羅致恆富 (RHI) 2008 Q3 法說會逐字稿

Welcome to the Robert Half Internation conference call to discuss third 2008 financial results. Our hosts for today's call are Mr. Max Messmer, Chairman and CEO of Robert Half International, and Mr. Keith Waddell, Vice Chairman, President, and Chief Financial Officer. Mr. Messmer, you may begin.

Thank you, and good afternoon, everyone. We appreciate your joining us. I will start by reminding everyone that comments made on this call contain predictions, estimates, and other forward-looking statements. These statements represent our current judgment of what the future holds, and they include words such as forecast, estimate, project, expect, believe, guidance, and 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 the press release we issued today, and in our SEC filings. We assume no obligation to update the statements made in this call.

Now let's review our third quarter results. Revenues for the third quarter $1.16 billion, down 2% from the third quarter of last year. Income per share was $0.43, down 6% from the prior year's third quarter.

During the third quarter, cash flow from operations was $96 million, and capital expenditures were $17 million. We paid a quarterly cash dividend to stockholders of $0.11 per share, for a total of $17 million. During the third quarter, we repurchased 900,000 RHI shares at a cost of $21 million. Approximately 13.8 million shares remain available for repurchase under our Board approved stock repurchase plan.

Our third quarter results clearly were impacted by the turmoil in the global financial markets. Clients did become increasingly cautious with their hiring actions as the quarter progressed. The quarter was not without its bright spots, however. Revenues from our international operations grew 15% year-over-year on a constant currency basis. Our technology division also reported positive year-over-year revenue growth. And our return on equity was 26% for the quarter, our return on equity has averaged 26% for the past five years.

Now I will turn the call over to Keith to provide a more detailed analysis for our third quarter results, and then we'll have time for questions after our prepared remarks. Thank you, Max.

We will start with company-wide revenues. Third quarter revenues were $1.16 billion, a decrease of 2% from the third quarter of last year, and down 5% sequentially, There were 64 billing days in the third quarter of this year, compared with 63 billing days in the third quarter of last year, and 64 for the second quarter sequentially. Revenues for Accountemps were $435 million, which are down 2% from the third quarter of last year, and down 6% sequentially on a same day basis. Accountemps is our largest staffing division,,n with 375 offices worldwide. It accounts for 38% of company revenues.

OfficeTeam had revenues of $209 million in the third quarter, down 3% from the third quarter of last year, and down 5% sequentially on a same day basis. OfficeTeam was introduced in 1991, and is our high-end administrative staffing division. It represents 18% of company revenues, and there are 329 OfficeTeam locations worldwide.

Third quarter revenues for Robert Half Management Resources were $156 million, flat for the third quarter of 2007, and down 6% sequentially on a same day basis. This division introduced in 1997, and places senior-level accounting and finance professionals on a project basis. It has 152 locations worldwide, and makes up 13% of company revenues.

Robert Half Technology revenues $112 million in the third quarter, up 2% from the third quarter of last year, and down 1% sequentially on a same day basis. Robert Half Technology was introduced in 1994, and places information technology professionals on a consulting and full time basis. This business operates in 112 locations worldwide, and accounts for 10% of company revenues.

Robert Half Finance and Accounting, our Permanent Placement Division, had revenues of $108 million in the third quarter, down 4% from the third quarter of 2007, and down 15% on a same day sequential basis. This business was established in 1948, and operates in 375 locations worldwide. It accounts for 9% of company revenues.

Third quarter revenues for our International Staffing Operations were $303 million, up 18% from the third quarter of 2007, and down 5% sequentially on the same day basis. On a constant currency basis, these growth rates were up 15% compared to the third quarter of last year, and down only 1% sequentially. We have staffing operations in 110 locations and 20 countries outside the United States. International Staffing Operations represent 30% of total staffing revenues.

Protiviti revenues were $139 million in the third quarter, down 1% from a year ago, and down 1% sequentially. Formed in 2002, Protiviti is a global consulting and internal audit firm, composed of experts in risk and advisory services. It has 61 locations in 16 countries and accounts for 12% of total RHI revenues. Protiviti's international operations represent 29% of total Protiviti revenues.

Now let's turn to gross margins. Third quarter gross margin in our Temporary and Consulting Staffing Operations was $334 million, or 36.7% of applicable revenues. This compares with 37.3% of revenues for the third quarter of last year, and 36.5% of revenues for the second second of this year. Lower conversion revenues during the quarter contributed to the lower margin percentages, although on a sequential basis, this was offset by lower payroll taxes.

