moved to New York in February 2003 to initiate coverage of the Advertising & Publishing sector. He covered US newspapers, yellow pages, magazines, advertising agencies and marketing services and was ranked 3rd in II in 2007. In fall 2008, Paul returned to covering Business Services and in 2012 was second in Institutional Investor's All-America research survey after being third the prior year. He was also #1 in his sector in 2010 in the FT-Starmine awards for earnings estimates. Previous to Deutsche Bank, Paul worked for PwC in Valuation Services and was based in Chicago and London. He received a B.A. in Economics from North Carolina State Univ. in 1991, an MBA at Indiana Univ. (Distinction), and is a Chartered Financial Analyst (CFA).
Staffing Consulting / Info Services Education
Robert Half (RHI, Buy) Huron Consulting (HURN, Buy) Grand Canyon Education (LOPE, Buy)
TrueBlue (TBI, Buy) Towers Watson (TW, Buy) American Public Education (APEI, Buy)
Four of six staffing stocks under performed from peak of temp penetration in Dec 2005 (1.97%) to the trough in temp penetration in Sept 2009 (1.33%)
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Source: Factset and Deutsche Bank Securities
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2010 DB Blue template
Temp penetration rose 28% from 1.34% in July 2009 to 1.72% in Dec 2010,which means temp penetration rose 0.02% a month on average
Early cycle: Investors like the staffing companies as they typically outperform early in the economic cycle
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TBI +42%MAN +31%SP500 +27%RHI +23%RECN +23%
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Source: Factset and Deutsche Bank Securities
Mid-cycle slowdown: Recession fears & temp penetration near previous peak = under performance
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Temp penetration rises only 9% from 1.72% in Jan’11 to 1.88% in Sept’12 (+0.008% / month)
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Source: Factset and Deutsche Bank Securities
This time its different: Outperformance due to belief of an improving economy and ACA
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Temp penetration was 1.88% in Sept 2012 and is now 1.90% in Jan 2011
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Source: Bureau of Labor Statistics and Deutsche Bank Securities
Part 3: Where are we in the cycle?
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Based on last two cycles, we are approaching the peak in terms of number of temps (4.4% below all time peak in number of temps of 2.676m in April 2000 with 2.558m currently) and temp penetration rate (1.90% currently vs 2.03% in April 2000)
We are 45 months into this economic expansion versus 80 months of expansion in last cycle, ~120 months in the cycle before that, and 39 avg. months in all US business cycles back to 1854
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Temporary Help Services, SA (in Thousands) [LHS]
Temp Penetration Rate [RHS]
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Source: BLS and Deutsche Bank Securities
Where are we in the cycle?
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Temp usage as a percent of incremental jobs created peaked at much higher levels in this cycle versus last, and has been steady at 10-15% of all new jobs since May 2011
Temp Jobs Created as % of Total Jobs Created Since Trough in Non Farm Payrolls
Current Cycle (Mar 10 - Jan 13) Previous Cycle (Sep 03 - Jul 06)
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
68.2% of all readings in a normal distribution should fall between the two bandsSource: Bureau of Economic Analysis and Deutsche Bank
Where are we in the cycle?
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Wages as a percent of nominal GDP are currently around 0.3 standard deviations below the 60-year relationship. This should mean stronger labor volume growth this cycle versus last.
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Working off excess labor during the up-cycle which muted growth
Hoarding labor at start of last temp cycle
Workforce cut aggressively
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
Temp penetration: Bulls versus Bears
2010 DB Blue template
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Bulls
Greater incremental usage
ACA is game-changer
Growing economy almost always drives increased temp penetration
Temp penetration grew peak to peak last cycle ex IT
Bears
We are near peak penetration
6-7 months of temp penetration stagnation
ACA will cause a recession and temp penetration will fall
No exec will risk their company by using more temps to avoid incremental ACA costs
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
Part 4: ACA should drive temp penetration to record highs
2010 DB Blue template
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Healthcare reform creates four opportunities for Temporary Staffing firms Lower wage, higher churn employee opportunity
13.3m workers making between $20-60k who do not have insurance from their employer. If 5% of these workers are made temp, adds 25% more temps to the US temp market.
Less than 50 FTE opportunity 21m workers at companies with between 20 and 99 total employees.
