羅致恆富 (RHI) 2005 Q2 法說會逐字稿

Good day and welcome to the Robert Half International conference call to discuss the second quarter earnings. Our host for today's call is RHI Chairman and CEO, Mr. Max Messmer. Mr. Messmer, please go ahead.

Thank you and hello everyone, thank you for joining us today. With me is Keith Waddell, our Vice Chairman, President and CFO. On today's call we will be reviewing Robert Half International's second quarter2005 financial results. You can obtain a copy of the press release issued today on our web site at www.rhi.com.

Before we get started, I would like to remind everyone that comments on today's call contain predictions, estimates and other Forward-looking statements representing our current judgment of what the future results. Among these statements are words such as forecast, estimate, project, expect, believe, guidance and similar expressions.

We believe those remarks to be reasonable, but they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Some of these risks and uncertainties are described in today's press release and in our filings with the SEC. We assume no obligation to update the statements made in this conference call.

Now let's discuss the second quarter. After our opening remarks, Keith and I will be happy to respond to your questions. Revenues for the quarter were $817 million, an increase of 27% from the second quarter of 2004. Income per share was $0.33 compared with $0.18 for the second quarter of 2004, an increase of 81%.

Revenues and earnings for the quarter once again reached record levels. Cash flow from operations for the quarter was $111 million before capital expenditures up $9 million. We ended the quarter with $441 million in cash and cash equivalents after paying a $12 million cash dividend to shareholders and after repurchasing shares of RHI in the open market. We repurchased for $85.1 million, approximately 3.4 million RHI shares during the quarter. Approximately 2 million shares remain available under our board approved stock repurchase program.

We were pleased our results for the quarter. All of our lines of business experienced strong double-digital growth on a year-over-year basis.

Accountemps, OfficeTeam and Robert Half Technology performed particularly well during the quarter. In addition, we saw continued high demand within our permanent placement division, Robert Half Finance and Accounting.

Protiviti also had a very solid quarter. Revenues were up 52% compared with the same period last year due to demand for Protiviti's full suite of internal audit and business and technology risk consulting services. The percentage of RHI's consolidated revenues during the quarter that related to Sarbanes-Oxley were declined to approximately to 13% to 15%. We are pleased with our progress in extending Sarbanes-Oxley relationships to internal audit and other risk consulting engagements.

At this time I'll turn the call over to Keith.

Thank you. As Max noted overall revenues for the quarter were $817 million. This is an increase of 27% from the second quarter of last year and an increase of 6% sequentially. There were 64 billing days in the quarter, the same as the prior year's second quarter and up one day sequentially.

Accountemps revenues were $305 million, an increase of 25% from the prior year second quarter and an increase of 7% sequentially. Accountemps is our largest staffing division with 333 locations worldwide. It accounts were 37% of total revenues.

OfficeTeam revenues for the second quarter were $169 million up 16% from the prior second quarter and up 8% sequentially. OfficeTeam is our high-end administrative staffing division. It began operations in 1991 and has 303 offices worldwide. This division represents 21% of total revenues.

Robert Half Management Resources had second quarter revenues of 102 million, up 29% from the prior-year's second quarter and down 3% sequentially. Robert Half Management Resources places senior level accounting and finance professionals on a project-basis. It was introduced in 1997. Operates in 120 offices worldwide and accounts for 12% of revenues.

Robert Half Technology revenues were $73 million for the quarter, up 12% from Q2 2004 and up 10% sequentially. This division places IT professionals on a consulting and full-time basis. It was launched 11-years ago and represents 9% of revenues. There are 111 Robert Half Technology locations worldwide.

Our permanent placement division, Robert Half Finance and Accounting had revenues of $55 million in the second quarter, up 61% from the second quarter of 2004 and up 20% sequentially. This business was established in 1948 and operates in 333 offices worldwide and accounts for 7% of total revenues.

International revenues for RHI Staffing Operations were $140 million for the second quarter, up 33% from last year and up 6% sequentially. On a constant currency basis, these growth rates were 26% year-over-year and 9% sequentially.

Our Professional Staffing divisions operate in 75 locations in 11 countries outside the United States, international staffing operations account for 20% of total staffing revenues.

Second quarter revenues for Protiviti were $112 million and comprised 14% of RHI revenues established in May 2002, Protiviti currently has 40 locations in North America, Europe, Asia and Australia.

