羅致恆富 (RHI) 2003 Q1 法說會逐字稿

Good afternoon, all, and welcome to the Robert Half International first quarter 2003 earnings conference call. All participants are in a listen only mode until the question and answer portion of today's call. At that time if you have a question, simply press star one on your phone. Today's call is being recorded for instant replay purposes.

Now I would like to introduce Mr. Max Messmer, chairman and chief executive officer. Sir. you may begin.

Thank you, and good afternoon everyone. We appreciate you joining us. With me today is Keith Waddell, our vice chairman and chief financial officer.

On today's call, Keith and I will be reviewing with your our first quarter financial results and providing general guidance concerning our expectations for the second quarter. After our prepared remarks, we'll have the opportunity to answer some of your questions.

Just a reminder that pursuant to Regulation FD our presentation contains predictions, estimates and other forward-looking statements that represent our current judgment on what the future holds. These include words such as forecast, estimate, project, expect, believe and similar expressions. While we believe these remarks to be reasonable, they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements.

We've described some of these risks and uncertainties in today's press release and in our form 10K and other filings with the Securities and Exchange Commission. We do not undertake the obligation to update the statements made in today's conference call.

Now let's review the first quarter.

Revenues for the quarter were $473 million, up 1% from the first quarter of last year. On a sequential basis revenues were down 1% from the fourth quarter of 2002. Earnings per share were negative 2 cents compared with 5 cents for the first quarter of 2002 and negative 4 cents for the fourth quarter of 2002.

Our staffing operations had earnings of 3 cents per share for the quarter and our Protivity (ph) subsidiary had negative earnings of 5 cents per share. Revenues for Protivity were above the estimated range. While first quarter revenues for our staffing divisions were less than the guidance previously given. Overall, earnings per share were within the estimated range.

Labor markets remained weak during the first quarter as the already uncertain U.S. economy was further impacted by the uncertain geopolitical climate leading up to the war in Iraq. Despite negative earnings of $3 million, RHI's cash flow from operations was $25 million for the quarter before capital expenditures of $11 million.

The Robert Half team around the world continues to execute well, in our opinion, generating strong cash flow even during this lengthy recession. We ended the first quarter with $306 million in cash and equivalents in the bank. Our preferred use of this cash continues to be the repurchase of our own shares. During the first quarter we repurchased 1 million shares of our company's common stock leaving approximately 10 million shares available under the repurchase program previously approved.

Keith will now provide a more detailed overview of our first quarter financial results.

Thanks, Max.

I'd like to start by reminding everyone that a copy of today's press release is available online at rhi.com, our 2002 annual report and 10K are also available there.

Turning to revenues, as Max indicated, total revenues for the first quarter were $473 million, up 1% from last year. There were 63 billing days in the quarter, the same as Q1 last year and up one day sequentially from the fourth quarter of 2002. First quarter revenues for Account temps were 204 million, down 4% from last year and down 2% sequentially on a same day basis.

Account temps is our largest staffing division with 328 offices worldwide, this division represents 43% of total revenues. Office team had revenues of 121 million, up 3% from last year and down 7% sequentially on a same day basis. Office team is our high end administrative staffing division and began operations in 1991. It has 309 offices worldwide and accounts for 25% of total revenues.

Robert Half technology revenues were 51 million for the quarter, down 11% from last year and down 6% sequentially on a same day basis. This division was launched in '94 and specializes in placing IT professionals on a consulting and full-time basis. It has 103 locations worldwide and represents 11% of revenues.

Our Robert Half management resources division had revenues of $51 million, down 5% from last year and down 4% sequentially on a same day basis. This division was introduced in '97 and specializes in placing senior level accounting and finance professionals on a project basis. It operates in 92 offices worldwide and accounts for 11% of revenues.

Our permanent placement division, Robert Half finance and accounting, reported revenues for the quarter of 22 million, down 15% from last year and down 3% sequentially. This business was established in 1948 and operates in 328 offices world wide. It accounts for 5% of total revenues.

Our Protivity subsidiary, which is coming up on its one-year anniversary next month, had revenues of 24 million for the quarter. Protivity offers businesses full outsourcing, co-sourcing and consulting services in the areas of internal audit and risk consulting.

During the first quarter we expanded Protivity to London, Tokyo and Singapore, bringing our office count to 34 locations in the U.S., Europe and Asia. It now comprises 5% of RHI revenues. Protivity continues to gain traction and we continue to see significant activity. Results for the quarter exceeded our expectations and were above the range of guidance we provided last quarter.

Areas experiencing notable increases in activity include Sarbanes-Oxley Act Section 404 compliance, regulatory and forensic investigations, technology security and the establishment of new internal audit functions.

International staffing revenues for RHI were 84 million for the quarter, up 1% from last year and up 4% sequentially. Our staffing division currently operate in 59 locations in ten countries outside the U.S., international staffing operations account for 18% of total revenues.

Temporary and consulting staffing gross margins were 149 million for the quarter representing 34.8% of applicable revenues. This compares to 35.9% of revenues for Q1 2002 and 35.1% of revenues for Q4 2002. The 25 basis points sequential decline relates primarily to higher unemployment insurance costs, which were partially offset by stronger pricing and slightly higher conversions.