Interpolating, this means 2.5m workers between 45 and 55 employees (50,000 companies). If half of the companies make a workforce change due to the ACA and each hires three more temps, it would add 3% more temps to US temp market. RHI cites 130,000 companies (40-50 EEs)
Quality of the temp labor pool increases Everyone will have access to healthcare coverage, even those with pre-
existing conditions, so more people will chose to be temps Help companies reduce their administrative burden
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
What Towers Watson is telling and hearing from large companies
2010 DB Blue template
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Jane Jensen, Senior Healthcare Consultant and lead Acturary on HC reform and HC reform consulting strategy for clients1. Ms. Jensen recommends to large employers to use more temps within a
range of solutions that includes: part-time, temps, outsourcing, and restructuring employee healthcare benefits
2. One of Ms. Jensen’s two dozen clients is heading down the path of using significantly more temps
Potential Negatives1. Companies may focus on restructuring healthcare benefits first (2014?),
and workforce restructuring second (2015?)2. Large companies first response to HR reform is to move workers to part-
time, the secondary response is to increase temps/outsource
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Source: Bureau of Labor Statistics, Staffing Industry Analysts, and Deutsche Bank estimates
US temp penetration last cycle impacted by IT
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While IT staffing contracted, Non-IT staffing grew 26% peak to peak with a likely 10% rise in peak temp penetration
BLS data shows temp wages grew about 9% from ‘00 to ’06
IT temps were likely down 23% peak to peak, which we believe caused the overall temp penetration rate to be flat peak to peak
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
Temp penetration stagnating right now (but its done this before)
2010 DB Blue template
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What are your theories why temp penetration has been flat for 8 months?
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Months of StagnationJun12 to Jan13 Dec10 to Aug11
Temp penetration spiked 0.16% from July’11 to July’12
Do we see another spike?
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Source: Company data and Deutsche Bank Securities
Part 5: Staffing company differences - Exposures
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Investors typically looking to gain exposures to something they think
will outperform or underperform, for example:
Manpower Group Robert Half
Generalist (~64% of GP) vs Professional (~80%) Light Industrial (~48%) vs Acc’t & Finance (~65%)
Large Clients (~55%) vs SME Clients (~80%)
Temporary (87% of GP) vs Permanent (22% of GP)
European (65%) vs US (72%)
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Source: Deutsche Bank Securities
What investors pay for?
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The easiest answer is successful strategies within a given exposure. We believe successful strategies are defined by:
Source: Company data, Factset and Deutsche Bank Securities
The Market pays for Organic Revenue Growth
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• The correlation between TrueBlue’s stock price and its organic revenue growth since January 2008 is 62% (which means 62% of TBI’s share price change is explained by the change in organic revenue growth)
Conversion Ratio = EBIT / Gross Profit Conversion Ratio 25% = $5 EBIT / $20 Gross Profit This is the “true” operating margin of the firm as it excludes the pass through costs, which are salaries of the temps and government taxes
It measuresthe efficiencyof SG&A
Personnel Cost73%
Premises Expenses
10%
Office & Admin. Expenses
7%
Marketing3%
Depreciation3%
Consultants & Associates
3% Bad Debt Expense1%
Adecco 2011 SG&A Breakdown
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
Comparison of Randstad's Three Operating Divisions
Each of On Assignment's divisions have very different characteristics Bill rate, gross margin (mark up), assignment length, temps per internal employee
These characteristics generate very different levels of GP per employee
Brand On Assignment On Assignment Oxford Vista On Assignment On Assignment Apex
Staffing discipline nm Life Sciences IT/Engineering Physician Allied Health Nursing ITLTM Temp Rev($m) as of 3/2012 $1,368 $164 $285 $88 $54 $44 $733Percent of revenue 100% 12% 21% 6% 4% 3% 54%Branches* 125 45 14 5 24 2 49Rev per branch ($m) $11 $4 $20 $18 $2 $22 $15Internal Employees 2,380 290 600 200 138 52 1,100Temporary employees 11,370 2,200 1,500 270 800 300 6,300Bill rate per hour $64-$65 $35 $116 $190 $37 $69 $60Length of Assignment (months) 3.7 4.5 5 1.5 2.5 2.25 5Gross margins (temp) 29.5% 33.5% 34.8% 31.1% 32.0% 22.0% 26.4%Client size na Large Medium Large Large Large LargeGP per temp assignment na $7,400 $28,300 $12,400 $4,100 $4,800 $11,100Temps per client na 2.4 <2 1 1.7 2.5 10.9Temps per Internal Employee na 7.6 2.5 1.4 5.8 5.8 5.7Revs per Internal Employee na 565,500 475,000 440,000 390,100 851,100 666,400GP per Internal Employee na 189,400 165,300 136,800 124,800 187,200 175,900
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Source: Company Data and Deutsche Bank Securities
Comparison of EBIT per employee drivers - Example
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Brand On Assignment On Assignment
Staffing discipline Life Sciences NursingLTM Temp Rev($m) as of 3/2012 $164 $44Percent of revenue 12% 3%Branches* 45 2Rev per branch ($m) $4 $22Internal Employees 290 52Temporary employees 2,200 300Bill rate per hour $35 $69Length of Assignment (months) 4.5 2.25Gross margins (temp) 33.5% 22.0%Client size Large LargeGP per temp assignment $7,400 $4,800Temps per client 2.4 2.5Temps per Internal Employee 7.6 5.8Revs per Internal Employee 565,500 851,100GP per Internal Employee 189,400 187,200
Nursing and Life Sciences are highest GP per internal employee divisions at On Assignment….
