羅致恆富 (RHI) 2004 Q2 法說會逐字稿

Good afternoon welcome to Robert Half International 2nd quarter 2004 conference call. All participants will be in a listen only mode until the question and answer portion of the call. At that time, if you have a question please press star one on your touch tone phone.

At the request of Robert Half International, today's conference ask being recorded for instant replay purpose.

I would now like to introduce Mr. Max Messmer, Chairman and Chief Executive Officer. Sir you may begin.

Thank you and good afternoon everyone. Thank you for joining us. With me is Keith Waddel, our Vice Chairman, President , and Chief Financial Officer.

As you know earlier today we reported financial results for the 2nd quarter of 2004. We will be discussing those results on today's call. You can obtain a copy of today's press release on on our web-site at www.rhi.com.

Before we begin I could bike to reminds everyone, as we do each quarter, that our presentation contains predictions, estimates, and other forward-looking statements representing our current judgement of what the future holds. These include words such as forecast, estimate, project, expect, believe and similar expression. We believe these remarks to be reasonable but are subject to to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. We describe some of these risks and uncertainties in today's press release and in our filings with the Securities and Exchange Commission. We do not assume the obligation to to update statements made in this conference call.

Now lets discuss the second quarter. After our prepared remarks Keith and I will be happy to respond to your questions. Revenue for the quarter were $641 million, an increase of 33% from the second quarter of 2003. On a sequential basis revenues rose 12% from the prior quarter.

Over all income per share was 18 cents compared with 0 cents for the second quarter of 2003 and 9 cents last quarter. Our staffing operations had second quarter income of 14 cents per share and our [inaudible] subsidiary had income of 4 cents per share. Cash flow from operations for the quarter was $50 million before capital expenditures of $500 million. The companies first cash dividend of $10 million was declared and paid this past quarter. We ended the quarter with $420 million in cash and equivalence. There remain approximately 8.7 million shares of RHI common stock available under our board approved stock repurchase program.

As you can see it was a good quarter for us we are pleased with year-over-year and sequential revenues gains in all of our lines of business. Our financial staffing divisions and Protiviti continue to benefit from the heightened demand for accounting expertise, particularly among public companies focused on strengthening there internal controls and meeting Sarbanes-Oxley compliance deadlines. Beyond financial staffing, other RHI service lines including Robert Half Technology and Office Team reported accelerating revenue trends.

Protiviti experienced robust demand for it's services during the quarter and continues to build strong brand recognition as a premier provider of internal audit and business and technology risk consulting services. Revenues for Protiviti were up 141% year-over-year, and 37% sequentially. Protiviti's suite of risk consulting services includes co-source and outsource internal audit, Sarbanes-Oxley section 404 compliance, information technology audit, IT security, as well as other areas.

At this point point I will turn the all over the Keith.

Thank you Max.

I will start with revenues for second quarter. Overall revenues for the company were 641 million. This is an increase of 33% from the second quarter of last year as Max said. There were 64 billing days in quarter as Q2 last year you have up one day sequentially from first quarter. Account Temps revenues were 243 million, and increase of 20% from the second quarter of last year, an increase of 6% sequentially on a same day basis. Account Temps is our largest staffing division with 332 offices world wide. It accounts for 38% total revenues.

Office Team revenues for the second quarter were 146 million up 17% from the second quarter of last year and up 10% on day same day basis. Office Team is our hiring and administrative staffing division. It began operations in 1991, and has 311 offices worldwide. This division represents 23% of total revenues.

Robert Half Technology revenues were 65 million for the quarter up 28% from last year and up 10% sequentially on a same day basis. This division places IT professionals in a consulting and full time basis. It was launched ten years ago and represents 10% of revenues. There are 104 Robert Half Technology locations worldwide.

Robert Half Management Resources had second quarter revenues of 79 million up 57% from Q2 last year and up 11% sequentially on a same day basis. Robert Half Management Resources places senior level accounting and finance professionals on a project basis. It was introduced in 1997, operates in 106 offices worldwide, and accounts for 12% of revenues. This business has proven to be a strong compliment to our Protiviti operations. It has allowed us to provide our clients with a broad range of consulting and staff augmentation solution for their businesses. As noted on prior calls Robert Half Management Resources frequently provides professionals on a project basis or for Protiviti engagements.

Our permanent placement division, Robert Half Finance and Accounting had revenues of 34 million in the second quarter, up 43% from the second quarter of last year and up 19% sequentially. This business was established in 1948, operates in 332 offices worldwide, it accounts for 5% of total revenues.