Overall, staffing gross margins were 171 million for the quarter and 38.1% of staffing revenues. This compares to 39.5% of revenues in Q1 2002 and 38.3% of revenues in Q4 2002. The sequential decline in overall staffing gross margins reflects the lower temporary consulting gross margins just discussed.

Gross margins for our Protivity subsidiary were negative 1.4 million for the quarter, a sequential improvement of 4.2 million versus the fourth quarter of 2002. This improvement relates to the higher revenue levels for the quarter.

Staffing SG&A costs for the quarter were 163 million, representing 36.3% of staffing revenues. This compares to 36.6% of revenues for Q1 2002 and 37.1% of revenues for Q4 2002. The 8 million sequential reduction in SG&A relates primarily to lower bad debt expenses and lower overhead costs, including technology infrastructure costs. Protivity SG&A costs were 9.9 million for the quarter, up slightly from the 9.4 million in the fourth quarter.

These costs consisted primarily of expenses for payroll, advertising and rent -- advertising expenditures will remain relatively high for the balance of 2003.

Operating income from our staffing divisions was 8 million for the quarter. The temporary and consulting divisions contributed 9 million of this amount while the permanent placement division had negative operating income of $1 million. Protivity had negative operating income of 11 million for the quarter before intangibles amortization of $2.8 million. This was a $3.7 million improvement from the prior quarter.

Cash and equivalents were 306 million at the end of the quarter after funding 11 million in the capital expenditures and repurchasing 1 million RHI shares in the open market during the quarter. We also acquired the RHI franchise for the Louisiana market during the quarter.

Accounts receivable were 222 million at the end of the quarter with implied days outstanding of 43 days. This compares to 49 days at the end of Q1 2002 and 43 days at the end of Q4 2002. We continue to be pleased with our management of working capital during this economic downturn.

Turning guidance, in an accordance with Regulation FD at this time we will offer general guidance for the second quarter of 2003. As you know, we do not assist analysts with their detailed models. Our guidance is based on the following business trends. On a same day sequential basis during the quarter, temporary and consulting revenues were down in both January and February before increasing in March. Permanent placement revenues were up sequentially in January and in February, but declined in March.

For the first week of April, revenues from our temporary consulting businesses were up 0.4% versus March. For the first two weeks of April, revenues from our permanent placement division were down 6% sequentially versus March. Of course, perm revenue trends are difficult to measure over such short periods of time.

Based on this, our guidance for Q2 is as follows. Staffing revenues a range of 440 to 460 million. Protivity revenues, a range of 24 million to 28 million. Staffing earnings per share. 2 to 4 cents. Protivity earnings per share negative 3 to negative 5 cents for the quarter.

As you know, these estimates are subject to the risks mentioned in today's press release.

Now I'll turn the call back over to Max for additional comments.

Thank you, Keith.

Clearly, weak labor markets continue to impact our staffing operations during the quarter. The Department of Labor reported significant declines in non-foreign payroll in March and the National Federation of Independent Businesses' Small Business Optimism index declined 1.4 points in March following a 3-point drop in February.

Until we see definitive signs of an economic recovery, companies will likely remain cautious about hiring. That said, we do expect an increase in demand for temporary professionals coming out of this lengthy recession. It is cost effective to use qualified project professionals and as the economy improves, we continue to believe employers will seek interim help to meet increasing work demands.

Of course, current trends fail to offer any visibility into when we might begin to see a true recovery. As we said before, Keith and I obviously are not macroeconomists, but with history as our guide, we remain bullish about the long-term outlook for RHI and the staffing industry as a whole for a number of reasons.

There is room to grow in the U.S. When measured as a percentage of the total workforce, the temporary services industry is less developed in the U.S. than in many European nations. We believe the potential size of the market for our services is considerable. In fact, we estimate that RHI's specialized staffing businesses do business with probably less than 10% of eligible U.S. prospect companies.

There's also room to grow internationally. Other countries have long recognized the value of highly skilled temporary and contract employees. Over the past six years, revenues from RHI's international operations have grown four fold and we believe there's significant potential for future growth.

The professional segments of the staffing industry in which RHI continues to be the recognized leader are less developed than the general temporary services industry as a whole. Protivity, our new subsidiary is well positioned, we think. This subsidiary already is becoming recognized for its expertise helping businesses improve their systems of internal controls, including assistance with the requirements of Sarbanes-Oxley and other corporate governance standards from the stock exchanges and the SEC.

Technology risk consulting is another area of the business with significant potential as companies work to safeguard their IT assets and manage other business risks related to technology. As Keith noted earlier, we are very pleased with the number of new engagements and proposal activities. RHI remains in excellent financial position with no debt, strong cash reserves and the ability to generate cash flow even in extremely difficult economic times.

Add to that our experienced field management team, established network of offices, proven brand equity and technology investments, and you can see why we're optimistic about our future growth.

At this time, Keith and I will be happy to answer questions. We would like to allow as many people as possible to participate. So please limit yourself to one question and a single follow-up as needed. If you have additional questions we'll try to return to you later in the call.

Thank you.

If you hear your question answered and wish to withdraw, you can do so by pressing star two.

Our first question comes from David Bilik (ph) of Morgan Stanley.

Hello, Mr. Bilik?

Hi. Sorry about that.

Hi, Max and Keith.

Hi.

Some follow-up questions related to Sarbanes-Oxley. First, we were wondering if you could provide any more detail on the impact on the other business units? I mean, clearly we can see that the overall economy has made it difficult for Account temps and Office teams, et cetera, we were wondering what types of impact you might be seeing there?

