羅致恆富 (RHI) 2006 Q2 法說會逐字稿

Welcome to the Robert Half International conference call to discuss second quarter 2006 financial results.

Our host for today's call is Mr. Max Messmer, Chairman and CEO of Robert Half International. Mr. Messmer, you may begin.

Thank you and hello, everyone. Thank you for joining us. Here with me today is Keith Waddell, our Vice Chairman, President and CFO.

As is our custom, before we get started I'd like to remind everyone that the comments we make on today's call contain predictions, estimates, other forward-looking statements. These statements reflect our current judgment of what the future holds and they include words such as forecast, estimate, project, expect, believe, guidance similar expressions.

We believe these 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 today's conference call.

Now let's review the second quarter.

Revenues for the quarter were $982 million. This is an increase of 20% from the second quarter of last year.

Income per share was $0.39 compared with $0.33 in the second quarter of 2005. This is an increase of 19% over last year.

As noted on our last conference call, our Company adopted FASB Statement 123R effective January 1, 2006. This reduced second quarter pretax income by $4.7 million and reduced reported income per share by $0.02 per share. Adjusted for this change, income per share grew 24% over last year.

Cash flow from operations during the quarter was $106 million before capital expenditures $19 million. We ended the second quarter with $528 million in cash and cash equivalents after paying a $14 million quarterly cash dividend to shareholders.

We also spent $46 million to repurchase 1.2 million RHI shares in the open market under our stock repurchase plan. Approximately 6.9 million RHI shares remain available for repurchase under the plan.

We reported record revenue and earnings results during the quarter. The strength was broad-based as we achieved double-digit year-over-year revenue gains in each of our staffing divisions and in Protiviti.

Based on the strong demand for our services we continued to add to our professional staff during the quarter. We were particularly pleased with the performance of our Permanent Placement division, Robert Half Finance and Accounting, which saw a 55% increase in revenues versus last year.

Protiviti also had a solid quarter led by revenue gains in each of its international locations, particularly in Asia.

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

Thank you, Max.

As noted, overall revenues for the Company were 982 million. This is an increase of 20% from the second quarter of 2005 and an increase of 4% sequentially.

There were 63 billing days in the quarter, down one day from the prior year second quarter and down one day from the first quarter of 2006.

Accountemps, which is our largest staffing division, had revenues of 363 million on a same day basis. This is an increase of 20% from the second quarter of last year and an increase of 2% sequentially.

Accountemps has 350 locations has worldwide and makes up 37% of total revenues.

Second quarter revenues for OfficeTeam were 193 million, up 15% on a same day basis from the prior year second quarter and up 4% sequentially.

OfficeTeam began operations in 1991 as our high-end administrative staffing division. It has 303 locations worldwide and represents 19% of total revenue.

Second quarter revenues for Robert Half Management Resources were 125 million, an increase of 23% on a same day basis from the prior year second quarter and an increase of 4% sequentially.

Robert Half Management Resources, which was introduced in 1997, places senior level accounting finance professionals on a project basis. It operates in 129 offices worldwide and accounts for 13% of revenues.

Second quarter revenues for Robert Half Technology were 88 million, up 21% on a same day basis from the prior year second quarter and up 4% sequentially.

This division, which was launched in 1994, places IT professionals on a consulting and full-time basis. It operates at 115 locations worldwide and represents 9% of revenue.

Our Permanent Placement division, Robert Half Finance and Accounting, had revenues of 85 million in the second quarter. As Max noted, revenues were up 55% from the second quarter of last year and up 13% sequentially.

This business was established in 1948 and now operates in 350 locations worldwide, yet accounts for 9% of total revenues.

International revenues for RHI staffing operations were 169 million in the second quarter, up 21% from last year and up 6% sequentially. On a constant currency basis these growth rates were 18% versus last year and 2% sequentially.

We have staffing operations in 92 locations and 14 countries outside the United States. International staffing operations account for 20% of total staffing revenues.

Second quarter revenues for Protiviti were 128 million, up 14% from one year ago and up 5% sequentially.

Established in May of 2002, Protiviti has 54 locations in North America, Europe, Latin America and the Asia Pacific region.

Protiviti represents 13% of RHI revenues. International Protiviti operations account for 24% of total Protiviti revenues.

Turning to gross margin, our gross margin in our Temporary Consulting Staffing operations was 286 million for the second quarter. This represents 37.2% of applicable revenues compared with 36.2% of revenues in the prior year second quarter and 36.8% of revenues for the first quarter of 2006.

The sequential improvement relates primarily to a reduction in worker's compensation accruals which resulted from semi-annual third party actuarial reviews.

Overall staffing gross margin was 371 million for the quarter, or 43.5% of staffing revenues. This compares to 41.2% of revenues in Q2 2005 and 42.6% of revenues last quarter.

These improvements are due to the higher mix of Permanent Placement revenues as well as the worker's compensation adjustment just noted.

Gross margin for Protiviti was 47 million for the quarter, or 36.4% of Protiviti revenues. This compares to 40.8% of Protiviti revenues in Q2 2005 and 35.5% of revenues in the first quarter of 2006.