Turning to gross margins. Temporary and consulting staffing gross margin was $235 million for the quarter. This represents 36.2% of applicable revenues applicable revenues compared with 36% of revenues for the prior year second quarter and 36.3% of revenues sequentially in Q1 2005. Overall staffing gross margin was $290 million for the quarter or 41.2% of staffing revenues. This compared to 39.9% of revenues in Q2 2004 and 40.8% of revenues in Q1 2005. The sequential percentage improvement is due to the higher mix of permanent placement revenues, which more than offset the slight decline in temporary and consulting margins. Gross margin for Protiviti was $46 million for the quarter. 40.8% of Protiviti revenues. This compares to 38.4% of Protiviti revenues in Q2 last year and 40.8% of revenues in Q1 2005.

Turning to selling, general and administrative costs. Staffing SG&A cost for the quarter were $219 million or 31.1% of staffing revenues. This compares to 32.3% of revenues for Q2 2004 and 31.4% of revenues for Q1 2005. The sequential percentage decrease is the result of better productivity from our sales staff particularly in our permanent placement operations. Our SG&A percentage for the quarter was lower than the SG&A percentage in 2000 at similar levels of revenue. Protiviti SG&A costs were 25 million for the quarter, representing 22.1% of revenues. This compares to 20.9% of revenues in Q2 2004 and 21% of revenues in Q1 2005. The sequential percentage increase primarily reflects higher staff recruiting costs.

Operating income from our staffing divisions was $71 million for the quarter. This is up 66% from Q2 2004 and represents 10.1% of staffing revenues. The temporary and consulting divisions contributed $58 million of this amount or 8.9% of applicable revenues. The permanent placement division had operating income of $13 million or 23.9% of placement revenues. Operating income for Protiviti was $21 million for the quarter. This is up 63% from Q2 2004 and represents 18.7% of revenues for this business unit.

Turning to accounts receivable, accounts receivable were $417 million at the end of second quarter with implied days outstanding of 46 days. This compares with 49 days at the end of Q1 2005. The sequential improvement is due primarily to more focused billing and collection efforts in our Protiviti subsidiary.

Now turning to guidance. Following are the business trends we witnessed during the second quarter and the first weeks of July. On a same-day sequential basis, temporary and consulting revenues were up in April, essentially flat in May, and then up again in June. Permanent placement revenues were down in April, but up in both May and June. During the first week of July, revenues from our temporary and consulting businesses were up 17% versus the same period last year. For the first two weeks of July, revenues from our perm placement division were up 53% versus last year. Keep in mind however, that it's difficult to assess perm trends over short periods of time.

Based on these observations, we had offered the following guidance for the third quarter. Revenues in a range of $820 million to $850 million for the quarter. Income per share, $0.32 to $0.34 per share for the third quarter. This guidance implies third quarter year-over-year revenue growth of 16% to 20% and earnings per share growth of 33% to 42%. As you know, these estimates are subject to the risks mentioned in today's release. It's our policy to limit guidance to one quarter. Now, I'll turn it back over to Max.

Thank you, Keith. We were pleased with the strong financial results in all areas of operations. Each of our business units performed well during the second quarter. We were particularly pleased with the broad-based growth in our Accountemps, Robert Half Technology and OfficeTeam divisions. With respect to our staffing operations as many of you know, our clients are primarily small and mid-size businesses. We were encouraged by the most recent small business optimism index in the National Federation of Independent Business.

While overall optimism levels remain unchanged May to June, the percentage of small business owners who expect the economy to improve in the second half of the year increased 11 points. There was also a sharp rise in optimism among this group with regard to business expansion plans.

These are unprecedented times for the accounting and finance profession. The industry's focus on enhanced internal controls and governance practices, combined with the market's desire to extend the service provider group beyond the traditional accounting firms has created many new opportunities to develop and build up on our relationships with new and existing clients. The elevated demand for experienced accountants and other skilled professionals places a premium on the services of those who are able to identify and recruit talent. It also places a premium on the services of those who can effectively deploy consultants with deep skills and competencies in internal audit and business and technology risk management.

Given these trends, we are optimistic about our business prospects for our staffing operations and for Protiviti in the second half of the year. Keith and I now will be happy to answer some of your questions to allow as many callers as possible to participate. We ask that you please limit yourself to one question and a single follow-up as needed. If you have additional questions, we will do our best to return to you later in the call.

[Operator instructions]

We will take our first question from the Greg Capelli of Credit Suisse First Boston. Please go ahead your mike is open.

I guess the question I wanted to ask is you mentioned finding people throughout the company in terms of hiring, including at Protiviti, how much harder is it today? Is it constraining growth and what does it mean for wage rates right now?

Well, Greg it's different for different sectors of the market. As we have mentioned for several quarters, a public accounting-type experience, 3 to 7 years, is very much in demand. Today as it was a quarter ago, as it was a quarter prior to that. To some extent, that is growth constraining, but we are working quite hard to add people in that category.