I would say that particularly with management resource we are seeing some positive impact from Sarbanes-Oxley and in fact there have been some engagements where Protivity and management resource jointly have worked together. But I would say the largest impact to our staffing operations has been to management resource.

And maybe just one follow-up since you said we could have one. Last month or I believe two months ago, you put out a survey discussing how some private companies are also looking to make some changes in their internal audit functions and they need help with that as well even though they're not -- Sarbanes-Oxley does not apply to them. Do you have any more information about that as well?

You have private companies with public debt. You have private companies with directors that are also directors of public companies and the thought is good governance practices that relate to you public companies ought to also relate to public companies. So we are seeing some demand from private companies that otherwise wouldn't expect. Not for profits would be another example where it isn't an absolute requirement but because of the influence of board members similar type of standards are being imputed.

Maybe one final question if I may. How has the pipeline been changing over the past few months? Increasing, decreasing, any sense for that?

Well, I would say if you look to actual results over the course of the quarter, we did better each month relative to the prior and I would also say the pipeline is very robust and includes not only Sarbanes-Oxley work but the work in the other areas that we mentioned in our release, the regulatory and forensics work, the technology security particularly in the wireless area work and there are a significant numbers of companies that have never had internal audit that are for the first time establishing internal audit and that's also driving demand.

Terrific. Well, thank you. I'll let someone else get on.

Thank you.

Our next question comes from --.

Sorry about that, Dave.

Andrew Steinerman from Bear Stearns.

Hi, I'm on a regular phone here, so it should be a little easier. When I look at the revenue trends you just described over the past couple of months for our temporary business it strikes me as a little odd, since we all know that the economy hit a soft spot in March and early April with the war initiatives, but when you look at your temp business, that's actually the period of time when you finally saw some pickup. Do you have any explanation?

We don't have any magical explanation, Andrew. Clearly, our temp business firmed in March. And that was on top of two quarters that had been -- excuse me, two months that had been challenging prior to that.

What was odd as well as the perm business was just the opposite.

Yes, I know.

They were polar up a signifies of each other. Although part of the perm trend is probably explained by December being soft in perm which kind of formed a basis for that sequential comparison and that's a seasonal thing. So I'm not sure we have any magic answer for you.

It would only be a partial explanation at best, Andrew. But we did have an unusually severe winter and that caused some problems on the eastern seaboard and some of the offices in the mountainous states, but again that, would only be a modest explanation.

Right. That's a February point, right?

Right.

Then looking at your next quarter again on the topic of seasonality. It seems like your temp and perm business taken together will be rather stable when you talk 440 to 460 even though this is a quarter where seasonal business sometimes falls off in your largest division.

Yeah, I would say that all seasonal bets have been off for a few quarters now. And so we built in a little bit of provision for some seasonal softness, but again, because in the fourth quarter and the first quarter we didn't see the seasonal increase we would have expected, we didn't dial in big seasonal declines either.

Okay. That's very helpful, thank you.

Thank you.

Our next question comes from Randy Mehl of Robert W. Baird.

Good afternoon, Max and Keith and you know, nice job on Protivity front. Good to see some progress there. On the gross margin side, I just wanted to the pursue that little bit. Since lower temp gross margin was related to SUDA (ph) should we expect that number to increase throughout the year?

Well, it's been our understanding that GAAP has also said you estimated your effective SUDA rate for the year and applied that to each quarter.

Okay.

So there's no time based reason it should change.

Okay. So for the part, you mentioned strong pricing and conversions. When you look at the pricing, can you quantify kind of the spread, the difference in wage growth versus rate growth in the quarter?

Well, I guess what we would share is that we expected about a 50 basis points negative impact due to higher state unemployment rates. And we only saw half of that. And so that other half is kind of split between better pricing and to some degree higher conversions, although again remember that those higher conversions are comparing to the fourth quarter which seasonally has that very weak December in it.

Right. Understood. Okay. Just on the SG&A as my follow-up here, very big reductions. You mentioned bad debt expense and technology. Could you quantify, obviously, if you could quantify the two of them, I'm just interested in why this point in the cycle would bad debt be less of a factor for you or did you just overestimate it, you know in prior quarters? What's your thinking there?

Remember that in the fourth quarter, when we had a fairly large charge for bad debts that was somewhat larger than usual. Though the absence of that fourth quarter large charge resulted in sequential improvement.

I guess my --

And we've got a somewhat higher provision in the first quarter, but not a significantly higher provision, which is what we had in the fourth quarter.

I guess what I'm getting at is Q2 and beyond more like Q4 or Q1?

We certainly hope it's more like Q1. That's our expectation and that's the rate at which we're providing which again is still somewhat higher than what we traditionally provide.

Okay. Thank you very much. I appreciate it.

Thank you.

Our next question comes from Jeffrey Silber of Gerard, Klauer, Mattison and Company.

Good afternoon. Hi. A question on the conversion fees. You mentioned the diversion trends intra-quarter between your temp business and your perm business and I was wondering if your conversion fees followed one or the other?

I guess the point we were trying to make, Jeff, is that the sequential trend in conversion all has as its base December conversions and December conversions just like December perm are always quite low. Though the sequential trend in conversions just like the sequential trends in perm, it was probably pretty good for the very same reason.