International revenues for RHI staffing operations for 107 million for the second quarter, up 25% from last year and up 2% sequentially. On a constant currency basis these growth rate for 16% year-over-year and 5% sequentially. Our professional staffing division operated 62 locations in ten countries outside the U.S. International staffing operations account for 19% of total staffing revenues. Second quarter Protiviti revenues were 73 million and comprised 11% of of RHI revenues, established in May of 2002, Protiviti currently has 36 locations in North America, Europe, Asia, and Australia. During the quarter new offices were opened in Sidney and in Melbourne, Australia. and.

Turn to gross margin. Temporary and consulting staffing gross margin was 192 million for quarter. This represents 36.0% of applicable revenues compared with 35.2% of revenues for for Q2 last year and 35.0% of revenues for Q1 2004. The sequentially improvement is result of higher conversion revenues as well as higher hourly billing markups, which were instituted to offset higher unemployment and worker's compensation cost.

Over all staffing gross margin was 226 million for the quarter, or 39.9% of staffing revenues. This compare to to 38.7% of revenues in Q2 2003. And 38.6% of revenues in Q1 2004. Over all gross margin benefited from a higher mix of permanent placement revenues as well as higher temporary and consulting gross margin just discussed. Gross margin for our Protiviti subsidiary was 28 million for the quarter and and 38.4% of Protiviti revenues. This was a sequential improvement of 12 million, compared to the first quarter when the gross margin percentage was 29.8%. The improvement comes from higher staff utilization and better staff leverage ratios.

Turning to selling, general and administrative cost. Staffing SG&A cost for the quarter were 184 million or 32.3% of staffing revenues. This compare to 36.2% of revenues for Q2 last year and 34.4% of revenues for Q1 2004. The percentage decline reflects better leverage of fixed operating cost primarily rent, depreciation, and administrative compensation. This also resulted in lower SG&A percentage levels than those reported 2001, when RHI generated comparable revenue levels.

Protiviti SG&A costs were 15.3 million for the quarter representing 20.9% of revenues this compares to 37.1% in Q2 2003, and 23.8% in Q1 2004. The percentage decline also represents better leveraged of Protiviti's fixed operating cost.

Turning to operating income. Operating income from our staffing divisions was 42.8 million for the quarter, nearly doubling on a sequential basis from Q1 2004 and represent 7.5% of staffing revenues. Temporary and consulting divisions contributed 37.2 million of this amount, or 7% of applicable revenues while permanent placement had operating income of 5.6 million or 16.3% of placement revenues. Operating income for Protiviti was 12.8 million for the quarter or 17.5% of divisional revenues. This was an improvement of 9.6 million, or 298% from the first quarter of 2004.

Turning to cash flow and balance sheet. We ended the quarter with cash and equivalence of 420 million. This was after funding 5 million in Cap Ex and paying a dividend of 10 million. During the quarter there were no repurchases of RHI shares in the open market. Accounts receivable were 322 million at the end of the second quarter with implied days outstanding, or DSO of 46 days. This compare to 43 days at the end of last year and 45 some days at the end of Q1 2004. DSO was again impacted by strong revenues gains during the latter part of quarter which impact the mechanics of the DSO computation.

Now let's turn to guidance. Following of the business trends we witnessed during the second quarter of the first weeks of July. On a same day sequential basis temporary and consulting revenues were up all 3 months during the quarter. Permanent placement revenues were down sequentially in April then up in May and June. The first two weeks of July revenues from temporary and consulting businesses were up 28% versus the same period last year. For the first three weeks of July revenues from permanent placement division were up 72% versus last year. Of course, it is difficult to assess perm trends on such a short period of time.

Based on on these trends we offer the following guidance for the third quarter. Revenues in range of 65 to 670 million. Income per share, 19 to 21 cents. As you know these estimates are subject to risk mentioned in today's release it is our policy to limit guidance to one quarter.

Now I I'll turn the call call back over the Max.

Thank you Keith.

We were pleased with the results for the quarter. Our staffing operations generated significantly higher income aided by higher revenues, expanded gross margins, and better leverage of our fixed operating cost. Our staff operating margin was over 7% , the highest level in more than 12 quarters. We were also pleased to see Protiviti further establish it's presence in the market place. Aided by higher revenues, greater staff utilization, and better operating leverage Protiviti grew it's operating margin to more than 17.5%. An all time high. As you know a number of projects for Protiviti and our financial staffing divisions relate to Sarbanes-Oxley compliance. We estimate this work represents 12-15% of total RHI revenues for the quarter. No one knows for certain, of course, the level of Sarbanes-Oxley related work that will continue past initial compliance.

That said we would like to offer a few observations. Many companies are not required to first comply with Sarbanes-Oxley until 2005. Sarbanes-Oxley. This includes non-calander year businesses, small cap companies, and foreign issuers listed on US exchanges, as well as new issuers. These companies must go through then entire cycle of controls documentation, design effectiveness, remediation, and testing that is required for initial compliance with Sarbanes-Oxley.