These changes relate primarily to differing staff utilization rates and the mix of contractors deployed on Protiviti engagements.

Staffing selling, general and administrative costs for the quarter were 274 million, or 32.2% of staffing revenues. This compares to 31.1% of revenues for Q2 2005 and 31.2% of revenues for Q1 2006.

The expensing of stock options, the higher mix of Permanent Placement activities and the continuing additions to professional staff all contributed to the higher percentage of SG&A costs for the second quarter.

Protiviti SG&A costs were 34 million for the second quarter, or 26.3% of revenues. This compares to 22.1% in Q2 2005 and 25.6% in the first quarter of 2006.

The higher costs are primarily due to expansion and infrastructure expenses.

Operating income from our staffing divisions was 97 million for the second quarter, or 11.3% of staffing revenues. The Temporary Consulting divisions contributed 76 million to this amount, or 9.9% of applicable revenues.

Our Perm Placement division had operating income of 21 million, or 24% of applicable revenues during the second quarter. Operating income for Protiviti was 13 million for the quarter, or 10.1% of revenues for this business unit.

Accounts receivable were 510 million at the end of the second quarter with implied days sales outstanding of 47 days, which is up one day sequentially from the first quarter.

Now turning to guidance.

We observed the following business trends in the second quarter and during the first three weeks of July. On a same day sequential basis, Temporary and Consulting revenues were flat in April, up in May and up again in June.

Perm Placement revenues were down sequentially in April, up in May and up again in June. During the first two weeks of July, revenues from our Temporary and Consulting businesses were up 16% versus the same period last year.

For the first three weeks of July, revenues from our Permanent Placement division were up 41% compared to last year. Keep in mind though, it's difficult to evaluate Perm trends over such a short period of time.

Based on these trends we offer the following third quarter guidance: Revenues a range of 990 million to 1.020 billion, income per share, $0.39 to $0.41.

As you know, these estimates are subject to the risks mentioned in today's press release. It's our policy to limit guidance to one quarter.

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

Thank you, Keith.

We are pleased to report another record quarter, particularly since we did see broad-based revenue increases in each of our staffing and consulting businesses.

The job market is strong. The U.S. unemployment rate has stayed at 4.6% despite Department of Labor reports of a slowing in overall job growth in recent months.

Within our professional disciplines the need for highly skilled talent has remained high. As we've noted on prior conference calls, the focus by companies on improved corporate governance and greater accountability has created full-time and interim accounting positions that simply did not exist five years ago.

Our financial staffing divisions are well positioned to meet our client's demands for these services.

Protiviti also has benefit from increased demand for deep expertise and internal audit enterprise risk management and compliance with Sarbanes-Oxley. This business also is a respected source for major corporations that require proven expertise in forensic accounting and fraud investigation, technology risk consulting, litigation consulting, any money laundering and many other areas.

Some investors have worried about whether a recession is coming upon us. Our operations to date show no evidence of a slowdown. In any event we take a long-term outlook in our business.

While we cannot predict the future we note that in prior downturns we continued to generate strong cash flow and emerged stronger and larger than before.

Keith and I will now been happy to answer 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 certainly try to return to you later in the call.

[OPERATOR INSTRUCTIONS] Our first question will come from the site of Brandt Sakakeeny with Deutsche Bank. Go ahead, please.

Congratulations, Keith and Max, for a great quarter.

I guess my question is just a little color more on the Protiviti and the accounting side. As you progressed out of the external audit crowd out, how quickly did you see that business come back?

And then I guess just as you look into the fourth quarter, what are your expectations for that going forward? Thanks.

Brandt, let me answer your question by speaking a little more broadly.

So for the quarter, the sequential growth we saw in Protiviti was pretty much derived from international operations. The revenues on the domestic front were pretty much flat with the prior quarter. We were actually pretty pleased with that because our Sarbanes-Oxley revenues continued to fall off and we replaced it with other sources of revenue in Protiviti.

If you looked at the quarter itself, the month of April was the softest of the three for Protiviti domestically and we actually picked up traction in May and June which continued into the third quarter that we're in.

So the growth that you see is principally related to international operations. We called out Asia, which had a very good quarter.

In addition, we also had good quarters in many of our European Protiviti operations as well. Therefore, we were pleased overall with the quarter that Protiviti had.

As we look forward in the third quarter we would expect to see some sequential growth in the United States in addition to continuing growth internationally as we've continued to pretty aggressively add to headcount, particularly in the international locations.

Great, Keith. Thanks for the color.

Our next question comes from Andrew Steinerman with Bear Stearns. Go ahead, please.

Hi, guys.

Could you just talk about office strategy? If I got my historical numbers right, we just opened up Accountemps eight offices, we opened up overall international six offices, and sort of similar numbers to the office count we opened up in the first quarter, which was a great pickup from kind of prior pace.

Could you just comment on why we're adding offices and why it seems like international for your base business, not Protiviti, is more important for expansion now than in the past?