As my follow-up, you mentioned the repurchase of your Louisiana franchise. I was wondering if you could quantify what the impact was on the quarter and roughly when, during the quarter, that was repurchased?

It was a very, very, very small franchisee. And had no discernible impact on revenues or earnings during the quarter.

Okay. Great. Thanks a lot.

Thank you.

Our next question comes from Brandt Sakakeeny (ph) from Deutsche Banc North America.

Hi. Couple of questions. Could you update us on the cap-ex plans for the year based on the 11 million in the first quarter?

I think we said last time our range for the year was like 40 to 50 million. So the 11 million kind of tracks on that. During the quarter, you still got several Protivity offices moving in into new space, new tenant improvements, furniture for that space, et cetera. So there will be some of that at least for a quarter or so. Then in to that, there's always kind of maintenance cap-ex, then there's also kind of an ordinary course number of leases that expire that many times you move and incur other costs with.

Okay. Can you also give us the share count at quarter's end?

Share count at quarter's end? Share count is somewhat odd because we don't know the impact fully diluted because of the loss.

Right. I'm just trying to figure out if you have -- I mean I guess it amounts to a penny gain three cent loss for the quarter I'm just trying to figure out what the sensitivity is for basic and diluted either way given the share repurchase too and timing of that.

I would have to do some looking here. Just a second. We'll get back to you here in a second.

Okay. That's fine. One other final follow-up. Is the tax rate question. It looked like it was a little lower in the first quarter than I anticipated. Should we assume 35 for the rest of the year or closer to 34.5?

Well, the tax rate is unusual because of our operating income on staffing is so low and our overall income is negative. The impact of permanent differences, things like nondeductible travel and meals et cetera were, as they aren't large dollar numbers, they have a large impact percentage wise on your tax provision, so it's more of a nuisance and noise quite frankly in the scheme of things, but it makes the rate jump around. So whereas the rate had been consistently 38% quarter after quarter. It's probably not going to jump between 30 to 38 quarter to quarter.

Okay. Great. Thank you.

Our next question comes from Greg Cappelli of Credit Suisse First Boston.

Hi guys, Greg and Josh. Two questions. Given the higher revenues that are given for Protivity. I remember you talked about this last quarter, talk about the progression of perhaps the business closing, I think more towards end of 1 Q going to 2 Q. But given the outlook, you know, is this a division that can become profitable by year end? I guess do they grow under the current cost structure maybe more quickly or do the higher levels of investment begin to slow down? Just a little more color around that, please.

Well, we certainly appreciate the question. But as you know, we've consistently had a policy of not going beyond one quarter at a time into the future. And we've kind of given the guidance that we've given for the quarter just coming. We're basically saying the low end of the revenue estimate is what we just did this quarter, which was 7 million more sequentially than be did last quarter and that the high end of our range would say we could do another 4 million on top of that. So again, we're trying to indicate with the discipline of not looking forward beyond a quarter but that said, given the trends, we're quite optimistic about Protivity and its prospects.

Keith, maybe just put it another way, would it be something on the higher revenue levels you would expect to continue to invest at higher levels or are you pretty much set at where the spending should be for the year and the results are what they are from a top line perspective it?

You've bifurcate indicate it a bit. We have opened operations and we are investing there and they certainly impact the results of the total Protivity operation. But from a domestic standpoint, our cost had been fairly stable and constant for a few quarters.

Okay. What about partners? Did you add any to that division the quarter just a quick look?

It's roughly the same.

Okay.

Roughly the same.

Going back to the prior question on the shares at the end of the month, it's 167,947.

Just one more quick one on the SG&A which was down sequentially you mentioned lower bad debt and infrastructure comforts. On that note, I assume you guys are sticking to what you said in the past, cutting fat, not muscle I guess the questions that continue to be the case here.

That's absolutely the case. Understand that a lot of that overhead reduction as we've had this couple three year kind of major IT project, one after the other, that's winding down from a development standpoint and so there's some cost savings associated with currently levels of activity from an IT perspective versus activity levels the last couple, three years. But that's got -- that's very unrelated to our investment in head count particularly in the field. And I think if you looked at our 10K you saw that our head count was essentially flat, down a percent or so, 2002 versus 2001 which kind of underscores the commitment we've made to our best people, even during this downturn.

Okay. Got it. Thanks, Keith.

Thank you.

Our next question comes from Matthew Litfin (ph) of William Blair and Company.

Hi, good afternoon. The question is I guess for Max, I wonder if you could give us an update for the competitive front for staffing as we continue to experience the weakening labor market in Q1 as you mentioned?

Well, Matt, it's a tough quarter, you've seen some competitor results I guess. And as people expect it's continuing to be a tough environment. Usually you expect manufacturing to pick up first, then commercial, then professional staffing. There's not a lot out there to alter that pattern. We continue to feel comfortable that we're not losing, but in facts gaining market share some n some communities. We continue our advertising. We continue to work with our top people. We just had you're big event year from our top performers around the country and spent a full day getting top ideas, set as to local markets and so forth. We feel we're well positioned. As Keith just said, we're sticking to business as best we can under the circumstance. And we're waiting for some economic improvements.

I do think that as we've noted probably in the annual report and maybe in some of these prior conference calls, I do think smaller competitors are suffering more in the recession as you might expect. This is sometimes an easy business to get into and not a very easy business to grow in, particularly in a rough environment. So we have seen a lot of fall off and smaller competitors in different local markets, but just for a quick overview of the competitive environment, that would be it.