Company that do initially comply in 2004 will still have to support on going compliance efforts by first identifying and evaluating any current business or process changes that impact their financial statements or disclosures. They must then ensure these changes are subject to the same cycle of documentation through testing, which I just described. Many of these companies will also implement business process and controls improvements to improve the sustainability of their compliance. This includes replacing detective controls with preventive ones, automated controls in place of manual ones, and recurring processes instead of ad hoc ones among others. A recent survey of US based multi-national firms by a big four accounting firm, estimated that 61% of the companies will undertake initiatives for risk identification and assessment to stream line future Sarbanes-Oxley compliance.

In addition recurring annual testing of existing controls will be required for companies to support the assertion that key controls remain in place. We believe some companies probably under estimated the amount of effort and the breadth of skills needed to achieve initial compliance with Sarbanes-Oxley requirements. And we also believe some may also be under estimating the effort and diverse skills required for on going compliance in the future.

We also believe that some companies have partially funded their Sarbanes-Oxley efforts by reducing their annual internal budgets. These budgets may be reinstated going forward particularly given the New York Stock Exchange requirement, that all listed companies have an internal audit function.

Sarbanes-Oxley compliance represents a significant investment by most public companies. However compliance is not a one year event. Ultimately companies will need to become focused on protecting their initial investment and documentation of internal controls by institutionalizing these processes. This will require infrastructure, personnel and process changes, all of which must occur while simultaneously maintaining and updating current documentation and controls.

Protiviti has demonstrated it's ability to deliver talent with these skills and highly sought after specialty areas. We believe Protiviti is competing very effectively with the big four accounting firms. We also believe Protiviti is well positioned for future engagements in internal audit and co-sourcing and outsourcing, business process improvement, business continuity, IT audit security, and many other areas. Our staffing business rebounded strongly following past resessions, and, of course, we are hoping that history repeats itself. Our staffing businesses rebounded strongly and of course we hope history repeats itself. We were pleased to see all of our staffing service lines post solid revenues gains in the second quarter. As I noted on last quarter's conference call we've maintained our local office networks, and retained what we believe to the industry best talent. Our clients know and respect us, and we believe they acquaint the Robert Haft name with quality service and professionalism. From a financial standpoint the company remains in excellent condition with virtually no debt and a very strong cash position.

Keith and I will now be happy to answer questions to allow as many many callers as possibility to participate we ask that you please limit yourself to one question and a single followup as needed. If you have additional questions we will certainly try to return to you later in the call. Operator we're we're ready for questions at this point. Jana, are you with us.

Yes at this time we will begin our question and answer session. Should you have a question at this time please press star one on your telephone touch pad. After the tone, please record your first and last name. Should you need to withdraw our our request you may press star two. Once again that's star one should you have a question at this time. One moment please, for the first question question. Thank you. Once again that's star one should you have a question at this time. First question comes from Greg Propelli with Credit Suisse First Boston.

Hi, can you hear me.

Yes we can Greg.

Great job on first quarter.

Thanks Greg, we thought you'd already asked your question.

You guys mentioned 12-15% of revenue with Sarbanes-Oxley related if you add all of management resources and Protiviti together it is below 23-24% of revenues in the quarter. Can you give us and idea of percentages in term of new businesses, in terms of new business coming in, where that's coming from?

Somebody jetted in there, the question is.

We are trying to understand if you make management resources growth then Protiviti, can you give us and idea of the percentage of business within those two divisions that is coming from Sarbanes-Oxley.

Again we gave the over all percentage of 12-15, we would say that Protiviti by itself is over 50, which is what we would expect. Over than that, that is, kind of the disclosure we are giving out.

Just a quick followup, the hiring environment for Protiviti can you talk about that a little bit. How many people you are adding, and how successful you have been there.

The market for internal staff in Protiviti is clearly the strongest market or toughest market depending on your perspective that we operate in. Protiviti was successful in adding to it's staff during the quarter aided significantly by the Robert Half recruiting division that sourced about half of it's new candidates, and also significantly Protiviti increased very significantly the contractors it used for manage resources during the quarter giving it a very sizeable variable cost labor trunch that it traditional hasn't had the benefit of.

Okay so 38.5% gross margin for Protiviti is that something you would say is a reasonable level to be using going forward or could that go considerably higher in your opinion?

Well, Greg, when we look at the prior Anderson financials before we did Protiviti we saw gross margins in the high 30s low 40s consistently over time. As we made the statement the last couple of years, that at steady state we expected higher gross margins and operating margins in Protiviti then in staffing. I think this quarter you are kind of seeing why we said that. Frankly the high 340s and low 40s is in line with what they traditionally realized, and at the operating margin line, kind of the mid to high teens is also a level that they sustained in the past.