Overall staffing gross margin was $443 million for the third quarter, or 43.4% of staffing revenues. This compares to 44.1% of revenues in Q3 last year, and 44% of revenues in Q2 this year. The sequential percentage decline reflects a lower mix of permanent placement revenues. Third quarter gross margin for Protiviti was $41 million, or 29.2% of Protiviti revenues. This compares to 30.2% of Protiviti revenues, Q3 last year, and 28% of its revenues in the second quarter of this year.

Now turning to selling, general, and administrative costs, staffing SG&A costs for the third quarter were $337 million, or 33.1% of staffing revenues. This compares to $343 million or 33% of revenues for the third quarter of last year, and $355 million, or 32.8% of revenues, for the second quarter of 2008. Staffing SG&A costs were reduced by 5%, on a sequential basis, and 2% year-over-year. Third quarter SG&A costs for Protiviti were $37 million, or 26.4% of revenues, this compares to $38 million, or 27.4% of revenues for the third quarter of 2007, and $38 million, or 27.1% of revenues for the second quarter of 2008. SG&A costs were reduced 4% on both a sequential and year-over-year basis.

Operating income from our Staffing divisions $105 million during the third quarter, or 10.3% of staffing revenues. The Temporary and Consulting divisions contributed $90 million of this amount, or 9.9% of applicable revenues. Third quarter operating income for our Perm Placement division was $15 million, or 14.1% of applicable revenues. Operating income for Protiviti was $4 million in the third quarter, or 2.9% of revenues. This compares to $1 million in the second quarter of 2008, or 0.9% of revenues. The increase in operating income is primarily the result of Protiviti's cost cutting measures, which are ongoing.

Turning to accounts receivable, at the end of the third quarter, accounts receivable were $587 million, with implied days outstanding of 46 days, which compares favorably to the 48.5 days at the end of the third quarter a year ago.

Now let's talk about guidance. We saw the following trends in our business during the third quarter, and the first few weeks of October. On a same day sequential basis, Temporary and Consulting revenues down in July, down in August, and flat in September. On a same day basis, Permanent Placement revenues were down sequentially, during all three moths of the quarter. During the first two weeks of October, revenues from our temporary consulting businesses were down 9%, compared to the same period last year, and for the first three weeks of October, revenues from our Permanent Placement division were down 26%, compared to the same period last year.

As we have said many times before, it's difficult to evaluate Perm trends over short time periods. Taking in to account these early trends, and the current economic environment, we offer the following fourth quarter guidance, revenues, 1.035 billion to 1.085 billion, income per share, $0.25 to 0.30. As you know, we limit our guidance to one quarter, we have broadened our guidance range this quarter to reflect current economic conditions. The estimates we provided on this call are subject to the risks mentioned in today's press release. Now I'll turn the call back over to Max.

Thank you, Keith. Our results clearly were impacted by the turmoil in the financial markets and its affect on businesses of all sizes. Many companies put hiring plans on hold during the third quarter, while others took much longer to make hiring decisions. The mood worsened as the quarter progressed. Employers are understandably cautious right now. The credit crisis and market instability have taken on global proportions. Obviously these conditions are unprecedented, which makes it difficult to provide you with any clear insight into what we may or may not expect to see from a business perspective in the next few months.

As we have said in the past, however, we do feel the Company is very well positioned to deal with a economic downturn. We have an experienced Field Management team and I'm confident in their abilities. We have essentially no debt and have maintained excellent cash liquidity. We have a cash balance of over $370 million. We have demonstrated that we can maintain cash flows even in a downturn. Between 2001 and 2003, when the United States was last in a recession, RHI generated more than $550 million in cash from operating activities.

Our client and geographical diversity work in our favor. We have an extremely broad customer base without significant concentration in any one industry. We have a wider international presence than we had in past downturns, which further diversifies our operations. International operations now represent 30% of our Company's total staffing revenues, and make up 29% of Protiviti's total revenues.

During the past 60 years, Robert Half has grown market share even in downturns, as some of our smaller competitors were forced to close operations. There are few staffing firms that have our longevity, reputation, and resources. We think we provide considerable value to clients, while offering cost effective solutions to their most immediate staffing needs.

Protiviti further enhances and diversifies this suite of services. Its professionals continue to help organizations solve problems in finance, operations technology, litigation, and compliance. Protiviti also remains a leader in internal audit. At this time, Keith and I will be happy to answer questions, and we would 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 comes from Andrew Steinerman, with JPMorgan.