Just one follow-up, if I might, on pricing. You guys have continued to maintain your pricing in an impressive way. So the question is do you feel like you're having to work that much harder today than even three, six, nine months ago in order to do that? Or about the same as before?

I think you have to have a tremendous attention to detail in terms of how you manage the spread, in terms of what you're paying candidates and charging clients. The typical client is focused far more on quality than price. We have to be very focused that we're certain on giving the quality that's required. To the extent we are, I think it becomes easier to manage the spread and maintain pricing. But again, that's something we pay attention to on a local level all the time and talk about all the time. But it all starts with being sure you're doing a good job. At the end of the day, it's the cost of the project that matters most to the client, not the rate. Everybody focuses on the hourly rate, but what they're really focused on is the cost of the project and did they get the value they were hoping for. So we're very focused on the quality delivery and as long as we do that we can handle the pricing.

Great. Thank you.

Thank you.

Our next question comes from Kelly Flynn of UBS Warburg.

Thanks. On Protivity, I wonder if you could speak to how the compensation model for the partners will change at the one-year anniversary of the transaction, if you will? That is the first question. Thanks.

Right. I would say, Kelly, the biggest difference would be that there were some incentive pay guarantees that extended one year that will kind of go away at the one-year anniversary. But structurally, other than that, there won't be huge changes.

Okay. All right. Then just the follow-up, you mentioned the offices that you add internationally at Protivity. Could you tell us when during the quarter those were opened and just to clarify did you add any additional offices after the close of the quarter?

As to did we add further offices after the quarter, no. We certainly have a handful of foreign countries that are on our target list had a we would like to add a Protivity presence and will do that as we get comfortable with the people that would be available in those markets. But we've closed nothing since the end of the quarter.

Okay. What about the timing of the openings of the other offices?

They are kind of spread throughout the quarter. You know, the London, I guess we did the first of February. Tokyo we closed in March.

Okay. All right. So I'm getting at the costs. Do you think the costs for those openings are fairly evenly spread throughout the quarter?

Well, I would say maybe it was a little bit back ended, meaning maybe you have to build in a little more queue versus what we experience midQ1, but they're not large dollars order of magnitude and we've certainly considered that in the guidance that we've given.

Thanks a lot.

Our next question comes from Adam Waldo (ph) of Lehman Brothers.

I just want to follow up the discussion of cost savings going forward from, if you will, elevating the anniversary technology spent. Keith, can you give us a little more quantification of annual cost reduction in SG&A as you now move to that lower level of activity.

Well, I certainly wouldn't dial in further reductions based on what we just reported. But by the same token as to bad debts, it's our hope that our write Geoff experience has leveled off as have appeared to have leveled off, but again, there's some uncertainty there. But we're hopeful that what you see in the first quarter is representative of what goes forward. From a technology standpoint, it's clear we wound down the development efforts of the last couple, three years. However you're yet to see some additional depreciation for things that are getting, that will be placed in service over the next couple of quarters. So from a non-cash depreciation standpoint, you're actually going to see it go up, I don't know, a million, million-and-a-half a quarter or so, before we get to the end of the year.

On just depreciation?

That's right.

On to option solution I wonder what you're looking for '03?

I'm not sure we have a number per se, we fairly consistently applied our option compensation philosophies for a number of years. And the number of grants we've made in the last few years have been very consistent. And at the present time we don't see a major modification of that policy.

Okay. Fair enough. Then one final one if I could. Could you just quantify for us a little bit more the bell right inflation change that you saw in the quarter in the temp staffing businesses?

It was low single digits.

One, two percent, something like that?

That's right.

So roughly the same as in the fourth quarter then, maybe a little better?

It was a little better than the fourth quarter.

Okay. Thanks very much.

Thank you.

Our next question comes from Mark Marcon of Wachovia.

Good afternoon, Max and Keith. With regards to the meetings that you just had with all of your top performers, last year at this time, when you came out, you indicated to us that you know they sounded pretty optimistic about what they're seeing in the field, things of that nature. Could you tell us about the tone and morale from the troops at this point? I mean it's obviously been a tough three years now?

Well, these are professional people. They do what they do well because they have a sales orientation and is a rare sales person who isn't optimistic. So I would say from an anecdotal standpoint, their enthusiasm was as great as ever. They know we've been at a war and this is a much tougher recession than historical ones. Many there were with us through the last recession. So we have a lot of veterans of foreign wars in the group. But I would say the group is optimistic and enthusiastic. They note company is in good shape financially, they feel good about our positioning in the market, but they recognize it's a tough economy.

I think these are the true performers. They have made it through difficult periods and they expect to be when things improve. They understand that to some extent we can't control the macroeconomy, but as it improves they stand to benefit greatly. I would say overall, the (inaudible) is very good. The morale is good, we have a great group of field leaders who have been with us for a long time. And it was a great series of meetings. But they would like to see the sun come out, everybody is tired of the rain, no question.

I noticed that the number of employees that you have is fairly constant relative to last year on the 10K. I'm wondering if you can talk a little bit -- have turnover rates gone down?

They have. We don't publish those rates, but they have. I think as we've said in other calls in the past, that typically your turnover is highest the first 12 to 18 months and after that, it drops off dramatically, but on after overall basis, you're right, turnover is down somewhat.