Got it thank you.

Thank you next question comes from Jeff Silber with Harris Nesbitt.

Good afternoon and let me add my congratulations as well. You mentioned this past quarter Sarbanes-Oxley was 12 of 15% of revenues. Can I ask roughly what the percentage was ast quarter and what you are assuming in your guidance for that percentage next quarter.

I think we were actually on the call last quarter, Jeff, and didn't go through by division the way we did this quarter to quantify it. In part because of the question that was asked last quarter. So I don't have a precise statistic for you. I would say modestly less last quarter than this quarter. As to next quarter, we would expect it to increase modestly again but nothing by leaps and bounds. We are talking orders of magnitude 12-15% of our total business.

Thats fair, I appreciate that. Greg was asking me about operating margins. I am going to ask the question another way. I think this is the first quarter are Protiviti's operating margins were actually higher than your perm business. Over time do you think that is sustainable, or should we expect perm operating margins to be higher than Protiviti.

Traditionally perm had operating margins that started with 2. We would hope as things improve in the full time hiring market that perm operating margins can return to the 20s. And so, whether Protiviti is high teens and perm is low 20s. Frankly it is a good problem to have to contemplate.

Okay great real quick one just on tax rates. Could you tell us what we should be modeling going forward.

We've said for last couple quarters that our tax rate is going to jump between 39-41%. It was a touch high this quarter because our state rate was a bit higher. If I were modeling I would probably model 39-40. 40ish to get in middle of that range.

Okay, great, I appreciate it.

Next question comes from Andrew Steinerman with Bear Stearns.

Good afternoon gentlemen. I want to focus on account temps. Correct me I'm wrong. I think this is division not benefiting much at all by Sarbanes- Oxley and it is your largest division. 6% sequential growth on an average day basis is about twice the average growth that you are seeing in Account Temps in second quarter over the last 15 years.

What do you see as helping out at Account Temps right now what do you see with in the guidance of Account Temps in the third quarter will it be and average grower or above average grower for the company sequentially into the third quarter.

I think you can look at Account Temps, Office Team, and RH Technology and conclude hiring in middle market companies is beginning to increase, pretty much outside of Sarbanes-Oxley each have small single digit exposures to Sarbanes-Oxley but that is it. I think they are a good proxy for the labor markets are improving with middle market America, middle market companies. As far as go forward guidance as it relates to those divisions. The range of guidance we have goes from, kind of, modest sequential growth to four to five percent sequential growth. We would see Account Temps as well as the other divisions, kind of, in that range.

There is no reason to believe third quarter Accounts Temps would be lower than average. If you guess could be and average sequential grower or company in third quarter.

Let's put it this way, we haven't assumed any significant mix shifts among our divisions for Q3 versus Q2.

Perfect thanks.

Thank you next question comes from from Randall Mehl with Robert Baird.

Good afternoon Max and Keith and congratulations. It is hard to find anything wrong with the numbers quarter to quarter. I wanted to pursue the leverage, the very good leverage you had in the temp side. SG&A was up only 2% despite substantial sequential growth in revenue. Is this a bit of and anomaly should we see operating cost pick-up a little bit relative to revenues or is this kind of the start of what should be, you know, a span of higher operating margins.

We think there is actually more operating leverage. We talked about how we carried a footprint larger than we needed through the downturn. We are kind of realizing the benefit of that extra fiscal capacity as we speak. In addition you can look at our CapEx for the last two or three years and see how significantly they fell off versus prior periods. That is showing itself now in depreciation. Finally from an administrative compensation point of view particularly our back office operations were beginning to leverage quite well.

Do you feel like you are basically on pace in term of investment or ahead of the game in terms of investment on the temp side?

Well we forever claim that you should look backwards and look at the SG&A percentage at that time we are like at a point and half better than that pace as we speak, and we will certainly attempt to stay ahead of the pace but that pace gets tougher as the revenues get larger. Again orders of magnitude, I think that is a pretty good rule of thumb, which still builds in a fair amount of additional operating leverage as revenues grow.

Outstanding results thanks a lot.

Thanks Randy.

Thank you next question comes from Chris Gutek with Morgan Stanley.

Thank you nice quarter. One of the [inaudible] issues above and beyond Sarbanes-Oxley wouldn't companies like Protiviti taking market share away from the big four accounting companies for a variety of reasons. Could you talk about that opportunity and how much business do yo think that companies like Protiviti can take away from the big four, and therefore to what extent could that long term opportunity offset what might be some moderating Sarbanes-Oxley specific driven demand.