Hi, guys. This is Will for Andrew. Can you talk about SG&A, and how those levels will look as revenues trail off, given the cost cut in (inaudible) in second quarter and third quarter.

When we did our guidance, we looked at revenue trends, which obviously are negative, and at the low end of our guidance we continued same levels of negative trends. At the SG&A line, clearly there will be some negative leverage of our fixed cost, which will put pressure on the SG&A percentage. It's been our position in the past and we've begun, as we speak, to try to match our revenue levels and our head count levels in the field and otherwise.

There is a lot of attrition that makes up a large part of that matching, but to some extent we go beyond that. So if you look back in history, you'll see there definitely is some negative SG&A leverage as the revenues go down. The margins certainly bottom out lower than what we have been used to seeing, but that said, on the flip side if you look at recovery, post the last couple of downturns, you see a lot of upside there as well.

Thanks.

Our next question comes from Mark Marcon with R.W. Baird.

Good afternoon, and good job managing the expenses this quarter. I was wondering if you could talk a little bit following on from the last question with regards to how we should think about expense reductions this time around, relative to last time around. It seems fairly obvious that things are going to be tough at least for the next few quarters, and so I'm wondering what your stance is going to be number one, and number two, to what extent is it more difficult to ratchet back expenses because of your greater international exposure?

Mark. Again as we have talked about before on these calls, roughly two-thirds of our SG&A costs are payroll. We've long had a policy of trying to match those payroll costs to the extent we can with revenues. We had begun that process last quarter that we talked about at length. We continue that process into the third quarter, and even to the time we speak. If anything relative to the past, we've probably matched those costs with revenues more quickly than we've done in the past. Not withstanding the fact we are every bit as committed as we have always been to protecting our best people, so that when things get better we have got dry powder.

There is no question that going into the last downturn, about 15% of our revenues were non-US, whereas today, it's roughly double that. There is also no question that it's somewhat more difficult to control those costs outside of the US, France being the most difficult, the UK probably being the most similar to the US. As we have talked about before, our European exposure is we get more revenues from Belgium and Germany than we do from France, and particularly the UK. So our French exposure, where there is the greatest difficulty controlling costs is not near as significant as it is with many staffing firms.

Thank you.

Our next question comes from David Feinberg with Goldman Sachs.

Good afternoon, gentlemen. First question on the share repurchase program, to the last downturn, you were able to generate sizable cash as you highlighted earlier in the call, but this time is a little bit different in light of the credit crisis. Any thoughts on suspending or continuing to pair back your share repurchase program?

The answer would be no. If you look at the last downturn, coming out of the last downturn since 2001, we have retired 30 million RHI shares, which is about 17% of the outstanding. That has helped propel earnings post the last downturn. Also, from a cash flow standpoint, we not only have significant non-cash charges, particularly for stock comp, there is also a significant buffer from our accounts receivable.

Remember with our clients being principally middle market accounts, the aging, the collection period for our receivables, doesn't change dramatically in a downturn, which means as the revenues reduce, those get converted to cash. So given our current cash position, which is over $370 million, given our consistent history, even during prior downturns of having positive cash flow, much less having to tap into current balances, we feel like it would be a mistake not to continue to repurchase shares particularly at these prices.

The only thing I would add is that we discuss repurchases of course every quarter with our Board. You heard how Keith and I feel, and we will have that discussion each quarter, but we think we would be missing a fairly large opportunity if we were to suspend stock repurchases at this point.

Great. One other question, as it relates to your US versus international mix, clearly your international business was growing very strongly this quarter. I'm trying to reconcile your comments about the first few weeks of October, with Temp down 9% and Perm [off] 26%, is that across all regions, or maybe you can give us some color, domestic versus international?

Domestic is clearly more impacted than international. It's the same states that are most affected, California, Florida, Arizona, Nevada, which track highly with the housing crisis, more recently New York for obvious reasons. If you go outside the US, we're weakest in the UK and we're strongest in Germany. On a year-over-year basis, we had very very strong growth, in Belgium, Germany, Australia, and even France quite frankly, on a year-over-year basis. On sequential basis, everything weakened during the course of the quarter, which is why our guidance is somewhat bearish.

The only thing I would add, Keith, is that in the scheme of the global financial turmoil it seems almost minor to mention, but some of our best offices have been in places like Texas and the Midwest, and they really took a hit this past quarter due to their hurricane activity. That's a slight factor as well in all of this.