Kind of absent that category, while the market is tightening. We certainly wouldn't classify it as tight as to what that does to wage rates, I think year-over-year, this quarter, our wage rates are up 5% or 6%. That's an average. The management resources Protiviti rates would be up higher than that and some of the other divisions would be up lower than that.

Greg, I'd just add that with we have been through tight labor markets before, as you well know. And I think that we remember those experiences and all I can tell you is, we will be as prepared as possible to take advantage of what we regard as our inside pole position in terms of recruiting.

Okay, very helpful thank you. And just a one quick follow-up, on the Protiviti side I'm assuming that given that you actually saw slight sequential growth this quarter that -- did you see some uptick in terms of Sarbanes from the non-accelerated filers that might have come through this quarter?

Well, there is many sources demand for the quarter, Greg. I guess we were happy that we converted prior SOA engagements to 2 or 3 or 4 kinds of engagements, is that first being internal audit. It seems that the buzzword internal audit these days is rebalancing. And there is a view that they need to rebalance from too much emphasis on financial controls and not enough emphasis on operational controls. And you have got the, what is called the E & E objectives which are effectiveness and efficiency. And so we are seeing more non-financial controls related internal audit work, which is what internal audit was way before Sarbanes. Further, we are seeing prior SOA clients convert finance function effectiveness assignments.

In addition to that, there was fair amount of IT applications controls work. We have gotten a couple of major engagements where we're designing the controls around asset management system implementations. So, on balance we have been happy, pleased with our ability to convert relationships that began as Sarbanes-Oxley into other things.

In addition to that, as you referenced, there are the non-calendar year-end companies that are still first complying. You also have got large foreign filers that are first complying and so, there was a component of that as well. But on balance, the second quarter we have less Sarbanes-Oxley revenues than we did the first. Not withstanding that we have more revenue overall, meaning we grew our non Sarb-Ox portion of the revenue base.

Okay, that's very helpful. Thank you very much.

All right we will take the following question from the site of Michael Moran (ph) from Merrill Lynch. Please go ahead, your mike is open.

Yes, good afternoon. There was, maybe one thing that caught my attention a bit on the negative side and that is the gross margin in temp. I think you may have alluded to that in your prepared remarks, but perhaps I missed it. Was there anything unique in the temp staffing gross margin this quarter? I would have expected a bit of a pickup sequentially from Q1?

Well, actually, I think the differential is like a tenth of a percentage point which is pretty razor thin. And what's going on there is our fringe costs, principally unemployment and workers comp are up a bit. That was offset partially by slightly higher conversion revenues. But again, on a sequential basis conversion revenues but again, on sequential basis the differential is a tenth of one percentage point.

Okay, that's very helpful. And then just a quick clarification on the guidance for EPS. What share count are you using?

Share count is kind of constant based on what we reported on the one hand. We get the benefit of some of our repurchases next quarter that didn't average in this quarter. On the other hand with the higher share price, the outstanding options will be more diluted. So the two kinds of offset.

Okay, great. Thank you.

All right, the following question is from the site of Jeff Silber of Harris Nesbitt. Please go ahead, your mike is open.

Thanks I just want to turn the table back to the supply issue. Anecdotally, we hear some of the folks that were working on the Protiviti type engagements, and not necessarily working for Protiviti are kind of looking for a home and maybe, we are seeing that in the strong growth in your perm business. I was wondering if you could comment on that from a supply perspective if some of the people to working on projects are now looking for full-time engagements?

Clearly, there is some of that. Many companies have decided that the demand related to this new compliance effort is here to stay forever and therefore, are willing to hire full time. And clearly, those that they know best are those they have already worked with. So, there is some of that. But again, that is all a subset of the supply issue. As I said, the three to seven-year people with public accounting or equivalent experience are in very high demand. Virtually anybody at accounting and finance will tell you that our Protiviti included, we are working very hard with all types of incentives, financial and other ways to be tracked and retain those people. We've done a reasonably good job of doing that. But it continues to be a challenge. We find it ironic that the pundits for many quarters were worried about what would happen to demand in this period of time when the greatest business challenge is actually just the opposite and it's supply.

Okay that's helpful. Just a follow-up from the previous question on gross margins, what are you looking for in your guidance for gross margin in that temporary and consulting area in the third quarter?