We can both comment. I don't think the the big four is lacking for business. External audit work has never been as complicated and detail oriented as it is today. Most of those firms are operating at full occupancy rate so to speak. They have plenty to do. They are certain legal constraints in their ability to do external work as well as internal audit work. There maybe addition regulatory or legal restraints in their ability to do external audit work in other types of consulting work. Obviously Protiviti has has good relations with those firms, and looks forward to taking care of work they cannot otherwise do. I would not want to give the impression that that is going to hurt the big four particularly, but I think it does present and opportunity for us. Why don't you amplify, Keith.

I guess the other comment I would make. See if I can articulate this. It has only been two years since there was a big five. Anderson is one of the big five, competed very effectively with the other four. Protiviti to the extent it is the cary over of a small piece of that continues to compete effectively. And It is like the market share was split up five ways for a long period of time. So to the extent Protiviti retains and even, retains a piece of what it had expanding into levels that previously did have. I guess, shouldn't be a surprise. As we said before there are many many many friends of Anderson in the marketplace be it former clients, board members of former clients, former employees that are a huge benefit to the men and women of Protiviti.

In addition to that, Keith, you have conflicts that exist because of accompanying rules that will afford additional opportunities for growth of Protiviti with firms that were not clients in the past.

I guess as a quick follow up to that. I think there is and opportunity there to take some business from big four but you also have a lot of competitors -- emerging competitors to Protiviti. Any thoughts on increasing competition whether it is Jefferson Wells, Resources Connection, or other smaller companies out there, or is is that not an issue because there is so much demand at this point.

Clearly at the moment, I think there is more demand than all the players combined can service. The bigger question is as we go forward our view is, he who has the most competent deep skills and the capacity to do work will win. And just because Sarbanes-Oxley compliance ends won't end the need to have very specialized skills that we believe will be relevant post Sarbanes-Oxley, and I think Protiviti, if anything, has demonstrated to this point that it has the the requisite skills among its former partners now managing directors and staff.

Thanks.

Thank you, and our next question comes from Marta Nichols with Banc of America Securities.

Good afternoon. Thanks, and let me add my congratulations on a stellar quarter. I just wanted to drill down on the SG&A level comments a little bit more. Keith, you commented a couple of time that is you have lower SG&A levels now than you did in 2001 when you were at simular revenue levels. Is that purely technology driven, or is there some other aspect of your SG&A that you are actually able to shrink relative to were you were in '01.

It is the 3 things I spoke of. I was speaking more this terms of percentage of revenues to try to kind of gauge it comparably. It is three main areas. It is rent and occupancy costs, it is depreciation, and it is administrative compensation. Those are areas we talked about there a second ago. A coupling of those are actually down on an absolute basis. Others are certainly not up pro rata with the increase in revenues. But the combination on a percentage basis gives you a fair amount of operating leverage.

I know you are [inaudible] to talk about what your headcount trends are and so forth, and what your compensation trends are to the folks you employ, but I'm wondering if you can give us a sense of of whether you are at what you would sort of term full placement and consulting fee bonus pay outs to employees. i.e., are your permanent placement and staffing consultants getting the same amount for placements today that they were say three or four years ago. So we are not actually going to see a ramp up in what you are paying people on a percentage basis for each of the placements that that make.

Well it is just kind of interesting. There has been commentary around in late '90s we got 35% of first year compensation in perms. That number now is in the mid twenties. Whether good or bad news, depending on what your point of view is, we were getting in the mid twenties in late nineties and we are getting in the mid twenties now. So quite frankly, our percentage of first year compensation that we get is a contingent permanent placement fee hasn't changed much. I would argue therefore that the compensation load that is built into our temporary staffing division as well as per placement is a normal one. We are adding to staff on the staffing side as well as Protiviti. On the staffing side it is low to mid single digits that were added to head count. On the Protiviti side we are up in the double digit. In addition to that we are adding contractors for management resources as I described.

That is really helpful. Just to put a finer point on one thing you mentioned. The compensation load being a normal one. Is it normal one both in term of the fees that you are charging to your customers and what you are paying out to the people that make the placements for you internally.

That's right.

Great thanks.

Next question is from Mark Marcon with Wachovia Securities.

Good afternoon and let me add my congratulations. Stellar quarter. I was wondering you mentioned the 12-15% of revenues coming from Sarbanes-Oxley. What I am wondering is how do you count that in Account Temps or perm division. Is it possible to truly quantify the number of positions that are being filled that are related to Sarbanes-Oxley, or how do you go about doing that?

You can certainly quantify those that are directly related, where the owner has a Sarbanes-Oxley descriptor.

Exactly.

