羅致恆富 (RHI) 2008 Q4 法說會逐字稿

Welcome to the Robert Half International conference call to discuss fourth quarter 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.

Hello, everyone. Thank you for joining us. As is our custom, I would like it start by reminding everyone that comments made on this call contain predictions, estimates and other forward-looking statements. These statements represent our best 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 conference call.

Now let's review our fourth quarter results. Fourth quarter revenues were $990 million. This is a decline of 19% from the fourth quarter of last year or 15% on a constant currency basis. Income per share was $0.26 which is a decline of 48% from the fourth quarter of 2007. Cash flow from operations was $110 million during the fourth quarter with capital expenditures of $18 million. We paid a quarterly cash dividend to stockholders of $0.11 per share for a total of $17 million. We also repurchased 4 million RHI shares during the fourth quarter at a cost of $72 million. There are approximately 9.8 million shares available for repurchase under our board approved stock repurchase plan. Our results continued to be effected by very difficult economic conditions in North America and internationally. Labor markets across the globe deteriorated significantly during the quarter, and this trend continued into the new year. We are faced with a great deal of economic uncertainty right now, but our financial condition remains solid. Our competitive position remains strong, and our experienced field management team is both capable and determined. We reduced our operating expenses significantly during the quarter, and we plan further cost reductions as revenues may dictate. I am confident in the strength and experience of our team as we navigate these difficult waters. Keith will now provide you with a more detailed look at our fourth quarter financial results. We'll leave time for your questions after our remarks.

Thank you, Max. We'll start with company wide revenues.

Fourth quarter revenues were $990 million, down 19% from the fourth quarter of last year and down 15% sequentially. On a constant currency basis, these rates were negative 15% year-over-year and negative 11% sequentially. There were 62 billing days in the fourth quarter of '08 compared with 61 billing days in the fourth quarter of 2007. In the third quarter of 2008, there were 64 billing days. Accountemps fourth quarter revenues were $374 million. This is a 17% decline from the fourth quarter of last year and an 11% decline sequentially on the same day basis. Accountemps is our largest staffing division, accounts for 38% of company revenues. There are 374 Accountemps offices worldwide. Fourth quarter revenues for Office Team were $180 million, down 19% from the fourth quarter of last year and down 11% sequentially on a same day basis. Office Team is our high end administrative staffing division with 330 locations worldwide. This division was introduced in 1991 and represents 18% of company revenues. Fourth quarter revenues for Robert Half Management Resources were $135 million. This is a 19% decline from the fourth quarter of 2007 and also at 11% decline sequentially on a same day basis. This division was introduced in 1997 and places senior level accounting and finance professionals on a project basis. It has 151 locations worldwide and makes up 14% of company revenues. Fourth quarter revenues for Robert Half Technology were at $101 million, down 9% in the fourth quarter of last year and down 6% 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 at 112 locations worldwide and accounts for 10% of company revenues. Our permanent placement division, Robert Half Finance and Accounting had revenues of $76 million in the fourth quarter. This is the decline of 36% from the fourth quarter of 2007 and a decline of 28% on a same day sequential basis. This business was established in 1948, operates at 374 locations worldwide. It accounts for 8% of company wide revenues.

Fourth quarter revenues for our international staffing operations were $241 million, down 15% from the fourth quarter of 2007 and down 17% sequentially on the same day basis. On a constant currency basis, these growth rates were up 1%, compared to the fourth quarter of last year, and down 4% sequentially on a same day basis. We have staffing operations in 110 locations in 20 countries outside the US. International staffing operations represent 28% of total staffing revenues. Fourth quarter revenues for Protiviti were $124 million, down 18% for one year ago and down 11% sequentially. Formed in 2002, Protiviti is a global consulting and internal audit firm composed of experts in risk in advisory services. It has 62 locations in 17 countries and accounts for 12% of total RHI revenues. Protiviti's international operations represent 31% of total Protiviti revenues.