As we talked on a prior call, Andrew, to some degree we're piggybacking on the international presence of Protiviti and opening locations for our staffing operations where we hadn't had them before and Japan would be a great example of that. Italy would be another example of that.

So I think the combination of the comfort we've gotten in Protiviti, together with some of the early success we've had in staffing, where it opened, where Protiviti already existed has given us confidence to get a little more aggressive on the staffing side with international openings.

Andrew, just one observation on Keith's piggyback comment.

We have been pleased with Protiviti's development internationally and in the staffing business people like to talk about warm calls versus cold calls. Opening staffing operations in some of the locations has involved warm calls, meaning it's easier to do.

You feel more comfortable. You know the market better. You can access people more quickly so it's been an easier thing for us to do.

We also feel we have an excellent international management team, we have critical infrastructure, so it simply makes sense.

And you're also nudging your office count domestically forward, too.

That's correct. I mean they're relatively small numbers but we are, I think, nudging is a good word.

Thank you so much.

Our next question comes from Jeff Silber with BMO Capital Markets. Go ahead, please.

Thanks so much.

The past few quarters you've been fairly aggressively adding headcount across the different divisions. Is that something that's incorporated into your guidance to continue into the third quarter and I'm wondering where your outlook is thereafter as well?

Again, let me talk more generally about our guidance and I will include in that kind of headcount observations, Jeff.

Clearly our guidance contemplates continued sequential and year-over-year growth. In fact, if you look at the quarter just ended on a same day sequential basis our growth actually accelerated in Q2 versus Q1. It was just a little bit, but our same day sequential growth rate for our staffing operations was actually better in Q2 versus 1, not worse.

We do expect to continue to see sequential growth as we go forward. We would expect that the Temp gross margins would moderate a bit because we won't get the adjustment credit we just got in the second quarter for the worker's comp, we would expect perm to continue to stay strong.

That's built into our guidance. You get a positive gross margin effect from higher perm mix.

We would expect SG&A to moderate just a little bit in part because we would expect some of the productivity enhancements from all of the hiring we've done over the last few quarters as you just pointed out. We did continue to hire throughout the second quarter.

We've hired, as well, in the early parts of this quarter but probably not to the same degree, not because our optimism has waned, but in fact, because we need to see some productivity out of our prior hiring before we continue to add at that same pace.

Further on the Protiviti side, as our U.S. operations begin to grow we would expect to see some leverage there and hope to see some margin expansion in the third quarter versus what we reported in the second. Maybe it isn't a huge margin expansion but certainly going in the right direction.

The tax rate's probably going to be a couple basis points higher. It was couple basis points low this quarter for one-time items.

The other thing to dial into your third quarter, based on your stock price assumption, the dilution for options in the quarter just ended assumed an average price of $41. You choose your own stock price assumption for the third quarter and every dollar a share that is different than $41 takes away 170,000 shares from your EPS calculation.

So when you dial all that together we got to the 990 to 1.020 billion and with a little luck it'll be the first quarter in the Company's history where we have $1 billion in quarterly revenues. So we're actually pretty excited about that.

Okay. Great. You actually answered a lot more than I had. I think that's the first time that's ever happened.

Just as a quick follow-up, though, you mentioned the worker's comp accrual. Roughly what was the impact on gross margins this quarter?

If I remember correctly, you had something similar last quarter. If you could tell us what it was then as well, I'd appreciate it.

It was about 40 basis points this quarter. I don't think it was anything last quarter but maybe the quarter before that.

We actually, twice a year, we go out to a third party actuary to confirm our worker's comp accruals. And because experience has gotten better in California over the last year or two, it's proven time and time again that we're conservative in what we've been accruing for workers comp and then we true those up twice a year when we get the third party input.

Great. So the fourth quarter last year was roughly how much?

You know, Jeff, I don't remember off the top of my head. Order of magnitude my guess it was 25 to 50 basis points.

All right. That's great. Thanks again.

Our next question comes from Chris Gutek with Morgan Stanley. Your line is open.

Thanks. Hi, Max and Keith. There's two questions. Wanted to follow-up on kind of a big picture perspective.

You know, obviously, some of the U.S.-based macro data has suggested some slowing in the macro environment in Q2 versus Q1 and on top of that you have geopolitical concerns and other issues and certainly within the labor market as well as some of the DLS day list data has showed some softening so your business might not necessarily be the first to see it, but it seems like other staffing companies are seeing a little bit of slowing.

Could you address how much lag you would expect to see if the labor market demand is in fact slowing and also qualitatively, when you talk to your customers, is there any increased hesitancy or reluctance to hire as aggressively with you guys as they have in the past?

Let's take it in reverse order. First of all, as we talk to our customers as late as this past week, we feel really good about the current state of our business. And we've reported to you our weekly numbers, some of which are only two days old, so you've literally got as much information as we have there.

On the lag effect, I think the big question is to what extent, particularly this time around, are the secular drivers with accounting finance sufficiently different from the overall labor market that will be impacted differently. And that's a question nobody knows the answer to.