Great, I'll hop back in the queue.

Our next question comes from Tim McHugh with William Blair and Company.

I just wanted to ask about Protiviti, how would you expect them to fair in this environment going forward, and then from a cost perspective as well, are you satisfied with some of the measures you pushed through last quarter, or will you take another look at some of the cost structure there and the amount of people you have?

Clearly we haven't had Protiviti during a downturn. The last downturn was when we were starting up Protiviti, so you certainly can't look at those numbers. At least so far, Protiviti is holding up a little bit better than staffing. The regulatory and compliance nature of what they do is not as economically sensitive. That said, clients do come back to us and say we will do more of it ourselves, less of it for you, we the client are under price pressure internally, you need to reduce your rate. They are clearly not immune, but at least so far they are not as impacted as Staffing, and because we haven't been there before, we are not making big forecasts about Protiviti in a downturn.

As to the cost structure, Protiviti has done a heck of a job in the last few quarters getting its cost in line with its revenues. As you notice this quarter they made $4 million on less revenue than they did last quarter, when they made only $1 million. And so while $4 million can be argued not to be a huge amount of money, it's certainly going in the right direction, and it's going in the right direction particularly relative to what the revenues are doing.

Protiviti has changed its year end from June 30 to January 1, effective the coming January 1, and the interesting part about that is that means there is a typical performance evaluation promotion cycle happening as of January 1, which will give it another opportunity to look at its cost structure. It continues to rebalance its resources away from the compliance areas, more into the consulting areas. They had a lot of success this quarter. IT security privacy, supply chain, consulting engagements, finance process improvement, so Protiviti continues to do well in the noncompliance area, but there are still head winds in the compliance area. In the quarter just ended Protiviti did not get the lift it had gotten seasonally in prior years, principally in the compliance area, and therefore the revenues were actually down a little bit. Again not with standing that, they actually made more money and less revenue.

Okay. Then the can you give us an update on the bill and pay rate trends that you saw year-over-year in the most recent quarter?

Sure. Little bit of a change. The year-over-year bill rates are up around 5%, and that's down from being up in the 8% range. On a sequential basis, they are down 0.5%, which is a turnaround from being up 1.5% to 2%. Consistent with what we've seen in prior slowdowns, the bill rates have come down and the play book and that kind of environment is to go back to your temporary employees and say we can't afford to pay you for the next assignment what we paid you the last assignment and protect our margins accordingly.

If you look over the course of the last few downturn at our Temp margins, typically peak to trough, you lose a couple hundred basis points. Most of that decline is a loss of conversions. Unemployment taxes do go up, but they go up on a lag basis. It doesn't happen immediately in a downturn. Typically, because it's on lag basis, our pricing has a chance to react and reflect that, so that at the end of the day the Temp gross margin decline you see peak to trough is typically more conversion related.

Thank you.

Our next question comes from [Kevin McVay], with Credit Suisse.

Quick thought, Keith, I know you widened out the guidance given macro uncertainty, and it looks like it's probably $0.02 wider than what it's been over the last couple of quarters, can you help us understand some of the factors in that?

Sure. Again, if you continue early quarter trends sequentially Temp revenues down 9% or 10%, Perm down around 25%, and coincidentally that's about what the sequential revenue trends look like the middle part of 2001. And further, if you look at Temp gross margins back then as I just described, you lose conversions, which have impact on your temp margins which we've also dialed in for purposes of this guidance. You have some negative leverage on the SG&A line, primarily because you don't cover your fixed cost as well.

Understand that in Perm placement, fixed costs are a larger percentage of revenues than is the case on the Temp side because you have more people per revenue dollar that take up more space, consume more overhead than is the case on the temp side. The margins we dialed to our fourth quarter guidance kind of track the change in margins you saw middle part of '01, where we were essentially saying if you go back to the past and superimpose kind of early down cycle performance on current revenues, this is what you get.

And then as far as the spreading of the range, it's just because there is more uncertainty, we thought it appropriate to have a wider range so our upside number simply moderates every assumption I just gave you. Doesn't say it's going to be true, doesn't say it's going to happen, whether the duration and intensity of this downturn is going to be different than prior ones, we don't know any more than you know, but what we can do is attempt to model what happened last time on top of where we are at the moment.

Just real quick, Keith, can you give us a sense of how convergent [fees] have been trending over the past couple of quarters?