Now turning to gross margin, fourth quarter gross margin in our temporary and consulting staffing operations was $292 million or 37% of applicable revenues. This compares with 37.6% of revenues for the fourth quarter of 2007 and 36.7% of revenues for the third quarter of 2008. Lower conversion revenues during the fourth quarter reduced our gross margin percentages although on a sequential basis, this was offset by lower payroll taxes and worker's compensation insurance charges. Overall staffing gross margin was $368 million for the fourth quarter or 42.5% of staffing revenues. This compares to 44.4% of revenues in Q4, 2007 and 43.4% of revenues in Q3, 2008. The sequential percentage declines are primarily due it a lower mix of permanent placement revenues. Fourth quarter gross margin for Protiviti was $34 million or 27.6% of Protiviti revenues. This compares to 32.2% of Protiviti revenues last year and 29.2% of revenues in the third quarter of 2008. Lower revenues during the quarter resulted in lower staff utilization rates. Turning to SG&A costs, staffing SG&A costs for the fourth quarter were $302 million or 34.9% of staffing revenues. This compares to $354 million or 33.1% of revenues for the fourth quarter of 2007 and $337 million or 33.1% of revenues for the third quarter of 2008. Staffing SG&A costs for the quarter were reduced by $52 million versus one year ago and $35 million sequentially or 15% and 10%, respectively. We ended the year with 10,300 full time employees in our staffing divisions down 15% from last year. Fourth quarter SG&A costs for Protiviti were $33 million or 26.4% of revenues. This compares to $40 million or 26.3% of revenues for the fourth quarter of 2007 and $37 million or 26.4% of revenues for the third quarter of 2008. Protiviti SG&A costs for the quarter were reduced by $7 million versus one year ago and $4 million versus last quarter or 17% and 11%, respectively. We ended the year with 3,200 full-time Protiviti employees and contractors, down 10% from last year. Operating income from our staffing divisions was $66 million during the fourth quarter or 7.6% of staffing revenues. Temporary and consulting divisions contributed $63 million of this amount or 8% of applicable revenues. Fourth quarter operating income from permanent placement was $3 million or 3.4% of applicable revenues. Operating income for Protiviti was $1 million during the quarter or 1.2% of revenues. Turning to accounts receivable, at the end of the fourth quarter, accounts receivable were $485 million with implied days outstanding or DSO of 44.6 days, which compares to 44.2 days at the end of the fourth quarter a year ago.

Now let's turn to guidance. Following a few of the trends we observed in our business during the fourth quarter and the first few weeks of January, 2009. On a same day sequential basis, revenues from all divisions declined each month during the quarter. December was particularly weak. During the first three weeks of January, revenues from our temporary consulting businesses were down 26% compared to the same period last year. For the first four weeks of January, revenues from our current placement division were down 56% compared to the same period last year. As we have discussed many times before, it's very difficult to evaluate per placement trends over short periods of time. Taking into account these trends and the uncertain economy, we offer the following first quarter guidance. Revenues $840 million to $890 million. Earnings per share, $0.05 to $0.10 As you know, we limit our guidance to one quarter. As we did last quarter, we have broadened our guidance EPS range this quarter to reflect the current uncertain economic conditions. The estimates we provided on this call are subject to the risk mentioned in today's press release. Now I'll turn the call back over to Max.

Thank you, Keith. As our financial results indicate, this was obviously a difficult quarter. All of our divisions were impacted by the weakness in the labor markets. Our permanent placement operations experienced the sharpest revenue declines as many businesses reduced full time staff levels and put hiring plans on hold. Obviously, there is a great deal of uncertainty right now with regard to the economy and the nature of our business does not give us much visibility into future hiring trends. We do think we are reasonably well positioned, however. We have the benefit of a lot of experience, both at headquarters and in the field. Our field management team has many years of experience and have worked through difficult economic times in the past. We believe our offices are in capable hands, therefore. Our field leaders understand the importance of keeping our cost structure aligned with our revenues. In addition, since the majority of our revenues are derived from accounting and finance assignments, as you would expect, most of our senior field managers have accounting or finance backgrounds and they understand the importance of cost management in difficult economic times. We believe they have the ability to flex costs with revenues. We think we also have an advantage over less established competitors. We believe our reputation, experience and financial position do give us an advantage over local competitors, many of which lack the resources to manage through this difficult cycle. As a result, we are certainly looking to grow market share in many of our markets.