That being said, as Max stated, as we sit here today we see no slowdown in our business. And in fact, as I pointed out earlier, we actually accelerated our same day sequential growth rate in a quarter that's otherwise pretty soft from a seasonal standpoint for Accountemps, which to me makes it all the more remarkable.

Keith, I actually had one other follow-up on the Protiviti business real quick here as well.

As you guys in the last couple of quarters have been aggressively opening offices especially outside the U.S. that probably has a negative impact on margins. In the context of the office opening plans going forward for the next couple of quarters, in the context of the U.S. business potentially stabilizing, what is the expectation for the Protiviti margin over the next one to two years? Can it get back to the high teens?

Again, our expectation is that the normalized margins in Protiviti are the mid to high teens. And we would expect that they return to the mid to high teens.

Exactly the pace they return to that mid to high teens, we can't speak to because it's in part a function of how aggressive do we continue to invest, particularly internationally. That said, we are extremely pleased with the margins that we've gotten in a very short period of time form our international expansion.

Chris, just a footnote on your first question. Keith responded very well I thought.

We, obviously, as I've said on innumerable calls, we're not macroeconomists and we look at the same data that you do and perhaps without the same level of expertise. Suffice to say that we have seen nothing in our business to date that would indicate a slowdown.

That doesn't mean there isn't one coming. Perhaps there is but we just don't see it. I've said often that I think there's sometimes a disconnect between Wall Street and Main Street. I don't know if that's true this time or not.

We don't know to what extent the secular drivers in accounting and finance offset whatever slowing you may be seeing. There's a lot of negativity that could account for some of the lack of optimism.

We saw, for example, in the NFIB survey, there's more difficulty in certain segments filling jobs, which can also account for some small business people being negative in terms of their optimism index. But suffice to say based on what we've seen as recently, as Keith noted a couple of days ago, there's no cause for pessimism.

Thanks, guys.

Our next question comes from Mark Marcon with R. W. Baird. Go ahead, please.

Good afternoon.

I was wondering if you could comment a little bit more with regards to outside of the F&A trends what are you seeing or what's your sense of the progression for OfficeTeam and R. H. Technology? Are those holding up as consistently as the quarter progressed on a monthly basis?

If anything, Mark, they did a little better. OfficeTeam seasonally, typically does a little better in the second quarter. You had better sequential growth in Q2 than did Accountemps as an example.

Further, on the R. H. Technology side we also saw nice sequential growth. A little different than past quarters. We really saw tech support, help desk, network administrators come on strong whereas in prior quarters it had been focused more on the programmers and developers.

So for the non-F&A businesses, as you call it, we were very pleased, and again, as I said earlier, second quarter seasonally has never been the greatest quarter for Accountemps. Notwithstanding that, our same day sequential growth accelerated, which by definition says, our non-F&A businesses did quite well during the quarter.

Yeah, what I was referring to, Keith, was if I go back and look sequentially over the last two years as an example, OfficeTeam, if I go back to 2004 was up 11% sequentially relative to the first quarter. Last year it was up 8.5% sequentially relative to the first quarter.

Q2 normally seasonally is a very strong quarter relative to Q1 for OfficeTeam and this time you were up about 3.5%, not seasonally adjusted. I was trying to get a sense for those monthly trends more on a year-over-year basis or however else you would look at it.

I guess the monthly trends we gave you were overall monthly trends.

Right.

Those overall monthly trends were flat in the first month, accelerating growth in the next two months.

And that would hold true, also, for OfficeTeam?

Well, again, divisionally there are differences and I guess we'd kind of have to draw the line at how granular we're going to get here, but the thought is that overall we saw accelerating sequential growth during the quarter.

And then it sounds like you're going to, you're going to leverage some of the investments that you've made during the first half going into the second half on the Temp side in terms of the investments behind people and things of that nature.

Again, we haven't been quite as aggressive this quarter as we were last with headcount additions. And our hope is to get some leverage from our prior additions to headcount.

One last question.

On the Protiviti side, can you talk a little bit about the status of some of the early Andersen partners that you brought on board? As you look forward what your anticipation would be in terms of retention and productivity and things of that nature?

We've been extremely pleased with the retention we've had with the initial partner group that joined us from Andersen with the partners that have joined us since the initial group. We feel very good about their intentions to remain with us going forward and so, quite frankly, there's virtually nothing but good news there.

There's are no like contracts that are terminating or anything like that would potentially lead to any sort of change in terms of those retention metrics that you've had in the past?

The only contractual point of relevance, and it only impacts a handful of people, is that were they to remain with us, I think it was 4.5 years, they have some retirement benefits relative to their equity. To my knowledge as I sit here today, I'm not aware of any of those that plan to retire pursuant to that.

Terrific. Thank you.

Next we'll go to Jim Janesky with Ryan Beck and Company. Your line is open.

Yes, when you look at your Permanent Placement division implied in your 990 to 1.020 billion, last year, for example, there was a slowdown sequentially from the second to the third quarter in the Perm division versus the second quarter from the first quarter.