Great. Going back to the gross margin, I just want to make sure I understand it correctly. Are you saying that SUDA negatively impacted by 25 basis points sequentially?

Net net.

Right.

Gross it would have been more like 50 basis points sure, but the net difference from Q4 to Q1 was a net 25 basis points.

Right.

And the conversion rates, were they in the 3 percent range?

They were still very much at the low end of the range. They were just slightly better than the fourth quarter. And the point I tried to make is in the fourth quarter, they were particularly weak.

Got it. Okay. Great. Then just with regards to Protivity, doing the simple math it looks like we're planning on spending, potentially, a couple million dollars more in Q2 relative to Q1.

When you say investing?

Personnel.

Are you talking about direct costs, SG&A?

Direct costs.

Direct costs?

Right. You just opened up a number of offices, so I imagine you have to staff them up.

You have the full quarter impact of the additional staff at our national office. You're going to have reimbursable expenses and as activity levels increase you're going to have more of those. To the extent you use RHI staffing division professionals on Protivity engagements, that's an incremental cost that gets captured there as well. So all of the revenue doesn't fall to the gross margin line, but a significant portion does.

All right. Do you know if there's, is it too early to tell if there's any sort of seasonality with regards to Sarbanes-Oxley?

You know, I think it's way too early to tell. I think companies have been in various stages of denial about the level of effort needed to comply with 404 and that many are beginning to get did. And there are some quite large engagements now being performed around it. But seasonality, that's hard to discern that at this moment.

Are they year long engagements, six month engagements? Do you have a sense?

Well, the big deadline is for the calendar year 2003 companies their audit report issued in the first quarter of 2004 from our external auditor has to have that external auditors as tags opinion on controls and further management has to make a representation on their system of internal control. So what everybody is working towards is making sure they can get their external auditors in a position and management is that position to make the representation and those auditors to do the opinion they've got to do which means there's got to be a lot of work done second, third and fourth quarters.

How big is Sarbanes-Oxley as a percentage of overall Protivity? Any sense?

We're breaking out percentages at this point. It's meaningful, but it's certain not all that's going on.

Would it be around a third?

We're not breaking out percentages, but it's meaningful.

Thanks.

All right.

Thank you once again. Participants if you would like to ask a question, you can do so by simply pressing star one on your phone key pads.

Our next question comes from Marta Nichols from Banc of America.

Hi, thanks, maybe a follow on to what Mark was asking, can you give us a sense or do you know yet whether the how much of Protivity revenue that you're seeing come in now is potentially sort of project-based versus something you would anticipate to be say recurring revenue on an on going basis like an audit relationship and Sarbanes-Oxley may become that I'm just curious.

Sarbanes-Oxley is a curious situation because many are funding their Sarbanes-Oxley work with their annual internal audit budget. So to the extent this year they expended their internal audit budget on Sarbanes, the next year, they expend it on something else. It's hard then to label the are Sarbanes-Oxley project one time or is the Sarbanes-Oxley an integral part of an annual annuity. So that's somewhat semantics quite frankly at the moment. But clearly there, is a significant amount of Protivity's ramp up that is for outsourced, co-sourced internal audit engagements, some of which have a component of 404, some of which are brand new internal audit engagements where the first project is 404. So it's hard to be very precise, but clearly, there is a significant element of ongoing work, but Sarbanes-Oxley clouds that a bit.

The hope is as you develop relationships with clients that you're in the inside position for future work related to internal audit work in the future.

And if you think about what you're doing with 404 and Sarbanes-Oxley, it gives you an opportunity to get in and extensively look at a company's controls there. Is no better entree into follow-up consulting services than those type of projects. Furthermore what you're finding is for many companies, it would take years to be able to go in, meet with their C level execs, audit committee and their board and propose and kind of show case your credentials. Where Sarbanes-Oxley is routinely giving you that opportunity which is a wonderful marketing opportunity for Protivity win or lose and believe me it's competing quite effectively with the big four.

That was actually a great segue into my follow-up questions, I know in past calls when you brought the Protivity folks on, you were concerned, maybe not concerned, but you did express that the company was seeing maybe less traction early on in part because competing against the big four was difficult. I think you described it as big fourites, are you finding that is less prevalent that companies are being cured of that in part by advertising or some of the things that have gone on with the big four firms, is it making it easier, I guess?

The answer is definitely yes. What you're finding is Protivity has really carved out Sarbanes-Oxley 404 as something they were really going to focus on so we've applied technology resources as to the tools that we built in providing those services. We provide extensive training for the Protivity, we've invested heavily in subject matter experts, deep skills in the area, we have relationships with the SEC and other regulatory agencies around this. So we've made a huge push in Sarbanes-Oxley to credentialize Protivity in the marketplace and I think we've had unbelievable success. And that success has spilled over into not just Sarbanes 404 engagements, but to internal audit and other engagements as well.

And the truth is, as it relates to the big four, there's always one of the firms, at least one of the firms that's conflicted because they're the external auditor. We're finding more and more that conflicted external auditor would rather have us in there than one of their other big four three competitors. So we've had honest where we've had referrals from that big four accountant or that big four accountant is certainly an influencer with the management they've known many years as their external auditor and management board's decision who to choose and Protivity is competing quite effectively today with the big four.