We think that our business is uniquely position today find opportunities, even though the times are challenging and periods of financial crisis businesses need accounting and finance professionals to help them discover cost efficiencies and handle rapidly changing priorities. We can locate this expertise for them and assist companies with their staffing needs as they attempt to survive, rebuild or merge with other firms. We have formed a global financial crisis team to serve clients in the troubled banking and financial services sector. The team is also helping a variety of other businesses in understanding the new landscape and managing the uncertain times ahead. We have essentially no debt and a cash balance of around $345 million. In the past, we have generated strong cash flow, even in difficult economic times. During the last US recession between 2001 and 2003, RHI generated more than $550 million in cash from operating activities. So we are cautiously optimistic. While recognizing the very challenging environment that now exists, we are optimistic about our opportunities. We believe this is a time when every hiring decision is especially important and companies can least afford to make hiring mistakes. We think we offer our clients a cost effective way to access highly skilled talent when and for as long as they require it. At this time, Keith and I will be happy to respond to your questions. We would ask that as usual, you please limit yourself to one question and a single follow-up as needed. If you have additional questions, we'll certainly try to return to you later in the call. Thank you.

Thank you. (Operator instructions). First question comes from Kevin McVeigh with Credit Suisse. Your line is open.

Thank you. Hey, Keith and Max.

Kevin.

Keith, I wonder if you could just drill down on the guidance a little more in terms of just a little more color around what would be the low end of the range as opposed to the high end of the range? And just how we should think about the buyback relative to the current macro environment. It seems like you bought back about five times as much stock in the fourth quarter as the third quarter. How should we think about the buyback going forward?

Okay. So let's first talk about the guidance. At the low end of the range, what we've done is taken the early January run rate and extrapolated that to the full quarter, and in fact, we have actually assumed that it declined further at the revenue line. At the SG&A line, because we are beginning to see some weakness in continental Europe, and by the way, for the fourth quarter, in continental Europe in a constant currency way, we had sequential growth and year-over-year growth. That was the good news. The not as good news is during the quarter we are in, they are starting to see some softening.

So, given that there is softening occurring outside the United States, and the assumption is it's going to take us a little longer to adjust our cost structure because of their labor laws than is the case in the United States, we have assumed a little more negative leverage at the SG&A line this time than we have last time. From the standpoint of perm and Protiviti, given those trends, we will have small operating losses for the first quarter given that trend line if it continues. In addition to that or above that, there will be some staff reduction costs that will also add to the losses in those two divisions. As to the buyback, as you can see, we did get more aggressive during the quarter. We continued to be very confident about our cash flow generation abilities as we move forward. We are very committed to our dividend as we always have been, and we'll continue to look at buybacks quarter-by-quarter with our board as we always do.

Great. Thanks. I'll get back in the queue.

Next question from Andrew Steinerman with JPMorgan. Thank you.

Hi, gentlemen. Keith, you spoke a little bit about the temp gross margin in the fourth quarter. You said workers comp helped out a little bit. Could you quantify that, and temp gross margins seemed to hold up pretty well in the fourth quarter. How do you think they will be going into the first?