On the staffing side, probably flattish. And maybe, you know, again spot me a tenth this side or the other. But we don't see any major change there. On the Protiviti side, there could be a little contraction that all the arises and compensation adjustments to the Protiviti staff are effected July 1st and you don't go immediately pass that on to every client. It's more kind of as those contracts renew. So, there might be a little pressure on Protiviti margins for the quarter. But over a several quarter-period, we would expect to fully recover those compensation increases.

Okay, that's very helpful, thanks again.

All right we will take the following question from the side of Chris Gutek of Morgan Stanley. Please go ahead, your mike is open.

Thanks, hi Max, Keith. Just wanted follow-up here on the Protiviti business. Certainly, the pure Sarbanes-Oxley business seems to be moderating at least a little bit further. But the non- Sarbanes-Oxley business in Protiviti is doing seems quite strong. Do you guys have a sense or an updated sense for the opportunity to take share from the Big Four. And you've got to talk about KPMG potentially being indicted. Even if that doesn't happen, I think the talk would probably accelerate corporate America's shift away from the Big four for this type of work. You guys have any read on what kind of an opportunity that does leaves for you guys?

There is no question there is overarching theme in public accounting that you want to reduce even the appearance of conflict. And therefore opportunities that otherwise will be exclusive to the Big Four are no longer. How we would quantify that, I'm not sure I could put a number on it but it's a very real every time there is a proposal opportunity, KPMG kind of puts front and center where does a Big 4 firm's accounting practice fit relative to the audit services that they offer. And whereas no matter where you come out on whether tax does or doesn't fit, it is certainly good for Protiviti when the discussion at hand is avoiding possible conflicts, if you are a Big 4 firm. So, as Max alluded to earlier, we think it is an unbelievably unprecedented time in that the marketplace is virtually demanding alternatives to the Big 4. And we couldn't be happier about Protiviti's positioning with its Big 4 pedigree in that regard.

I would add, Chris, that obviously it is no secret among the C level executives with whom Protiviti works up for the most part, that Protiviti was formerly made up of the domestic internal audit group and risk consulting group from Arthur Anderson. These are highly confident people.

Given the sensitivity from a governance standpoint to conflicts, if you use a Big 4 firm to your external auditor and you use them for your tax work, or any other types of consulting work you've already taken 2 or maybe even 3 at the Big 4 out of play in the event you wanted to make a change.

A lot of clients have as I think retained Protiviti for the very reason that by using them for example for their internal audit function, they fulfill their New York Stock Exchange requirements but they still keep their powder dry with what everybody agrees is a small number of potential external auditor sources. So, I think we are benefiting from the trends and we don't wish any ill to KPMG or any other accounting firm, but there's no question that we stand to benefit from the current environment and are seeking to do so.

In that context, do you guys think you can grow the Protiviti business sequentially and specifically in Q3. Any guidance you could provide there would be appreciated?

Well, it is -- traditionally we have not given guidance by division. With the exception of Protiviti I guess, we would like over time to get out of the business of giving even sequential guidance for Protiviti. That said, we certainly do not expect negative sequential growth for Protiviti in Q3.

Thanks a lot.

We will take the following question from the side of Brandt Sakakeeny of Deutsche Bank. Please go ahead, your mike is open.

Thanks. Nice quarter Max and Keith. Question, Keith I think you brought up earlier the issue as to where your SG&A was running. And I guess, it was looking at your margins currently noted you are very close to actually, pretty close to your peak margins both in perm and temp in the last cycle, and you have obviously, one could argue that we still have a ways to go? So, it's in light of tha,t I guess, how much --so I guess, my question is do you think, margins can be materially higher both in temp and perm this cycle than they were in the prior cycle?

Well, a couple of items still remain. On the perm side the last peak, perm revenues were 10% of revenues. Today they are still like 7.5. That differential is virtually pure margin. So I would argue, given that perm's revenues even on the absolute basis haven't reached prior peaks and then further, relative to the total revenue based aren't what they were last time coupled with our optimism on that side of the business, which is pretty much industry held, we believe there is potential of a margin expansion for that reason alone.

On the SG&A side I think, clearly as you expand, you lever your fixed cost. The fact that we also have common fixed cosst to be levered over the Protiviti organization as well gives you even more upside there. Having said all that, I don't want to create expectations that are unrealistic. We think there is some upside in our margins, both in staffing and in Protiviti, but we are not asking you to go crazy.

Okay. And I guess just one quick question in terms of follow-up on the buy-back. Please to see that you still have, loads of cash in the balance sheet. Any thought to either accelerating the buy back or increasing the dividends at this point?

Well those are topics that we will be discussing with our board. And we have been buying in stock for a long time and we would certainly expect at some point to ask the board to increase the authorized number of shares available for repurchase. The dividend's considered each quarter and I can't comment except so to say that we agree with you that we have tremendous cash flow.