Clearly there are some argued to be indirectly related that you may or may not even know about. So it is not a science as to what that percentage is but to the best of our knowledge our revenues stream 12-15% relates directly to Sarbanes-Oxley.

So, Keith, those would be positions that would have Sarbanes-Oxley somewhere in the title or some sort of explicit reference to Sarbanes-Oxley.

Or where we explicitly know it is a back fill where the person we are back filling for is going to work on Sarbanes-Oxley.

Got it.

It is not precise.

Go it. With regards to you gave a description in term of all the dynamics that are going to go beyond this year for Sarbanes-Oxley, how do you, I mean, you gave us a nice qualitative description in term of all the initiatives that will stay in place in '05. How do you think that will work quantitatively, roughly.

Well because quantitative guidance is kind of one quarter out. We said we expect Protiviti to do more in the third quarter but than the second. We also said based on over all guidance we expect the other divisions to grow sequentially in third quarter. But quantitatively we don't go beyond one quarter. Kind of directionally and qualitatively we tried to discuss it as fully as we could.

I was trying to get a sense of whether you thought, you know, it would be kind of flattish or down or up, not precisely but --

Again I think Max's comments kind of spoke for themselves, and I am not sure I can improve on that.

Okay with regard to Protiviti margins this last quarter there was a question earlier about how they would relate to perm, you indicated perm could go up to 20% do you think Protiviti margins could reach that level as well.

Mid to high teens is traditionally where we saw them in their former firm. Mid to high teens would be higher than the staffing averages that we've been talk about forever. It would be or hope that the inherent margins in Protiviti would allow us to compensate our people in Protiviti above market and still leave higher that staffing margins left for the shareholders of Robert Half. We would view that as kind of the goldilocks scenario, where everybody is happy.

Last question with regard to to CapEx, you know, it did fall off a little bit this quarter so did depreciation. Can you give us the guidance for the full year CapEx and where you would expect depreciation to go.

CapEx guidance was 40-45 million as I said last time we have and IP telephony project going, when exactly that will hit, that could come, -- some could role over into next year versus the end of this year. It is orders of magnitude in the ball park. Depreciation is still going to fall off a little bit, versus the run rate it currently is. Again you look backwards at how CapEx has come down. It is dramatic. And you are seeing that in the P&L with depreciation.

Okay, great. Thank you.

Thank you, and our next question comes from Andrew Phones on the behalf of Kelly Flynn from U B S.

Hi, guys, I'd like to add my congratulations as well. Great quarter. I'd like to ask if you could break this down in term of both the traditional staffing and then the perm placement. Could you talk about productivity levels within your staff and kind of where you are versus prior peek levels.

We clearly have on used capacity relative to the productivity levels we see both on the staffing side and on the perm placing side. That said, we would not and you should not expect a huge point of leverage from a percentage point of view in SG&A to be on on how we pay or staff. The lever points are more the fixed cost, the indirect costs, the back office costs, the administrative costs, which are the lever points you're seeing right now.

So are you able to quantify those productivity levels versus prior periods?

Not precisely. Again given that net it isn't going to be a big driver for the percentage of SG&A going forward. I guess I would refocus you on the areas we just talked about which drove the leverage at the very quarter we just reported.

Okay. Could I also ask what your plans are for kind of office role outs.

The our office role outs are modest we added three or four satellite type locations in management resources this quarter. We added two international locations in Protiviti. So it is going to be a handful of offices per quarter kind of pace maybe two maybe six to eight, depending on how successful we are we are at identifying and recruiting the right people. It is not a significant portion of our growth story, adding numbers of locations rather expanding the locations we currently have where in most cases we have ample real estate to deal with in those expansions that will be a bigger driver.

Okay. Thanks guys.

Thank you. Our next question comes from Brandt Sakakeeny with Deutsche Bank.

Thanks, this is Brandt, also my congratulations. Question for you Keith and Max, I guess if you look back to 1998 the last time we were in a really robust hiring environment, there were obviously difficulties in sourcing supply and you put through a bunch of changes. Can you talk to just the supply environment, and I guess some of the changes that you put in place since then and why you think that perhaps you can satisfy the level of demand that probably looks like it is out there for the next couple of years. Then a quick follow up.

A lot of pieces for that question. Back in late '90s we paused for a couple of quarters due to supply constraints we instituted various recruiting techniques including significantly our own branded web-sites which continue to this day to be a major source of recruiting candidates but for the one pocket related to Protiviti's needs kind of one to five year big four type people there certainly isn't a supply constraint across our operations today. Because of what we learned in the late 90s the cause of the ever growing use of our own internal web-sites we are more confident as unemployment levels get lower, lower, lower, that we will be able to deal with the supply issue more effectively than we did in the late 90s.