The fourth quarter did benefit from our semi-annual worker's comp adjustment, and that was a couple of pennies, Andrew. The thinking is in the first quarter, the quarter we are in, we certainly won't have that credit. But the bigger story, frankly, is conversions. And if you look over prior downturns, the big issue is conversions as to what happens to your temp margins. Typically, you lose of couple hundred basis points, principally for reasons of conversions. We have been able in the past to offset the higher payroll taxes, including worker's comp and unemployment costs that do rise by reducing the pay rates of our temporaries. So we did have a couple of penny benefit at the gross margin line during the quarter. By the way, we had a penny detriment due to currency. We had another penny detriment due to a higher tax rate, which related to our foreign subs. Further, we got more conservative with things like our bad debt reserve because of our economic conditions. So when all said and done, that extra couple of pennies we got at the gross margin line was more than accounted for other places in the P&L.

And how temp gross margins should look in the first quarter? What is assumed in the range of guidance?

Again, the thought is you probably got a percentage point or 100 basis points purely for the fringe difference because of the fourth quarter true-ups. Translated, it ought to be down in the neighborhood of 100 basis points.

Okay. You think first quarter temp gross margins should be down year-over-year 100 basis points, right?

Year-over-year not as much as sequentially.

Got it. And then could you just tell us where conversion as a percentage of applicable revenues is approximately in the fourth quarter?

They have come down to the low end of our range. Our traditional range is 3% to 5% of revenues, and we are down at that low level. I would also comment that our guidance, particularly for perm placement, essentially assumes that for the past three quarters, we have as much revenue drop off as we did the entire 2001-2003 downturn. So clearly, the pace of the decline in perm placement is much more rapid this time than before. That said, on the temp side, it's uncanny how closely the sequential declines in temp this time around are tracking what happened in '01-'02. Now that rate accelerated a bit during January. But still, cumulatively, if you start with the second quarter of '01 as the first quarter, we had negative revenues during that down cycle, and you start with Q3 of '08 as the first quarter we had negative revenues in this down cycle, and you compare the two, you will see that the rate of decline for perm is much more pronounced this time than last, whereas the rate of decline for temp is pretty much tracking as it has in the past.

Sounds good. Thank you so much for that clarity.

(Operator instructions). Our next question comes from Mark Marcon with RW Baird.

Good afternoon. I have a longer term question that relates to the economic environment. Some people assume that this is as normal cyclical downturn. And by the way, congratulations to doing $1.63 in a full year recession. Some people assume this is a different type of recession and that maybe we are going for a reset and that the excessive leverage we have had across the global economy is coming out and therefore, that we are going to reset to a whole new level. So the question is a broader one, which is if we think that this is a reset and that we are going to a whole new level, to what extent can you talk about your ability to restructure your operations so that you could still achieve the sorts of margins that you had back in 2005 and 2006 at those same sort of revenue run rates? Is that possible? Or have you expanded to a point where it would be difficult to try to achieve those over time?

As we have talked in the past, if you look across cycles for the last 25 years, we've always grown one peak to the next. So not only did we come back to the same level as to the prior peak, we come back even stronger. So stipulated that perm placement, particularly this time, is declining more rapidly. But one can make the case that therefore, there is more upside thereafter. Even in perm placement, it is not that we are without orders. The issue is just as much those orders we have, our clients are [expletive] picky when they go to fill them. So orders haven't dried up. Many companies are saying we are going to take advantage of this, and we're going to upgrade our staff. Other companies have already cut so low that any time they have a termination, they have to replace it. So we actually have orders in perm, but the close cycle has extended dramatically. But again, back to the long term. We've been around a long time, as you know, and we are very confident it will come back. Kind of a pace at which it will come back, we can all argue.

One other footnote to that, Mark, we have, as we said in prior calls, somewhere in the range of 13% to 14% share of what have we define as the relevant market here in North America. It would be much smaller internationally, of course. We are watching small to midsize firms get in trouble, struggle and I'm sure, as has happened in prior recessions, we'll watch many of these firms go out of business. As I said in my earlier remarks, one of our goals is to pick up market share. My personal opinion as to why we have grown peak to peak in many cases is typically, we are in much stronger condition, both managerially and in terms of financial resources, reputation, longevity, marketing reputation, et cetera than the competition. So it stands to reason that as the competition shrinks, our opportunity to increase our share of the remaining market increases. As the market itself begins to come back, we are very well positioned to grow much faster than others. So while there is no guarantee about the future, we fully expect to see a similar scenario play out this time. I would certainly like to think we could continue to grow reasonably well, even under a prolonged agony situation such as you described.