Do you at all anticipate the same type of trends? I know it's still early but just from a big picture perspective has anything changed this year that would change the sequential expectations?

Well, in fact if you go back beyond more than just one year you'll find that the third quarter, which is dominated by the summer months, isn't a great time for hiring. I mean it's usually a solid quarter, but it's not a home run kind of quarter and we certainly considered that in the guidance that we gave.

Okay.

Second question is stock buyback. I mean the average price that you paid per share last quarter, significantly higher than where the stock is now. Do you anticipate continuing with buybacks in the third quarter?

I think if you look back at our history we've been fairly active pretty much every quarter. And we pick up the pace based on the price.

And I think the fact that you point out we were willing to by 1.2 million shares in the high 30s and around 40 would certainly be pretty good indication that we might be willing to buy more at less than that.

This is a case where lower is better.

Okay. Great. Just checking. Thank you.

Our next question comes from Kelly Flynn with UBS. Go ahead, please.

Thanks. I have a few questions.

First on the worker's comp issue you cited and its impact on the margin. I know you said 40 basis points but should we just look as we look to the third quarter as that as kind of a one-off gain or have you changed the way that you accrue because of your better experience and so it won't be quite that much of a one-off, if you know what I mean?

I think the conservative thing to do is to consider it a one-off because we tend to be conservative there and kind of wait until the actuary proves it before we anticipate it. So I think the easiest and most conservative thing to do is consider it one-off.

Okay. Great.

And then on the options expense can you give us the detail by segment as I think you did in the Q&A last quarter?

Sure. It was 3.3 million for Temporary and Consulting, a half a million for Perm Placement and $1 million for Protiviti.

Importantly, as we progress through the rest of the year the options expense will go down. In fact, for the upcoming quarter we expect it will go down buy about $1 million.

As you may recall, we essentially quit issuing options except for a few international locations where it makes sense tax wise. We essentially quit issuing options back in '04. So the options are winding down and the expense related to those is winding down as well.

Okay.

And then finally on Protiviti, there have been some comments this quarter from others about increased competition from the Big Four. I think we touched on that in the Q&A last time. Can you just update us on that theme? Thanks.

We've had a fair amount of dialogue on this point internally because I've certainly read what you refer to. And our reaction is it's more a market-by-market thing and the firms different by market.

And so in some markets some Big Four firms really got aggressive with their hiring and decided after the fact that maybe they hired too many and therefore they have a big appetite to be aggressive on the pricing and they are. That same firm in a nearby city that doesn't have those attributes isn't near as aggressive.

So I guess I wouldn't and we wouldn't consider that trend as pervasive as I've kind of read as I looked at how the others have reported. We certainly see it in spot markets. And again, it's not the same firm all the time. But as I said, not near as pervasive as what we've heard others say.

Okay.

Is it pervasive in certain big cities you could site or you wouldn't even go that far?

It's even rarer in a certain city that every one of the firms is equally aggressive. It's usually a specific firm for firm specific reasons.

Just like we at Protiviti don't really price on a national basis. I sometimes chuckle to think that how would others describe our pricing strategy when it's so decentralized. Yet when we talk about the Big Four as if they have one centralized pricing strategy, I just don't think it's so.

All right. Thanks a lot.

Our next question comes from Tobey Sommer with SunTrust Robinson. Go ahead, please.

Thank you.

I was wondering if you could comment on, you've hired quite a bit of people in your, in terms of your recruiter base. I was wondering if you could comment specifically as to the pace of hiring for people focused on Perm domestically? Thank you.

The pace of hiring for permanent domestically is probably the one area where we haven't throttled back, in part because that market is so strong newer people added to our staff there typically get up to speed very quickly.

It takes longer to get people on the Temporary Consulting side up to speed. And because of that short time period to get the Perm people up to speed, we continue to be fairly aggressive adding to that.

Just a question regarding sort of the pricing umbrella that you may see in Protiviti. What have you heard in the market regarding rate increases either among auditing firms or perhaps legal fee increases that would provide sort of an umbrella for Protiviti to raise rates?

I guess as one data point PWC, who's outside auditor basically came to us and said, we've got to get a rate increase kind of in the mid to high single-digits and there's not much we can do about it. And if you've got a problem with it, we understand but, quite frankly, we've got very little flexibility.

And so I think that's some indication that at least one firm in one city thinks the market's pretty strong, strong enough that they're pretty much dictating what they say the rate increases have to be.

Thank you very much.

Our next question comes from Michel Morin with Merrill Lynch. Go ahead, please.

Good afternoon, guys. A couple of questions.

First on the Protiviti office count, it looks like obviously you opened a couple of offices in the quarter. I was wondering if that's perhaps the trend or the pace that we should expect for the rest of the year? I think had you mentioned last quarter that the recent pace would likely slow down a bit.

I think that's right. I think we added a second office in Germany and the other addition was in South Korea.