They clearly have been trending down and they account for most of the Temp margin decline. On a sequential basis, Temp margins went up. It's a bit of a head [fake], because early in the year we very conservatively estimate what our state unemployment rates are going to be. As the year progresses and we get more actual data, it's not unusual to see those rates moderate. That's exactly what's happened this year. So we were particularly conservative early in the year, and you get a little benefit from that later in the year. But, the underlying fundamental as just as Perm is down, so are conversions, which is very consistent with the past.

Thank you.

Our next question comes from T.C. Robillard, with Banc of America Securities.

Great, thank you. Good evening guys, just wanted to drill down if possible into the trends that you saw in kind of September into early October on the Perm side, if you can give us a little bit of a sense international versus US, are we looking minus 25% in the early part of October across the board, both in your international markets as well as US, or have you seen US ahead of the international? I'm just trying to get a little bit of a sense as to how those two measure up. I know International has a much greater percentage of Perm than you do in the US.

That's correct, and it's fair to say that international, relatively speaking, is still doing better than the US, but when you dial the two together you got the trends you saw in early October, which were a continuation of September. Frankly for the quarter, through August, we were feeling pretty good, and traditionally September, you get a huge up tick relative to what you get in July and August. As we said, sequentially, September in Temp was flat, so you say that's not like it's falling off a cliff but, but the problem is, that's compared to most Septembers, where you have a huge lift sequentially, which we didn't have this year. Going into the quarter we are in in early October, not only was it not flat, but sequentially it's down a few percentage points. And hence one of the reasons why we gave the forecast we did, which we hope is conservative but we don't know.

Part of the dilemma when you talk to people in the field, is that the last three or four weeks of the expression used was a stun gun, like somebody hit the stun gun on the entire economy, and everything from a hiring standpoint just grounded to a halt. People were afraid to move. That obviously impacted the numbers. Is that going to improve, is going to get better as the credit markets begin to fall, what is going to happen. Keith and I are just giving you our best guess of where we are going; it's difficult to predict, and that's why the range was wider this time in guidance than before. Obviously, we hope it's going to at least begin to slowly improve, but we really don't know anymore than you do.

Turning back to a prior question, clearly we need to manage our cost structure through this downturn. We've been here now 22 year, we've done this before, maybe it will be worse than it's ever been, maybe it won't, but we are prepared to do what we need to do on the cost side. But for us, the focus is what's the pot of gold on the other end of the rainbow, and there, if you look at the last downturn, we grew revenues 2.5 times from the trough.

We grew operating income 13 times from the trough. We did that on 17% fewer shares. So the point is we need to get through this storm, but there is a long history of Robert Half and the Staffing industry generally recovering nicely in an up cycle, and its for that reason why we are as committed as we ever have been to stock repurchases.

Another footnote as long as we're on this tangent, in terms of our conversations with our key people in the field, most of our field managers are veterans, they've been with us through prior recessions. Of course, they don't need to be reminded, but we are reminding them of how well we have done coming out of prior recessions. We've talked a lot about the cost side, on the revenue side, I have tried to remind people that in one of the prior recessions you'll recall, the ResolutionTrust Corporation, they became our largest single staffing client. So obviously, we are attempting to be a part of the solution in terms of the various government programs we've been talking about, we think we have the stature, the scale, and the resources to provide talent needed for a lot of the work outs and so forth.

So in other words, we are trying to move on all fronts, we're trying to watch expenses while also generating revenues in a tough environment, and we're reminding our people in the field that there will be a sunny day. It may take a while. We have done well before and we'll do well again.

Understood. Can I infer then from your comments and your commitment levels, it sounds as if you would be more aggressive on share repurchases, given the share price over the last month, with the market obviously, but just relative to the levels that you guys bought back in the third quarter. Is that a fair assumption?

I think history would show that our cash flow holds up very nicely, and just spending your cash flow at these levels affords a much greater number of shares to be repurchased.

Understood. Thanks for the color, guys.

Our next question from Paul Ginocchio, with Deutsche Bank.

Thank you, just a question on head count of Protiviti, just the percent change, can you give us the [queue on queue] change in head count, maybe year to date, and then maybe your stomach for profitability at that division, if revenue does decline, at what point do you stop cutting head count and maybe just start to take losses?

While we only give head count numbers once a year, we indicated last quarter that we were down mid-single digit in head counts, and that trend is continuing. As to what we are willing to stomach as we go forward, we will have to take it quarter by quarter. We haven't been there with Protiviti before.