Yes, and I'm not saying that that's my belief. I have certainly followed you at this point longer than anybody else and realize you have grown peak to peak, and you continue to gain market share. But I was just wondering to the extent that people might be concerned this is longer downturn, and you have obviously demonstrated this last quarter, how well you are able back your expenses. I'm just wondering if we go through a prolonged period where it's -- it did take three years during the last downturn before things really started picking back up. If things take that long this time around, can you keep managing the expenses as you have been? And is that the philosophy, to try to keep expenses down so that you can continue to generate a good operating margin over a two year period? Or would your perspective be, well, we may go into a downturn where things are going to be a little bit rougher for a little bit longer, and we'll just -- we'll take the lower operating margins so that we can have -- so we can position ourselves for the upturn when it eventually does come, even if it does take longer than usual?

We have always tried to balance, even in prior downturns, the objective of having dry powder with capital and experienced staff with reporting decent returns during a downturn. So we'll continue to evaluate that trade off quarter-by-quarter. But as we sit here today, we don't see any reason for a sea change difference in philosophy relative to what we have done in the past.

Okay. Thank you.

Our next question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Thanks so much. Just wanted to shift gears a little bit more near term. Your RH technology business on a relative basis is doing better than other divisions. I'm just wondering what you can attribute that to and if you think that will continue in the near term? Thanks.

Yes, Jeff. The tech support, the help desk part that have business is hit just like the rest of our businesses. What is holding up better is the tech development or programming part. And just like us internally, companies that have projects in process aren't shutting them off mid project, and therefore, that demand is continuing. Particularly if there are cost cutting motivated capital projects on the part of our clients which many times voice over IP and virtualization to save server costs. Those are two biggies out there that clients are continuing, because the justification for doing them was cost cutting. And while we are talking about capital expenditures, we expect our number to come down to the $50 million range for the quarter for this year, '09. Over half of that is a carry over of projects and process from 2008, so that come 2010, absent a major change in economic conditions, we would expect the CapEx to come down even further.

Okay. Great. And then actually, I just had a couple of numbers questions, you answered one of them. What tax rate should we be using for 2009? And then in terms of stock-based comp, what are you expecting some '09? And what did you report in the fourth quarter of '08? Thanks.

Tax rate is going to vacillate a bit. It's probably going to be between 40% and 43%. Stock comp was $17 million a quarter, this quarter. And will probably continue into next year as well. So, depreciation and stock comp are roughly the same on the annual basis of about $70 million, roughly.

I guess I was talking about the stock comp on your income statement.

I understand. So it is also about $70 million on an annual basis. It was $16 million or $17 million this quarter.

Okay. All right great. Thanks.

Next question comes from Tim McHugh with William Blair & Co. Go ahead please.

Yes, I was wondering if you could give some sentiment on the -- what you view is the opportunity for cost cutting as we look over the next year. You mentioned you'd start doing some things in Europe. Are you halfway through what you are comfortable with in terms of cutting costs? Or is it -- just give us a relative sense of that. And then, as you do that, is there certain minimum level of profitability you keep in mind? Do you manage it such that at a minimum, you would like to stay break even or modestly profitable there in the downturn, and how you weigh that against kind of the longer term considerations.