I would add just one comment to that Brandt. In the late 90s we amended our training program for new hires as well as higher level staff to change the focus somewhat from the almost total client orientation we had at that time to one that was oriented also to candidate recruitment. So, we are hopefull that we don't make the same mistake twice. We think our staff is fairly well trained in both fronts now and we'll do what we have to to attract candidates. We bounced back before very successfully, because I do think we have a history on the recruiting side, and it was really just a question of realizing that the labor supply wasn't infinite. The companies that are best known and have the best internal talent usually can do the best job recruiting candidates. So, we hope to fair well if in fact the labor markets continue to tighten.

Thank you, and just two quick housekeeping items. The amortization looks like it stepped up in the quarter did -- did some capitalization or something kick in then. -- [inaudible] conversion ratios for the quarter.

We had a deferred payment obligation surrounding our purchase of our Louisiana franchisee a year ago, that that kicked in this quarter and the nature of the intangibles there were short lived and/or noncompeting intangibles that is why you saw the amortization.

Conversion rates in the quarter.

Conversion if you look at your gross-margin percentage improvement sequentially this quarter it was like 1.3 points or 130 basis points the components of that would essentially be 60 basis points mark up, 40 basis points conversions, 30 basis points per mix so the ten marks at 60/40 mark ups/conversions then on top of that the perm mix.

Thank you nice quarter again.

Thank you and our next question is from Matt Liftin with William Blair.

Good afternoon. Now that the business is beginning to recover from the recent few years downturn I was hoping to get some insight on the professional staffing competitive landscape as you see it in both number of competitors as well as quality of those competitors, and maybe talk about perceived market share today versus two years ago.

Matt, we have great respect for all our competitors, and as we said historically, our experience is that usually our most effective ones are what you would call small to mid sized firms in individual local markets we can typically grow faster and get much larger but they are like the corner drugstore when your trying to build a sky scraper. The are fairly entrenched in certain aspects of the market. They do a good job. We would still stay toughest competitors are local firm, as the job market improves, we would expect those firms to grow somewhat. A lot went out of business during the recession. Many of them have been attempting to come back with funding from different sources. I don't see that big a change in the environment. We will compete effectively against them we believe, but again we have able competitors in every market in which we operate, and all you have to do in any local market is look at the yellow pages and see how many competitor we have we have. What was the other aspect to your question Matt.

That answered it.

Okay Okay.

And has your success with Protiviti at all [inaudible] you to explore investing in new models either within staffing or the consulting area, and I know you have traditionally maintained a preference for organic development would you continue to maintain that preference if you saw something.

There are certainly opportunities we study. I always try to remind myself and everybody else we have a small share of the specialized staffing market in the United States not to mention abroad, and I guess our feeling is there is tremendous growth opportunity there. The glass is definite definitely half full. We still belief half our target prospects have never used professional temporary from anyone. So, much of our efforts are designed to increase the penetration of local markets, grown the offices as significantly as we can, open new satellites where necessary. We think we have a good infrastructure in place with the right management team in the field, the network of offices we preserve is now yielding dividends, we invested heavily in our technology platform, which I think is also yielding dividends now. We have good brand equity and we're attempting to capitalize on it. We talked and the war for talent which may come with a tighter labor market we are prepared for that as well. Again we are looking at expansion opportunities. We said Protiviti represent as platform of sorts all by itself in terms of consulting to look to expand aggressively. We are studying that. We are not immune to other opportunities but we are also very focused on expanding businesses as aggressively as we can.

We would also say we are particularly excited about the way Protiviti and our staffing divisions particularly MR have worked together and frankly gives us confidence that as we expand Protiviti including our consulting platform, the extent to which we can add variable labor to their model we think makes it a stronger business model so we are particularly excited about how Protiviti and MR particularly have interfaced over the last couple of years.

Great thanks a lot.

Thank you next question comes from Adam Waldo with Lehman Brothers.

Good afternoon. Followings up on Matts Liftin's line of questioning and one to maybe drill down further here, you guys with Protiviti here now appear tracking towards doing something on the order of 270-275 million in revenue this year, maybe around 15 cents in EPS, and year three cash on cash return of triple dilling digit that certainly would make your Sam Hill neighbors there blanch in terms of private equity returns of late. I wonder, does the experience with Protiviti now prompt you to want to take other lines of business in a similar fashion going forward and how would you prioritize making those investments versus increasing dividend and continue to execute on 8.7 million shares on buy back which you haven't executed much of late.