I think if anything, if you look at the last couple of quarters, Protiviti has demonstrated a commitment and an ability to control its costs. We've shown improvement outside of the US, that was our problem area for a year, frankly. We have also shown improvement inside the United States. I think they have certainly demonstrated a commitment to address that their cost structure, and we will just have to take it one step at the time based on the severity of the downturn.

Thank you.

Your next question from Tobey Sommer, with SunTrust Robinson Humphrey.

In the Technology space, you did demonstrate little bit of year-over-year growth, and I was curious about what you've got in terms of an expectation in your guidance for the fourth quarter, and what you may think, how that may react in a downturn over the next couple of quarters relative to your other businesses in prior cycles, thanks.

Our project driven divisions, Technology, to some extent Management Resources, and Protiviti as well, all did better than the transactional sides of our business, and frankly clients didn't cut projects off mid-project. And further, many of those projects, particularly on the technology side were cost reduction justified projects, voice over IP, virtualization to save server costs, so those kinds of projects, clients didn't pull the plug mid-project. So I think, frankly, we are more concerned come the end of the year when there is a natural break in many projects, you're liable to see more impact in those businesses, but our guidance has them perform a little better than the rest through the end of the year.

Thank you very much.

Our next question comes from Paul Condra, with BMO Capital Markets.

I just have a quick question, wondered if you could give me your stock compensation for the quarter?

It was $16 million on the restricted stock and a $1.4 million on options, options I think next quarter goes down to 800,000, because we quit issuing options all the way back in 2004, that expense will go to zero quickly.

Just have one more general question. You were talking about it looking like something had hit the economy with a stun gun out there, late September, early October. I know it's on been a couple of weeks, I'm just wondering, does it still look like that?

We gave you the latest data we have. We gave you the October start numbers, which are what they are, and they consistent with the early part of prior downturns. So that's pretty much what happened during the period that Max described.

Thanks.

Next question comes from Vance Edelson with Morgan Stanley.

Thanks, two questions, first one is really a follow up. Do you have a feel from the front lines as to whether you're international operations in terms of economic weakness, or to some extent following the US and would therefore be affected for longer, or put another way that the US is closer to a bottom, and is likely to bounce first, do you have a feel for that?

There is no question there has been a lag between what's happened in the US and what's happened outside the US. As I said earlier, we had tremendous year-over-year growth during this quarter in Belgium, in Germany, in Australia and even in France. But that said, on a sequential basis, they began to slow, particularly in the UK, which is more financial services driven than most countries. So there is a lag, we have seen impact more recently, sequentially which we presume will following in to the quarter, but exactly how the lag into the downturn mirrors what it will look like in the subsequent upturn, we can't say.

In terms of the domestic competitive environment, do you smaller players getting in trouble in the tough environment and perhaps giving you a chance to take share, or I guess the flip side would be, is competition intensifying as staffing firms attempt to maintain revenues, what are the latest competitive dynamics?

It's still early, but there are a lot of smaller competitors that have shut down in most of the markets in which we operate in the US. I think in the last recession the Industry Trade Association reported there was something close to 8,000 mom and pop and regional type firms that folded, and frankly I would be surprised if something similar didn't happen if this turns out to be a tough recession.

Obviously on the operating side, all we talk about is how to gain market share in a downturn, there is less business but there's less competition. You have better resources, a better reputation, more experienced people, so obviously our marching orders are to gain market share during these circumstances. We will just have to see how it plays out, but there are early signs of that. Some of the larger companies have begun closing offices as well, so it will get interesting.

Thanks a lot.

Our next question comes from Andrew Fones with UBS.

Thanks. I wanted to ask what your Q4 revenue guidance [implies] Protiviti. I know it's usually a seasonally strong quarter, sequentially we usually see growth, obviously didn't see that sequential growth in the third quarter. What are you expecting? Thanks.

You're correct, we didn't see the lift the in the third quarter from compliance activities we have seen in the past. So therefore our guidance didn't include a further lift in the fourth quarter. That said, our Protiviti revenue guidance is a little more bullish than our Staffing revenue guidance. But because we don't have the long history in Protiviti that we have in Staffing, there is probably more standard deviation around that number.

Thanks, and then a second, I guess it looks as though you saw a greater drop off in your Perm business in terms of the trends down 26 in October from down 4% in Q3, than you did in your Temp Staffing business down nine, versus down 1% or 2% in the third quarter. Should I infer from that that you saw a greater slow down internationally? I understand currency is having an impact. And if so, which countries are you seeing the greatest slow down?