One thing I would add to that it's a rare client that doesn't check references before hiring someone for something as important as this. And people at Protivity have a long history at Andersen. They've worked with a lot of clients, a lot of clients know them well and their references check out extremely well and that has served Protivity well in terms of gaining new assignments.

Thank you very much. Just a small follow-up on Kelly. I think asked about the compensation guarantees. I think you said there were some small portion of those guarantees that go away at the year one mark. How far down do those guarantees go? Are they just for the partners or do they run deeper into the organization?

We had kind of a six month arrangement with everybody below the partner level and that date ran last November and there was very little fallout once those guarantees went away, if you will. It's only the partners, the former partners that are now managing directors that we're now talking about. Clearly we will take an annual look at how we compensate these former partners, but we set a general structure in place as part of the initial transaction and sure we're going to tweak that general structure somewhat. It's probably going to be a little more equity oriented, a little less cash oriented, but the general structure for most of the former partners is pretty much in place.

The point being, were there elements of it is that were one time such that the cost structure of paying those guarantees will change in June?

I would say probably not. The issue was for the first 12 months kind of the performance conditions to get their incentive pay or effectively guaranteed by us. Past that first 12 months to earn that kind of compensation, there will be performance conditions. But in setting those performance conditions, we will very much consider the environment that Protivity is operating in and it's startup nation.

So while those guarantees are all off, it's not like the costs will change in June?

I think that's a decent, decent assumption.

Okay. Thank you very much.

Our next question comes from Fred McCrea from Thomas Weisel Partners.

Good afternoon, gentlemen, I'll keep it brief. Quick question in terms of the temp business and where from a industry perspective where you see areas of stream and conversely areas of discrepancy and weakness in terms of your customer base?

There are no pockets that just stream at you positively or negatively. I think functional trends as exhibited by different lines of business pretty much speak for themselves. You had year over year growth and office team. Which is a more of an early cycle participant and you haven't had as strong a performance in the last several quarters from the accounting and finance sector which is very classical.

Great. Thanks so much.

Thank you.

Our next question comes from Kurt Muller (ph) of Drezerin (ph).

Good afternoon, ladies and gentlemen. Just want some clarification on a few things and I apologize. What did you give as far as guidance from the earns on the staffing side in the second quarter?

We gave a range of two to four cents.

And also for cap-ex for the whole year.

Forty to 50 million.

All right. Thank you very much.

Thank you.

Thank you.

Our next question comes from Ed Silver of Giragard (ph).

Good afternoon I'm sorry, just a couple of quick follow-ups. Keith, you mentioned the tax guidance. If you would repeat that I would appreciate that.

The guidance was it's going to jump around more than traditionally, because at low levels of income, positive or negative. The impact of nondeductible items is exacerbated so. What you're going to find is I'll use a range between 30 and 40 percent whereas it's traditionally been spot on right at 38. What's happening is the impact of nondeductible expense like half of meals as an scalpel whereas in the scheme of things aren't large dollars have a disproportionate impact on your tax percentage division.

Okay. Great. Also in terms of your guidance on revenues, did you break out guidance between temp and perm for the quarter?

No.

Something you would be willing to talk about at least in terms of trends?

Well, as you know, particularly in the perm business, it's lumpy as we've used in the past quite, therefore, I think it's more are prudent to stick with the overall staffing assumption.

Okay. Fair enough. Thanks a lot.

Thank you.

Our next question comes from David Bilik of Morgan Stanley.

Hi, Max and Keith, I apologize for the background noise here at the airport. I hope you can hear me okay. Just a quick question on Protivity. Can you comment qualitatively or quantitatively at Protivity for the former partner, peoples and the regular staff and how that's been trending?

It's certainly been trending up or north or better. There certainly is a certain amount of unused capacity still within those people as we speak. But we're not in a position at this point to start publicly talking about utilization rates.

If the economy were to stay sluggish for long than you currently expect, at somewhat point would you consider head count reductions among those not generating sales. Is that something you would not consider or is that something you are actively considering currently?

Well, when you think about the down cycle, those who remain with us, are our very best people and we struggle to hang on to them as demonstrated by our last 10K and those head counts. So it seems like an odd time to start throwing in the towel now with respect to keeping your best people.

Just to be clear. Not necessary lit senior people, the revenue generator, but just the lower level people the professional staff, even for them, you're not inclined to have any layoffs to boost utilization?

Again, are we talking about non-sales staff? Are we talking about headquarters administrative staff? Are we talking about more junior sales staff in the field?

More on the junior side.

Well, again, you have to have somewhat of a pipe so that they can become more senior people down the road. So you can't totally shut down the pipe, particularly given the turnover we traditionally have those first 12 to 18 months as max talked about. But I think suffice it to say, we work very hard to hang on to our very best people and we remain committed to do so. And it seems that, and it's everybody's hope this downturn is pretty long in the tooth and ware not about to change now.

I appreciate that. One more follow-up question if I could. If I heard correctly, I thought you guys said the gross margin was moderate because of the unemployment taxes being up on a year over year basis. I thought you said on the last conference call, you expected to task those through. Was that achieved through with some time play or did I misunderstand?

We said it would be around 50 basis points. We would try to pass through as much as we could, quite frankly, we were pleased that we passed through half of it in this kind of market. So if anything, we were pleased on the up side with our pricing performance during the quarter where we only had a negative 25 basis points impact from state unemployment increase.