As I said last time, even four or five years ago when we established Protiviti we had a list of countries where we felt like we pretty much had to be, and in fact, many of our global clients based in the U.S., we had to make a commitment to be in those countries. We've just gotten to where we pretty much fulfilled that commitment and so from here on out we wouldn't see the pace of adding new countries to be as rapid as has been the case in the past.

Now we would see us continuing to get critical mass in countries where we've already opened so don't get me wrong. But as far as adding new countries, clearly, we see that slowing down from a rate of addition standpoint relative to the past.

Right. Okay.

And then on the Temp side, there was a nice ramp-up there, I think eight offices on Accountemps. Are there many more locations where is you've got Protiviti that have laid the groundwork for you to bring in the staffing operations?

It's a relatively small number and again, when you're adding six and eight offices on the base of 350, it's a pretty small number anyway.

Right.

Although I guess where I was going with this question is when you look at the Temp margins I was a bit surprised to see that we didn't see a bit more operating leverage in the quarter. And I was wondering if presumably those eight office openings are what drove that SG&A pickup.

That SG&A was much more, Michel, about adding to headcount domestically in offices were already opened than it was adding offices.

Great. Thank you.

Our next question comes from Jeremy Davis with Credit Suisse. Go ahead, please.

Hi, guys.

Wondering what your current capacity utilization is in the Protiviti division relative to where you think that should be longer term? And if there's any granularity that you can give to where your capacity utilization is domestically versus in some of your newer offices.

Well, we've had a policy from the beginning of Protiviti of not disclosing for competitive reasons exactly what our utilization or chargeability is. Clearly, during the height of the Sarbanes-Oxley period our utilization was much higher than what they traditionally would have seen pre-Protiviti when they were at Andersen.

I'd say we've gone through a period where the utilization's been lower than norm.

We're getting close to norm but we are still below norm and currently getting back to those mid to high teen operating margins, the single largest thing that has to happen to get there is to get domestic utilization or chargeability at or above prior norms. I know that's not as specific as you wanted but at least it's directional.

It is helpful. And presumably the fact that you continue to do hiring within Protiviti suggests that you're comfortable with where your current capacity is.

That's correct. And as I said earlier, our utilization percentages improved during the quarter March to June and improved yet again the first part of July. So we like the trendline in domestic U.S. Protiviti and this transition away from Sarbanes-Oxley into internal audit, technology risk, et cetera, is a transition that's going well.

We're very pleased that this quarter on the internal audit side we are introducing a new technology portal for our clients where they can manage their internal audit operations, their Sarbanes-Oxley compliance and other regulatory compliance issues as well. That portal's been very well-received and part and parcel to our strategy to support internal audit kind of separate and apart just from Sarbanes-Oxley.

Okay. Great. Thank you.

Next we will go to T. C. Robillard with Banc of America Securities. Your line's open.

Thank you. Just a quick question on the share repurchase.

Can you outline any restrictions that you guys have within the quarter in terms of volume that you would be able to buy in the open market?

Sure. There's an SEC regulated volume limitation and it relates to the average trading volume like for the last 20 days or something and as a practical matter that number is usually somewhere between 150,000 and 250,000 shares per day based on how activity the stock has been. I don't know precisely what the formula is. The firm that we deal with, they calculate that every day.

Okay. That's very helpful. Then just one other quick question.

If you look back to kind of where operating margin peaked at least kind of in recent history in the 98 level around 12% or a little bit above, is there anything different with the model today relative to then that would suggest that operating margins have the potential to be above that level?

I mean you're obviously pretty close there, a little over 11% now. I'm just trying to get a sense as to what the potential for the model today is versus kind of the peak so to speak last cycle.

Clearly, as Perm continues to grow aggressively, faster than our Temp business there's margin upside there. One having 20 plus percent margins and the other one having ten plus percent margins. That's a plus as Perm continues to grow.

Protiviti with normalized margins is going to be accretive to our overall margin. It's kind of interesting, everybody talks about, oh, woe is, look at Protiviti's margins, they're only 10%.

Well, Protiviti's margins on a depressed basis are pretty close to what our staffing margins were at peak, so there's only good news as we take Protiviti's margins back up to the norm.

Further, Temp to Perm conversions are still in the midpoint of the range. They've not gotten to the high point of the range from a percent of revenue standpoint.

So we certainly haven't closed the door on, there's more margin expansion. Because we're conservative we don't want you to necessarily expect margin expansion, we're going to do what we think prudent.

We're going to make the investments we think prudent. And the margins will be what they'll be but, clearly, it's possible that the margins expand from here.

Okay. Can you remind me what level of Perm was back in kind of the '97, '98, '99 time frame?

I think it got to like 9.6, 9.7% of staffing revenues and we're currently at 10% of staffing revenues. I would remind you that back in the early '90s Perm got as high as 13 or 14% of revenues.

So on an absolute basis Perm is at its peak. As a percent of revenue it's gone past the last cycle peak but we've had prior cycles whereas a percent of revenue it's gone even higher.

Great. Very helpful. Thank you.

Our next question comes from Michael Fox with JPMorgan. Go ahead, please.