Great. Thank you, very much.

We will take the following question from the side of Andrew Steinerman of Bear Stearns. Please go ahead. Your Mike is open.

Thank you. Keith, I have a message for you. When you look at the early July growth, the 17%, which is in temp and consult, I assume that includes Protiviti in there and I was wondering if the Protiviti growth recently has been much different than the temp growth, meaning the non-Protiviti growth and if that is skewing the 17% either way?

Andrew, the 17% is pure, temp and consulting, does not include Protiviti. It is the pure number you were seeking to obtain.

Right, and so you don't comment then on recent year-over-year rends in Protiviti, right?

We never have over a week or two period. The whole time collection process, the adjustment process, Protiviti doesn't lend itself to week-by-week comparisons the same way the staffing business does. First of all, they only turn in their time reports twice a month. So, it isn't the weekly business that consulting is and therefore we haven't given post-quarter actual updates.

Okay. But is it fair to say that Protiviti remains solid after the quarter?

As I said to the previous caller, it definitely has remained solid and we do not expect negative sequential growth in Q3.

Okay. Thanks for the clarification.

All right the following question is from the side of Jim Janesky of Ryan Beck. Please go ahead. Your Mike is open.

Yes. As you are talking to your clients about now, you know, God forbid going into the 2005 Sarbanes requirements, obviously it's going to be less compliance efforts than in '04. What timeframe do you think that you will start to see any revenues from, you know, the compliance efforts now in '05 and will that be more late '05 into '06?

That's a good question, Jim. I think we have been a little bit surprised at how late companies are to kind of turn to year 2 compliance if they have already complied. Our observation would be that clients took a breather after they complied first time. They were then in hope of legislative relief that didn't come and so, they are now left with the reality they have got to comply in year 2. And some have observed that there may be a crunch of fourth quarter or into the first part of next year, as companies comply with year 2. But clearly, we have seen less of that so far than what we would have expected.

But, we also believe, there is going to be a significant amount of that for the balance of the year, which will probably be back loaded to the fourth quarter into the first. On the Sarbanes point that I'd also like to make another observation as you go back and write up and compare Management Resource performance to some of the other public companies in the space, you are going to see a differential in the sequential growth rates and a couple of observations about that.

I would say first of all, that Management Resource, as it addresses principally the middle market, it is that market that had their Sarbanes-Oxley deadline extended a year, which clearly impacts them relative to a firm addressing larger companies. But more importantly, at least one of those other competitors has a May 31 quarter end versus June and on a sequential basis there is a significant number of additional days in their current quarter versus their prior quarter and where we took recast Management Resources revenues for that same period of time, there would be a significant adjustment as to what we reported. So I just wanted to give you that guidance as you go back tonight and make those comparisons.

Okay thanks. And as a follow-up, you know, as we move through towards the end of the year, especially post-Thanksgiving, at least historically, we have seen some slowdown, sometimes especially in perm as people look out to the following year for their budgets. And even in temp in some cases. Is there anything that is going on either side of the equation that would change that in 2005?

Well, I would actually say come usually September, as companies work on their budgets and need a fair amount of help to do that, then get ready for their year-end audit, typically, the fourth quarter, seasonally is a nice uptick for us, versus the third. And so given those typical seasonal patterns, contextually exacerbated by this deferral, of year 2 compliance to the end of the year could actually make the fourth quarter even more robust than it typically is.

Okay hat's very helpful. Thank you.

All right we will take the following question from the side Matt Litfin of William Blair & Company. Your Mike is open.

Yes, good afternoon. Could you talk about current hiring trends? And turnover in your staffing business. I'm talking about your Robert Half employees here.

We added to staff during the quarter, Matt. We expect to add more even more aggressively to staff at the second half of the year. One of the things we dialed in to our guidance was the possibility that we added to our internal staff that pressured margins just a little bit. So the bottom line is, we are bullish about the near term outlook and we would express that bullishness by adding to our internal head count, particularly on the staffing side. But we are clearly doing the same in Protiviti as well.

As to turnover, I'm though the sure there are anything unique or special about the current environment. Particularly on the staffing side, on the Protiviti side, the turn over that we do see to one of our clients or a prospect and not to one of other Big 4 firms. It is usually a decision to leave the consulting industry rather than a decision to go to a competitor.

We said in the past that turnover in this industry probably in general, but certainly at our own company is highest during the first two years of employment on the staffing side. Many people are well suited to the business and some are not. So that is a process that usually works itself out during that first year or two.