Clearly we saw slow down in Perm, particularly Perm, it's not unusual as economic conditions toughen that Perm is more impacted. Because Perm is a bigger part of all of these operations, it's clearly impacted. We talked about the UK is most impacted. Germany is the least impacted so far. Belgium and France are somewhere in the middle.

Thanks.

Our next question comes from Gary Bisbee, with Barclays Capital.

I wanted to know in your time running the Company, can you think of any or many periods in which things turned down this quickly and then rebounded fairly quickly, particularly with the Perm business, it looks like in the early 90's recession and in the 2001 recession, Perm revenue fell three years in a row in both of those time periods. I'm trying to assess what the chances of a more quick rebound, or when that starts going does it normally take a long time to come back?

As far as the intensity of the rebound, I think clearly the biggest difference between now and prior down cycle slash subsequent up cycle is the amount of government intervention, and clearly there has been more government intervention quicker now than before. How effective that's going to be, we could debate all day long. But I guess our central point is, put timing aside, it comes back. It's come back every time. Before I was talking about how much we came back relative to the troughs.

Let's talk about how much we came back relative to the peaks. If you look at prior peaks, we still grew revenues 1.5 times the prior peak. We still grew operating income 1.5 times the prior peak. We still reduced shares by 6%, relative to the prior peak. So peak to peak it still grows. Whether there is a one year hiatus or a two year hiatus, don't get me wrong, we care, but in the long-term, peak to peak it grows. And with the benefit of hindsight, what we've learned in past down cycles, take advantage of the stock price when it's low. Which turbo charges the earnings from the recovery whenever it happens.

To the extent you're looking for differences this time versus the past, it's all speculative on our part, but it's probably worth noting that if you wanted to be slightly more optimistic at this point, you have the baby boomer generation that's preparing to retire, a lot of people think the job market will be stronger this time around, that there will be more demand because of more people leaving the work force sooner than before. Who knows how important that will turn out to be.

I think Keith's basic point is that we have always come back strongly, we've always, after recession, faced far less competition,and I don't expect that to be any different this time. We use the opportunity to be aggressive in attempting to pick up market share. We have always marketed services in terms of advertising more aggressively and so forth than others, on occasion been criticized for spending more on advertising than others, but we think the rewards pay off in terms of how much we've come out of these downturns. So, we are hoping to follow a similar game plan, but we don't know if it's a year or two years, but we expect to be there at the end.

Fair enough. Just switching gears, do you have any sense at this point when you would likely benefit with the Protiviti business from the international accounting standards stuff that is going on? Is that really a year out at this point, or are you getting some early indications of interest around that?

We are getting some early interest, but the early projects are principally GAAP technical projects, where you're technically determining for a client, these are technical requirements of US GAAP, these are the technical requirements of IFRS. Frankly, relative to the whole conversion to IFRS, we see that technical comparison as maybe 10% of the effort. The heavy lifting is to change your processes, your controls, your documentation to what you need to do to comply with the IFRS technical requirements. So we are getting some of that early technical comparison work. It's not a huge amount of work, but the bigger numbers we think are somewhat distant, and they relate to processes and controls which as you know, that's our sweet spot.

Further, the big four themselves have concluded, while they can do this accounting technical comparison for their audit clients, they are conflicted from doing the process and controls work for their audit clients, and what does that sound like? That sounds like a compliance period of a few years past. That's a good thing.

Next go to Jim Janesky with Stifel Nicolaus.

Yes, Keith and Max, can you give us an idea of what level of operating margins you expect sequentially, or even overall, specifically within the Perm division for the fourth quarter, in your outlook?

That's getting pretty granular, Jim, I guess what we try to do is say let's go back to mid '01, let's look at what is margins did then, and what we're modeling now approximates that. So you get single digit margins, clearly in Temp and Perm. We hope we will do better. We hope we are not impacted as much by that. But we thought it was a time to be conservative and to at least model what we know, and what we know is what's happened in the past. We can try to make it better, and we will try to make it better, but those are the kind of numbers dialed into the guidance that we gave.

In the past your Perm margins have gone negative pretty significantly, at the end of '02 they were negative 11.5% I believe, and actually at the end of '01, but that was event driven, they were over 13.5% negative. Do you think or do you feel that because you are reacting with head counts quicker, as you said in your your prepared remarks and maybe in answer to a question, that you're reacting quicker, that there is a possibility if trends continued to deteriorate, that you would be able to protect the margins within Perm from going negative.