Adam. I say clearly the success of Protiviti increases our appetite for related consulting type businesses the more related they are to our sweet spots in staffing or Protiviti's current businesses the more interested we would be. Our style as you know over many many years that we do acquisitions that we can leverage across our network my point would be given our strong balance sheet where we have over $400 million in the bank given our on going strong cash flow it is not and either or. We believe we con to pay dividend maybe hopefully increase it over a long period of time. We can continue to do acquisitions because cash flow is ample to do all the above. We will also continue to do share repurchases.

Understood you had to rank order the three, and I know it is a moving target, if you had growth trajectory of the business, and other opportunities you are seeing out there, you know, but, if you had rank order the three at current share levels how should we think about that.

As you said it is a moving target based based on stock prices based on what is our appetite in a given sector, I guess what is clearest is the dividend we instituted we certainly have to present intention to discontinue. Therefore for that reason we will certainly will sustain that. Maybe that's number one as a maintenance point. Then between the other two points it depends.

All of that is obviously you have to be optimistic when looking at acquisitions. This industry is littered with acquisitions that have not worked well. So we are we are cautious and sometimes accused of being to to cautious but at the end of the day we have a good business. We are keenly aware of opportunities it has wet or appetite for expansion along the lines. We'll be looking for opportunities.

Last follow up on dividend policy. Should we expect expect it the dividend to grow in some proportion to earning or to cash flow or premature to comment on that.

Given last quarter was our first one ever we can't can't lock ourselves into trends.

Fair enough especially given business.

It is certainly something we'll review each quarter. Since we just paid our first one.

Let me comment on your comment there about given the growth of the business. I would pause that even looking back during the last three years which was the worst labor downturn this companies ever experienced we still generated more than $5 millions worth of cash flow. I would argue the brought of the business would not inhibit us in continuing a dividend in a healthy amount in a downturn.

I didn't mean to imply that I just meant maybe the rate of increases might be stronger than a downturn.

Thank you thank you next question comes from Brad Saffalow with JP Morgan.

Thank you for squeezing me in here one question on during the quarter there has been a lot of talk with other staffing companies the month of June seen some weakness or slowing of growth through out the quarter June relative to May and July relative to June have you seen changes in trends line there.

As we proof usedly reported our both temp and perm sequentially grew in June on a monthly basis. We also disclosed that post June we're up 28% year- over-year on temp side and 72% year-over-year on perm side.

The sequential growth in June was with that in May or no meaningful change I guess is what you are saying.

The point I am trying to make is we continue to grow sequentially in June which extended into July.

Thank you for detail. Separately, wondering with your experience of Protiviti and conversations you've been having with clients what you might think about foreign countries whether Europe or Asia adopting similar Sarbanes-Oxley requirements do you have any opinions on that.

I think there are many countries contemplating I think there are many countries adopt standards where it is not actually required. You talk about foreign companies there are large foreign companies registered on U.S. exchange that is first comply in 2005 that we believe will be a significant source of work. More so, maybe than might meet the eye.

In terms of your exposure that client base is it a meaningful amount or still early stages of targeting opportunities.

We have already had meaningful success stories and wins with foreign registrants that have to comply in 2005.

Thank you for the detail I'll turn it over.

Are you with us.

Next question comes from Fred McCrea with Thomas Weisel Partners.

Afternoon. Great quarter. As we look at the Protiviti business and you talked about 50% of revenues coming out of Sarbanes- Oxley compliance work and so forth. What of those customers how many to quantify on a percentage basis have come back for additional assignment or work specifications out side that field right now.

Actually it is early in the game to talk about they come back. Just as part of the initial compliance many maybe most of those companies have had to do remediation work. Many times we participated with them in. I could also say that for at least the last six to nine months we've been very selective in the new accounts we've taken in Sarbanes-Oxley and in fact in many occasions we've gotten a firm commitment for years two and three to be to be their out source providers as part of initial engagement to do Sarbanes-Oxley 404 work.

Follow up on that that has obviously opened a broader market than temps. Has this lead to any type of Account Temps assignments from larger customers as opposed to traditional middle market business.

Clearly under Protiviti umbrella we place people from virtually all our staffing divisions into larger companies and that Protiviti umbrella creates quite a margin advantage relative to what that division may have done on its own.

Great thanks so much.

Thank you and our final question comes from Toby Summer with Suntrust.

Thank you very much my questions been asked and answered.

Thanks.

Thank you and as a reminder today's conference will be available via instant replay through and including July 28. To access that that recording you may dial 1-800-867-1930 domestically, or 402-280-1684 internationally. Those numbers are 1-800-0867-1930 and 402-280-1684. I would like the turn the meeting back over to Mr. Messmer for final thoughts.

Thank you again for your time this afternoon the conference call will be archived in audio at web-site www.rhi.com this does conclude our teleconference call thank you again. Thank you everyone for participating in today's conference call have a wonderful rest of the day and you may now disconnect.