Okay. Very helpful. Thank you, Keith.

Thank you.

Our next question comes from Steve Cole (ph) of Matador Capital.

I'll just try to stick to my countdown question and a quick follow-up. You mentioned on the working capital front that you've done extremely well and you have. I guess what I'm curious about now is if things do pick up, what should we expect to see from a working capital use percentage as business starts to ramp?

I think somehow assume that we work very hard to keep our DSO about where it is. That means with increases in revenues, which would be a breath of fresh air, there will be a modest impact to working capital, but the good news there is with higher revenues there will be earnings, and you'll have your earnings generating cash flow rather than work working capital items.

That would be a welcome change. One last question just on the share repurchase plan. Any idea, I think you bought a million of them. It looks like the average daily volume was 800 -- something thousand. Any plans to accelerate that. What's your thought process on share repurchase plan given where the stock is?

We constantly look at near-term prospects. Long-term prospects, share price what's going on in the market. And we subjectively make decisions. Some of which are designed to offset option solution some of which are designed to be opportunistic about share price. As you can see over the last several quarters, we've bought between one and two million per quarter based on where we were at the time. We've stated earlier that it's our preferred use of cash. I think you could expect that we will be in the market to some degree as we go forward.

Very good. Thank you, guys, very much.

Thank you.

Thank you.

Our next question comes from Adam Waldo (ph) of Lehman Brothers.

Just a quick follow upon the corporate development front. With Protivity mass hiring anniversary towards the end of the current quarter, any thought process that you would care to elaborate on with respect to corporate development initiatives in terms of material new service lines introduced over the balance of the year?

Adam, we believe that Protivity provides the platform to provide a number of other professional level services that are quite complementary to internal audit and risk consulting, but that for competitive reasons we're probably not in a position to share just what those ideas are as we speak. Some of which are already being tested as we speak.

We talked in the last call about this Adam. And I understand your views that you would like to see us be a bit more aggressive in this area all we can say what Keith did, Protivity is a significant undertaking, we're added a lot of people, a lot of office, we have the opportunity to evaluate a lot of related businesses as part of the platform that has provided.

Sure.

We've got our lab coats on. And we are attempting to do that I assure you.

Thanks very much, Max.

Thank you.

Our next question comes from Richard (inaudible)

Good afternoon, following on the prior question, could you in a little more detail share with us the financial analysis that leads you to the investment decision to repurchase your shares at current levels? In other words, why is it your preferred use of cash.

Well, you first kind of look at long-term prospects that include prospects for staffing as well as Protivity. You look at short-term prospects for both. With current interest rates, our pretax cost of money is one-and-a-half percent. With that very low confident of money, we can pay 111 times earns for our stock and it not be diluted. The question then becomes what are earnings? The street has its consensus, we have our own views. Further your view of how Protivity delusion should impact those numbers also has a significant impact on what you should be willing to pay. But at the end of the day, we have ten year models that we look at that in part are based on history. That in part are based on our market research and the size of the market opportunity that we believe there to be in staffing as well as Protivity, all of those things kind of bring us back to a number.

And that number changes as interest rates changes as the market changes as prospects change. So it's not kind of put your finger up in the wound and kind of see what feels right. We have very quantitative short-term and long-term models that in form what we're willing to pay but it's not kind of repurchase by slide rule either.

I would say philosophically just to step back in a somewhat higher level, at end of the day, you look back over the last decade and you look at the manner in which different firms used excess capital or for that matter borrowings and you would have to conclude the history of the so-called consolidaters has not be a very good one. Many people have made acquisitions that are not wise if you want long-term stockholder value, which is our goal. We have a high focus on return of invested capital. We believe in analyzes acquisition opportunities all the time and we do that quite extensively here. We have a couple of people who spend all their time doing that. But at the end of the day, we know our own business best and compare that with everything in mind we are more optimistic about the future than wall street analysts are and that leads to different conclusions about repurchases. As Keith was saying, we think the stock is a good investment and we'll see if we're right.

Thank you.

Thank you.

Thank you.

Our final question comes from Mr. Mark Marcon of Wachovia.

Hi, quick follow-up on Protivity. Can you comment on their rates relative to when they were part of Andersen?

Yes. I'll think you would be safe to say, Mark, they have kind of continued their rate structure, their bill rate structure, I presume is what you're talking about.

Right.

They pretty much continue the rate structure they had at Andersen.

No need to discount in this sort of environment?

Not to any real degree, particularly with Sarbanes-Oxley where the perception in the market place is if those participants in that market aren't already sold out they're going to be.

Are you seeing on your staffing and perm business, are you seeing any changes with regards to the size of clients that you work with?

I would say our bread and butter client is still a middle market company on the staffing side.

How many, on average how many people does that sort of a company employ?

One or two. And that's one or two of our people.

And that's been consistent for many, many, many years.

Okay. So no change there.

No significant change, no.

And you're not seeing any regional differences either in terms of business?

I mean you always see some regional differences based on the industry that are focused in a given region, but again no new trend there of note.

Okay. Great. Thanks a lot.

Thank you. At this time, we have no questions registered.

Thank you again for your time today. This does conclude our teleconference A tape recording of this call will be available later on today. 800-925-0856. This phone number is also included in today's press release. The replay will be available until 8:00 P.M. Eastern Time on Friday April 18. The call will also be archived in audio format on our website. Thank you, again.