The answer to the question is we will certainly try, but I think, frankly, saying the margins go to negative 11% overstates what happened. We lost $2.5 million, so again, we hate to lose anything, but that was hardly a huge amount of money. So whether we lose $2.5 million or break even, relative to the sparrow which is how well do you do when things get better, frankly isn't the highest priority.

Okay. Did you take actions early in the quarter with respect to any, either not replacing attrition, or laying off, or I guess what level is worked into your outlook of $0.25 to $0.30, is there an opportunity that if things really continued, I mean Perm being down over 25% is a pretty shocking number. I mean is that worked into the outlook or is there an opportunity that the margins could come in better?

That is what we worked into the outlook. It's the down 25%, we were out of the gate down 26%. Mid '01 sequentially in the first few quarters of the downturn, we were down 25%. All of those dots connect, and that's what we dialed in, do we hope it's better? Yes. Have we been more aggressive with the cost cutting? Yes. Were we attempting to be conservative? Yes.

Okay, thanks Keith.

Next question comes from Michel Morin with Merrill Lynch.

Max I think you mentioned RTC became a large customer going back to the early part of the 90s. Can you remind us or share with us was how significant of a client that became, and what was the timing of that? In other words how long did it take for that kind of revenue opportunity to actually materialize?

Let me jump in a little bit. Our role during RTC was principally as a sub contractor to those that had the prime contract with the RTC, and the nature of what we did primarily was due diligence around mortgage files. as income verified, did they get appraisals, and you then classified them in valuation buckets, based on that due diligence. It was very granular, you need a lot of feet on the street to do that kind of work, but it was at the sub contractor level, so it lagged a little bit the work that the prime contractors got.

As we speak, we are working hard, including with the capabilities that Protiviti gives us that we didn't have back then. We would also like to be a prime contractor, we have the capability to be that today that we didn't have back then. We don't have a huge track record with big government contracts. But again, our attempt is not only to participate at the sub level, which we have done traditionally and done quite well, we are attempting, at least, to participate at the prime level. We never gave percentage of revenues, it wasn't humongous, but given that our typical account is one or two people on assignment at a time, it doesn't take much to get to be our largest client quickly.

Okay. Great, that's helpful. In terms of the office count, Keith, it looks like you still added a couple in the quarter, and if we go back to the last downturn it does look like you rationalized the branch network somewhat starting at the midpoint of 2001. Is there any reason to think that would not happen again this time?

The two offices we added during the quarter were Vienna and Dubai, so it's again part of our international footprint expansion. I would offer that there will probably be less real estate contraction this time than last. We have been more careful in the up cycle with not getting too distributed with our real estate, and therefore insulating ourselves to some degree from revenue contraction. That said, on average, a third to a fourth of our leases come due every year. So we will have a bite at the apple for a significant number of our leases in the ordinary course this year. And we will therefore have an opportunity to less rate, less square footage. You naturally have that opportunity, which we plan to take advantage of.

I'll try my luck on a last one. Would you be able to, given the volatility in Perm, be able to break out how significant Perm is within your international staffing operations?

We haven't broken it out specifically, we have told you as a percent of revenues, it's significantly higher outside the US than inside the US. But it's not something we've broken out specifically.

I thought I would try, thank you.

Our next question Ashwin Shirvaikar, with Citigroup.

Most of my questions on the quarter have been answered. Just to step back, look at the business through the 90s and early part of the decade, you added a new line of business every three to five years. It's been a while since you done that. Would you be willing to perhaps use your balance sheet or take advantage of broken down asset prices, to grow a new line of business, maybe something like legal staffing, or is that out of consideration at the current time?

First of all, we are already in the legal staffing business. Clearly we would use our balance sheet to buy broken down assets if those broken down assets were in functional areas, geographical areas that made since for. In the absence of that, the acquisition we really like is Robert Half.

So the focus is going to be really buy back?

I think the focus is twofold. Clearly, there is activity with broken down assets as you describe them, but again, they need to make sense for us, they need to be a functional extension, they need to be a geographical extension, they need to be a tuck-in a way that makes sense, and so clearly that's something we are looking at, but in the absence of that, there is Robert Half .

Right. Thanks.

We are out of time. We apologize we are not able to get to all questioners. Our final question will come from David Feinberg with Goldman Sachs.

I will pass along because I have already been in the cue. Thank you.

I will turn it back for closing remarks.

Thank you very much. Sorry we don't have more time. I thank all of you for participating in the call. This will conclude our teleconference. A taped recording of the call will be available later. Thank you operator.

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