We have a very good training program with our RHI University. We think that frankly a lot of people target our people for hire and it is hard to blame them for that. We consider that a compliment. We do our best to retain people. But we have a good training program. We think we are getting better at getting people up to speed faster, as we continue to grow. So, you are always going to have some turnover, particularly the first two years. Occasionally, thereafter but actually very limited turnover after that first two year period in the staffing side.

Yes, that is helpful. As a follow-up, what kind of capacity do you think you have in your current employee base on the staffing side as measured by the productivity metrics that you guys keep track of?

I would answer that by saying I would expect that future increases in revenue would carry with it a requirement for future increases in headcount. And I wouldn't necessarily assume we are going to squeeze a lot more out of existing headcount to make that happen i.e., no necessarily higher SG&A leverage from that alone. Maybe there is a little of that but I wouldn't model it in.

The facts are we are always seeking to improve the per desk averages and the individual productivity, but I think what Keith is saying from your standpoint, you shouldn't necessarily count on that going forward in terms of how you look at the numbers of the but you can be assured we will be seeking to improve our margin performance overall.

Yeah, I know you will. Thank you, very much.

Thank you.

The following question is from the side of Tobey Sommer of SunTrust Robinson. Please go ahead. Your Mike is open.

Thank you. I was wondering if we could turn to RHI Technology and maybe could you give us a sense for the proportion of revenue that you are getting engagement from Sarbanes-Oxley and what kind of impact that is having on the technological side of your business?

The direct impact of Sarb-Ox on technology is very small. I guess there has been some talk for over a year about how technology projects were crowded out by focus on Sarb-Ox generally and want to avoid having to have Sarb-Ox documentation applied to anything you do in technology. So, clearly there has been an overarching dampening effect on technology spending generally by Sarb-Ox. That said, clearly in this quarter, we had a very nice quarter in technology. We saw assignments related to wireless installation, security, telecom upgrades not dissimilar to what we are doing ourselves internally. So we were very pleased.

In fact, I think we talked on the last call that we got off to a slow start even in the 1st quarter in technology, but by the second half of the 1st quarter, we picked up steam. And frankly, we continued that into the 2nd quarter, which is why you see the sequential growth that you do.

Regarding the supply and demand equation among your technology personnel that you place, do you see any wage pressure there or is there still ample, would you describe that as above or below average in terms of wage pressure?

Probably average to below average.

And if I may, in terms of perm placement within technology, any noteworthy trends there?

Clearly, that market is also heating up as perm placement is across the board. So we are encouraged by what we are seeing in perm placement in IT.

Thank you very much very helpful.

The following question is from the site of Kelly Flynn of UBS.

Hi, this is Andrew Fones for Kelly. I have two questions on your temp restaffing division. Could you give me a sense of what conversion rates are at the moment and what your historic highs and lows have been?

Conversion rates, as I'd spoke earlier were up just a touch sequentially versus the prior quarter. We have talked before that historically, conversions are 3% to 5% of revenue on the temporary side. And at the moment we are right in the middle of that range.

Okay. Thanks. And can you give me a sense of how bill rates have increased year-over-year?

Bill rates year-over-year are up 5% to 6%.

Okay. Thank you.

All right. Following question is from the side of Mark Marcon from R.W. Baird. Your Mike is open.

Good afternoon. One of things that we are hearing from a number of corporations is that during the Sarb-Ox boom, they became disenchanted with their Big 4 accountants in terms of, feeling like they were getting gouged. I just wondering if you could talk about both in terms of Protiviti as well as Management Resources how the value proposition stacks up relative to the Big 4 at this point and time? And then, I have a followup.

I would say that we tried to be constrained. We got normal, traditional Big 4 margins on our Sarb-Ox works. We did note get outside margins on that work. Clearly, from the beginning, our view was, as we were trying to establish new client relationship was to have a long-term client relationship. And that alone constrained our rates somewhat. We have never tried to compete with the Big 4 on price alone. A couple of the Big 4 are more aggressive than the others about their pricing. But generally speaking, when we are in a proposal situation with the Big 4, our pricing is comparable. Maybe it is a little bit less but not dramatically less. And we typically would not compete on price.

As to Management Resources, understand there, essentially having to buy labor at spot rates and therefore reprice it to clients at spot rates, and as that market heats up and moderate, so do Management Resources bill rates. But again, it is not like Management Resources dramatically improved their margins during that time even though there were times when their bill rates went up a bunch. That was in direct response to the fact they were having to pay more for spot labor in that market.

Can you give us any feel for what the bill rates are for, on average for Protiviti as well as Management Resources? Is that possible?