Good afternoon, guys, and congratulations on a strong quarter.

Can you talk about given the strength in the end markets for finance and economy workers the availability of qualified workers at this point?

We feel good about supply. There's this one pocket of three to seven-year Big Four accounting types where it's the tightest but absent that pocket, we're not seeing supply issues that cause us concern.

And then you talked about the growth in Protiviti and the non-Sarbanes-Oxley which offset all the declines of Sarbanes-Oxley. Can you just give us an idea of how big SOx is as a percentage of either Protiviti or total revenue?

As we said last quarter, I think we quit formally disclosing what it was when the number got as low as 6 to 7% and it's declined two quarters in a row since then so that gives you some idea the orders of magnitude. But frankly, we're trying to kind of get away of having to quantity SOx given how low the percentage has gotten.

Great. Thanks a lot.

Next we'll go to Clint Fendley with Wachovia Securities. Your line is open.

Good afternoon, guys.

Max, you just commented on the Perm supply. I wondered on the Temp side any commentary you could provide as far as labor supply issues there?

Well, as Keith indicated, the people with public accounting experience are in short supply, whether you're looking for them for permanent positions or temporary positions. And so you have to work pretty hard to access them.

In other areas there may have been a little tightening here and there but overall we just have not been supply constrained on either the Permanent side of the business or the Temporary.

Are our people are probably working a little harder to access them? Yes, but the supply is still adequate. We are fairly sophisticated. We've been in the recruitment business a long time.

We have tentacles just about everywhere and we have good technology platforms and so we're probably much better today than we would have been a decade ago at accessing talent, but the facts are the supply is adequate right now so we feel all right about that.

Would you expect to make any changes to any of your advertising or any other recruitment efforts to deal with any of the tightness in the near-term?

I think I noted on the last conference call that we felt we made some mistakes many years ago in waiting too long to shift our advertising toward a recruitment focus from a client-oriented focus and I think I said we'd be careful not to make that mistake again. So we have in mind the labor markets as we review our advertising programs, budgets, and so forth, and as necessary, obviously, we'll turn up the spigot of spending as it relates to recruitment as necessary.

So the answer is, yes, we'll make adjustments as we think necessary going forward.

Thanks, guys.

Thank you.

Next question comes from Pete Carillo with Citigroup.

Hi, guys. A couple of questions for you.

Could you remind us of any sort of seasonality trends that affect operating margins in the Protiviti division?

The Protiviti division, typically the first quarter and the second quarter will be softer than the third and the fourth, but particularly the first quarter where companies focus more on closing their books and getting their outside audit accomplished rather than internal audit. Some of that spills over into the second quarter as well.

By the time you get to the third quarter that's kind of behind you and now companies are starting to focus on getting their current year internal controls certification and audit done as well. Plus you start getting ready for other year-end matters. So third quarter seasonally is typically better than the first couple.

But again, this is the fifth year we've had Protiviti and the prior four years there have been all kinds of start-ups, Sarbanes-Oxley, I hate to call it noise, but relative to a seasonal pattern there's been a fair amount of noise for the first four years and it's been good noise, don't get me wrong. But I'm not sure we can hone in precisely just yet on seasonal patterns.

Okay. And a quick one is, Cap Ex, I don't remember what you originally gave for guidance for the year. Is it still mid [80s] or so for the?

I think it's tracking along those ways. We were a little bit under 20 million this quarter. For the most part what we would have expected for most part in line with what we've been talking about. No big surprises there.

What about, in terms of Temp operating margin is the trend sort of flattish or do you think you can get back above ten and sort of stay there for the foreseeable future?

Well, as we talked about in our guidance, we hope to get a little expansion from productivity increases on the prior hiring, but if you kind of retro engineer the numbers, you don't need a whole lot of that to get to the numbers we're talking about.

Okay. Great. Thanks a lot.

Our next question comes from Jeff Silber with BMO Capital Markets. Go ahead, please.

Just a couple of quick follow-ups.

In prior quarters you've given us roughly what the average change year-over-year was in billing rates and wage rates. If you could you give us that again?

Sequentially it's 1.5%, or roughly 1.5% and year-over-year it's 5.5%.

That's on the billing rate side. How about on the wage rate side.

They're about the same because the spread hasn't changed much.

Great. Also in the 8-K that you filed you disclosed a lawsuit from an ex-Protiviti employee. If you can provide a little color on that, I'd appreciate it.

I think it all relates to the same overtime issue that we've talked about many times on this call.

All right. Thanks.

Out next question comes from Kevin Steinke with William Blair. Go ahead, please.

Hi. This is Matt Litfin.

I have a question about the competitive environment and your scale advantage. As the largest company in the specialty staffing industry, I wondered what advantages generally do you have versus your typically mom and pop competitors? And specifically, are there examples of technology investments that you can afford to make that give you any advantage versus your typical competitor?

Well, I'll start and Max can jump in.