…but have very different drivers.
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Source: Deutsche Bank Securities
What drives EBIT per Employee
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2010 DB Blue template
Bill RatePay Rate
Gross ProfitTemp Cost
GP per PlacementTaxes / Workers Comp
Length of Assignment GP per Employee
Temps per Employee
EBIT per EmployeeEmployee Salary
Branch Costs Cost Per EmployeeOverhead per Employee
Employees per Branch
In the following slides we are going to look at the drivers I can analyze
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Source: Company data and Deutsche Bank Securities
Drivers of EBIT per Employee: Temps per Employee
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2010 DB Blue template
2011 Temps per employee vs EBIT per Employee: correlation = -10%
Negative correlation could highlight professional more profitable than generalist staffing
Note: Correlation excludes Michael PageSource: Company data and Deutsche Bank Securities
Drivers of EBIT per Employee: Employee per Branch
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2010 DB Blue template
2011 Employee per Branch vs EBIT per Employee: correlation = 37%
Seems to be a definite industry trend to increase branch size, it creates culture and continuity. Internet has also increased geographic reach of branch.
* Note: Correlation excludes Michael Page due to Michael Page’s 80% perm exposureSource: Company data and Deutsche Bank Securities
EBIT per Employee to PE
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2010 DB Blue template
77% correlation = Very strong relationship between PE (value of company) and operating efficiency
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Source: Deutsche Bank Securities
Conclusions
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2010 DB Blue template
The market obviously pays for growth and margins
As our examples showed, sometimes stocks are more correlated to organic growth while others are more correlated to operating efficiency
Investors are going to judge you versus the market and your closest peers, particularly in terms of revenue growth
Gross margins do not tell the whole story
Companies can have great conversion ratios with low gross margins, and can have bad conversion ratios with high gross margins
A successful strategy will produce a high conversion ratio, in our view
Drivers of the conversion ratio (EBIT per employee) that I would focus on: Employees per Branch - more controllable than pricing (gross margin)
Length of assignment – may enable higher temps per employee
E-mail me if you would like to get on my research distribution list [email protected]
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
22/02/2013 16:03:06 2010 DB Blue template
Important DisclosuresAdditional Information Available upon RequestDisclosure Checklist Company Ticker Price (02/ 22/ 13) Disclosure Adecco ADEN.VX CHF 53.90 14 Hays plc HAS.LN 97 pence 14 Kforce KFRC $14.49 2 ManpowerGroup MAN $54.90 14, 17 Michael Page Int' l plc MPI.LN 430 pence 6,14 On Assignment ASGN $20.68 7 Randstad RAND.AS Eur 32.76 none Resources Connection RECN $12.58 2 Robert Half Int' l RHI $35.36 none TrueBlue TBI $18.83 none
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2010 DB Blue template
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
2010 DB Blue template
Buy: Based on a current 12-month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield), we recommend that investors buy the stock.
Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock.
Hold: We take a neutral view on the stock 12 months out and, based on this time horizon, do not recommend either a Buy or Sell.
Notes:
1. Newly issued research recommendations and target prices always supersede previously published research.
2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of 10% or moreover a 12-month period
Hold: Expected total return (including dividends) between -10%and 10% over a 12-month period
Sell: Expected total return (including dividends) of -10% orworse over a 12-month period
Equity Rating Key Equity Rating Dispersion and Banking Relationships
43
Analyst CertificationThe views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Paul Ginocchio, CFA
Paul Ginocchio, CFASIA Executive Forum
Feb 26, 2013
Deutsche Bank
2010 DB Blue template
Regulatory Disclosures
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Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank’s existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
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