Well, it's certainly possible I guess we have got a long-standing policy of not going there for competitive reasons. The bill rates for Protiviti are significantly higher than Management Resources, which are significantly higher than Accountemps, which is what you would expect.

Okay, great. One area that seems to be really heating up right now is legal staffing. You have got the affiliates, which I believe is contained within your Accountemps division, I am wondering if you can you talk a little bit about any sort of trends that you are seeing there?

It has never been a huge division of ours and therefore, we don't break it out specifically. I mean, I will say it made some pretty nice progress during the quarter. But again, given its relative size, it does not have much of an impact on our results.

I didn't think it did. I was just wondering about it in terms of future avenue of growth. And whether or not you are seeing a real pickup in trends there?

We have people dedicated to the legal division whose careers depend on how the legal division does. And we are as committed to those people in that division growing as we are any of our divisions.

And this had significant growth this quarter.

: Okay. Thank you.

We will take the following question from the side of Ty Govatos CL King. Please go ahead, your Mike is open.

Yeah, how are you? Technical question, is the acquisition of Lender Advisory going to be meaningful at all over the next few quarters?

Well, it certainly as to size isn't going to be meaningful initially. It was a very small acquisition. But it is certainly is meaningful to the sense that it is one other revenue broadening activity of Protiviti. Clearly, essentially that business is doing due diligence on accounts receivable records for lenders and others which is very close to Protiviti's sweet spot. Verifying accounts receivable trial balances. Reconciling the general ledger, you're determining the aging was computed correctly.

You're taking additions to that trial balance back to see that bills were issued, et cetera. So it is meat and potatoes, blocking and tackling internal audit work that is applied to a specialized market and that's something we intend to expand. But I think it is significant in that it demonstrates there are many, many, many niches that fit nicely underneath the risk consulting umbrella.

That leads to the second question. Sorry about that. Can we expect you to, maybe, you usually don't do acquisitions but the small ones. Are there other areas where it would be easier to make small niche acquisitions to fill those slots?

Inside Protiviti, there is a product based organization structure, and each of those product leaders is very actively pursuing smaller acquisitions in their product area. And the one we just discussed, kind of in the credit risk product area, but we have many, many people inside Protiviti looking to grow their product area that would be inclusive of small acquisitions.

We said for many quarters that we viewed Protiviti as a very interesting platform for expansion for a lot of reasons, for internal growth and through acquisitions. So you shouldn't be surprised in the future if you see more small transactions along the line that we are talking about now. But I think many that have followed us for many years would observe that the ideal acquisition for us is something small, that we then can internally grow across our distribution network.

Okay. Thanks an awful lot.

The following question is from the site of Chris Gutek of Morgan Stanley. Please go ahead, your mike is open.

First, two quick two follow-ups and first is on the macro outlook, you guys sounds very bullish about the labor markets broadly. I guess, in my perspective, if you look at the early cycle portions of labor market, where for example, Manpower operates, they had no revenue growth in the 2nd quarter in the US and the Labor Ready results this morning, I guess the market was somewhat disappointed there as well. Is it possible that the broader labor market is somewhat soft? The early cycle portions of the market are experiencing that. The white-collar being a bit later cycle maybe won't feel it for a few quarters? What are your comments there and what is the source of the confidence of the strong labor markets for your portion of the market will continue?

Well, let's remember that 70% of our revenues are account and finance. And we think there is a 'C' change underway as it relates to accounting and finance that is more secular than cyclical. That said, the small business marketplace as represented by the NFIB, would read that data as fairly bullish as well.

We have said in many prior calls, Chris, that we are not macroeconomists which is pretty obvious, but we have also said that we ware pretty optimistic based on our experience with our own business. We don't see anything in terms of what is going on right now that causes us to be anything other than very optimistic as we head forward.

And then other quick unrelated question. You guys have two overtime related lawsuits outstanding. Is there anything happening with those?

Basically, the answer is no. Those were filed some time ago. My understanding is those suits have been filed against a variety of companies and there hasn't been a lot of action on either.

Okay, great thank you.

The following question is from the site of Pete Corillo (ph) of Citigroup. Please go ahead. Your Mike is open.

Hi guys, a quick question for you. It you were to go back six months or 12 months ago, you found people questioning if you could even grow Protiviti in '06 or '07 just sort of getting at longer term. It is becoming more obviously I guess now that you're planning on positive growth in '06? And the next question is sort of operating margins, I think we would think if those were to fall off as well as you got further out, now it sounds like those would hold on. Can you talk about that, just sort of longer term?