I'd say, obviously, there's many, Matt. First of all, I think because of our size we have, from a candidate standpoint, the greatest selection of jobs and because we have the greatest selection of jobs, that in turn gives us the greatest selection of candidates, and there's a network effect by having the greatest selection of both that's irrespective of technology.

Further, I think because of our size we've been able to make investments in marketing and advertising for 60-odd years, whatever the number is, such that the brand awareness of our divisions far exceeds the brand awareness of the smaller firms.

And as relates to technology I think that brand awareness is ever more important today as candidates particularly go to the Internet, go to the Web, those recognized brand names are where they go, it's on their short list of where they go looking for a job. Further, the investments we've made in technology have been in large part around, how do you integrate what we've been successful with in the offline world with the new online world.

And the quicker we can respond to an "A" candidate that registers on our Web site with a live call from one of our internal professionals, the more successful we're going to be. And it's those kind of endeavors, our size and scale and strong cash flow and longevity that allow to us make investments in.

I have just a couple of points, Matt. I think Keith covered it pretty well.

On the point about reputation and brand awareness, that's important to candidates, but it's possibly even more important to your internal staff. The people that work for us see a company that's 60 years old, that has an outstanding reputation, that's the leader in its field that can provide them with the greatest career opportunities, the greatest opportunities for advancement.

We have an outstanding financial record and I think reputation. We've never had a restatement or any sort of accounting irregularity. We have a lot of cash on the balance sheet.

We're a strong company. We have lots of people that have been with us 10, 20 years and so forth and I think what they see is a strong career opportunity and that's what it takes to hire the best people.

So I think we have those advantages which we try to bring to bear in everything we do. That doesn't mean we don't have very fine competitors, many of whom are small and locally owned, and they can certainly do a good job carving out a reputation in the local community, but I do think it's hard for them to compete long-term on any sizeable basis with us.

Okay. Thank you.

Our next question comes from Leone Young with Citigroup.

My question's been answered.

In that case our final question will come from Chris Gutek with Morgan Stanley. Your line is open.

Thanks.

Keith, I just wanted to push you a little bit more on two issues if I don't mind pushing my luck here. The first is your EPS guidance for Q3 doesn't look quite as bullish as some of your qualitative comments might otherwise suggest you could give guidance for.

I'm curious, is the disconnect there or if there is any disconnect at all, is that a function of some of the investments in new office openings and the margin's taking a while to ramp up or conversely, have you layered in a bit more conservatism to your guidance than you might otherwise have because of the macro concerns or some other issue?

Chris, our hope and our aim is to always be conservative and our hope and our aim is that we've been conservative again. And when you deal in increments of pennies, whether it's 39 to 41or 40 to 42 or 38 to 40, at some level it's kind of splitting hairs. And over a long periods of time, it almost seems silly to have a big debate over is it a penny up or down this way or the other way.

But the hope is that it's conservative. And there was no overarching message that was intended by what we came up with.

Okay. Great.

And then just a little bit more on these lawsuits. I think this is now the fifth one of these overtime lawsuits. I think maybe four out of the five are in California.

And in recognizing that California labor law can be a bit crazy, but I think this is the first lawsuit that deals with Protiviti versus the staffing side of the business. What is the argument to say that a Protiviti consultant should be paid overtime, if any? In other words, do you think these are completely frivolous or do you see any risk here?

I guess the difficulty given that they're lawsuits it's kind of hard for to us speak openly other than to say that we believe we have meritorious defenses and we intend to pursue those aggressively. Beyond that, we're a little bit tied as to what we can say because they're legal matters.

I'd just add, Chris, that some of the industry trade-type publications have had some small articles about this type of litigation and I think you'd find that there are probably other suits involving other companies and this seems to be, among lawyers, an area that they're exploring with great interest. Our counsel is advising us is competent, is experienced and feels we have very strong and meritorious defenses and beyond that there's really not a lot we can say.

The one thing I would add is that it's our understanding that our overtime practices are consistent with virtually every other major firm in the staffing industry and they're consistent with virtually every other major firm in the consulting and Big Four accounting industry. So it's not like we're out there doing something different than everybody else is doing.

Final quick follow-up. Is there any incremental legal costs you guys are incurring that moves the needle at all related to these five lawsuits?

Well, clearly, there are incremental legal costs. It so far hasn't meaningfully moved the needle but it hurts nonetheless.

All right. Thanks, guys.

I'd make just one comment before we close. We had some questions about Protiviti.

We're extremely happy with the relationships we've developed with people in Protiviti. They're very professional, they've done a great job. We felt they were done an injustice when Arthur Andersen had its problems with the Justice Department but, again, it's been a wonderful relationship and the results have indicated that it's working well.

Mr. Gutek's question was our last one. I'd like to thank everyone for your time today. This will conclude our call. Thank you.

This concludes today's teleconference. A taped recording of this call will be available for replay beginning at approximately 8:00 p.m. Eastern tonight and ending at 8:00 p.m. Eastern on August 1st. The dial-in number for the replay is 800-723-1517, or outside the United States, 1-402-220-2659. This call will also be available in audio format at RHI.com.