First of all traditionally when we did our due diligence at Andersen, kind of the 15 to 20% operating margins were the norm, kind of public company adjusted for that business. And 15% to 20% would be our long-term expectations. Clearly, we have been at the high end of that range, 17% to 20%. We are comfortable with margins in that range. Those margins are higher than the margins we get in staffing. And I wouldn't necessarily assume that those margins are going to expand significantly as we grow Protiviti.

And in terms of the growth as well, I mean, I think it went from sort of maybe negative to sort of now low single digital, potentially you could grow double digit as you get-as you...?

We certainly think there is a market opportunity that would support long-term double digital growth. And we have been bullish for several quarters kind of how this year one Sarb-Ox transactions quarter-to-quarter has been hard to predict given that nobody has ever gone there before. But we remain bullish for Protiviti. The fact that we have essentially digested all this huge year-end calendar filers and their Sarb-Ox impact two quarters hence now, we feel good about the opportunities we have got with those clients to do other for them, we also we also feel good about.

You said this quarter, less than half of Protiviti was actually Sarb-Ox work, is that right?

I'm not sure we commented directly. I mean, I would say it is approximately half.

Okay. And did you, for last quarter could you give us an idea of what it was then?

I think last quarter we said it was more than half. We have talked in general terms. It is less than it was last quarter. And we have never articulated precisely the percentage -- what we said is what is important is let's look at RHI as an entity in its entirety right and that, 13% to 15% of entity-wide revenue or Sarb-Ox and that was 15% to 17% last quarter. So rather than focus just on Protiviti, we are saying as an organization, what is our exposure to Sarb-Ox and those are the numbers we have tracked.

Although the footnote with respect to your question, maybe one of the prior ones, as I said in my opening remarks, these are unprecedented times in the accounting and finance world. Well over two-thirds of our revenues derive from accounting and finance. We think Protiviti has a great opportunity for growth. We think that we can take advantage of much of what is happening in the market's desire to extend the service provider group beyond the Big 4 accounting firms. And we also think the elevated demand for our experienced accountants and other skilled professionals isn't going away any time soon. So we feel like we are in the sweet spot of the market and we like how we are positioned. Time will tell whether we are able to take advantage of it as fully as we hope. But we are optimistic on Protiviti's future as well as the staffing business.

Great. Thanks.

Thank you.

The following question is from the side of Michael Moran of Miller Lynch.

Thank you just a quick follow up. I know that you won't be giving us a Protiviti consultant head count number until the k is filed next year, but I was wondering if you could give us a sense, given the supply constraints we've talked about earlier on the call, if you can give us a sense of where you are today, headcount wise, kind of year-over-year if you will or sequentially in terms of growth rates. How is that progressing?

We have grown our headcount in staffing during the quarter. We have grown our headcount in Protiviti during the quarter. We would expect to do the same in the third quarter or the second half of the year.

Great. Thank you.

All right. The next question is from the site of Mark Marcon of R.W. Baird.

A follow-up to the last question. In terms of Protiviti, are you finding that Protiviti is actually a more attractive employment model? There have been stories recently about the people leaving the Big 4 just based on burnout and they want to get a little bit better of work-life balance. Is that something that is drawing people to Protiviti at all?

Clearly, we are trying to provide a better experience for our people than they can get this other locations. We feel good about our compensation systems. We feel good about our flexibility as to their work schedules, et cetera. So again, particularly as competitive as this market is, we try to be as responsive as possible to what your candidate-base wants and desires. And, so, we think that Protiviti has become a very, very viable alternative to a Big 4 career. And we would like to think and our recruiting efforts would seem to support, that we are being successful in that regard.

Looks like you had -- did you say that you had 9% sequential constant currency revenue growth in your international operations?

That's correct.

Which would be higher than the overall. What are you seeing internationally and what particular areas of strength are you -- what areas are particularly strong?

The two areas that contributed most significantly to the international operations were the UK and Canada.

And what's driving that?

I think that in the UK particularly, we have singled out of somewhere that we are going to invest significantly, in a particular area of interest for our permanent placement operations not to downplay our staffing operations. But clearly London is a market we have singled out as one we think has a lot of potential, particularly relative to our historic market share there. And it is starting to pay off to some degree.

Great. Thank you.

All right, this concludes our questions for today. I will turn the call over to management for any final comments.

Thank you. Since that was our last question, I would like to thank everybody again for their attention today. A tape recording of the call will be available for replay beginning later today and ending at 8:00 p.m. Eastern Standard Time on July 28. The dial-in number for the replay is 888-214-7993. If you are outside the United States, the number is 402-220-4931. Our conference call will be archived in audio format on Robert Hart International's web site at www.rhi.com. Thank you again.