Right. So as we have talked before, roughly two-thirds of our costs are compensation related. Our strategy for managing compensation, we have normal attrition, we have the variable portion of our pay packages. On the temp side, that's 25% to 30%. On the perm side, that's around 40%. For some people, we are discussing base pay reductions to help us with our cost control and in other cases, there is actually forced attrition. And as I said, during the first quarter, there would be roughly about three pennies a share in staff reduction costs. As to pegging a profitability level, we won't go below. Clearly, we are mindful of profitability, clearly we want to be profitable.

As I said, for this quarter, on an operating basis, Protiviti and perm will lose a little bit of money. That is not something we are happy about. And that is also something we are trying to remedy with the cost reductions as we proceed. So it's a quarter by quarter thing. But as we stand today, we certainly don't think we are anywhere close to the point where we are unwilling to cut our costs any more without regard to revenues. But instead, feel like for the most part, we can continue to run the playbook we have run traditionally.

Okay. And then, can you give a little more color on what you are seeing with Protiviti in terms of the macro environment, as well as some of the other growth opportunities?

Sure. Sure. With Protiviti, the good news is their renewal rate, with their large, internal audit clients is excellent. Virtually every major internal audit client that they have has renewed in the last few weeks, if not months. They have also had success with some of their solutions. Things I would point out would be security and privacy, application controls for the CIO, supply chain, our restructuring practice is doing quite well. We have been named the accountant for the creditors committee in a couple of high profile bankruptcies that you would recognize the name of. Further, we have got some finance process optimization work. So they are winning new business. They are renewing old business. The challenge they have is that clients are saying whereas before you did 80%, we did 20%, now we want to keep more for ourselves, so your hours get reduced further because of the competitive market we are in, you need to reduce your rates. So the combination of a transfer of some of the work back in house, the lower rates, some engagements have been deferred, all put some pressure on Protiviti's top line.

For the fourth quarter just ended it's typically a seasonal uptick for Protiviti. Protiviti reduced its cost direct in SG&A by $13 million for the quarter, which is pretty incredible, given its history. Unfortunately, its revenues fell $15 million, such that their profitability was impacted by a negative $2 million. But I can assure you, two years ago, had they had a $15 million sequential decline in revenue, you would have had a $14 million sequential decline in operating income. So I think they have shown a particular seriousness in managing their costs in a way they never have before. Further, outside the United States, we have also gotten some nice traction, again during the fourth quarter. Their cost reduction actually exceeded the small amount by which their revenues declined. That said, they are at a very small level of profitability, and further reductions in revenues further stress their profitability. Which is why we said earlier we do expect him to have a small operating loss in the first quarter which will be exacerbated by further staff reduction costs because again, they remain very committed to controlling their costs.

Okay. Thank you.

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

Thank you. I was wondering if you could comment on trends within bill rates and pay rates across, maybe broadly across the different segments? In particular, you mentioned, I guess in the just the last questions, pricing pressure on Protiviti. Thank you.

So let's talk overall. On a year-over-year basis, our bill rates were up 0.5%, so essentially flat. But sequentially, the bill rates are actually down 2%. And so the challenge we have on the staffing side is we've got to manage the pay rates to our temporaries. As our bill rates decline, we have to turn it right around and say to our temporary employees, we can't afford to pay you per hour what we paid you in the past and because of economic conditions, you have to take a pay reduction. And over prior down cycles, we have successfully pulled that off. Protiviti's rates are impacted even more, and Protiviti's rates are never something we have disclosed.

I guess I was curious. When you mentioned the pricing pressure at Protiviti, you were also speaking about restructuring, et cetera. I would assume that that is an area where there is fairly good pricing at this stage. Is that a --

Absolutely. The good news is we've got a restructuring practice. They are doing extremely well. They are winning some very high profile accounts competing with household names. We have a very, very good team. The bad news is they're a relatively small percentage of the total, less than 10%, so it's hard to move the needle with a group that is less than 10% of the total.

Right. And just one point of clarification. You said guidance kind of -- inside your guidance is the cost for staff reductions in Europe already embedded in that number?

That's correct.

Thank you very much.

Next question comes from Andrew Fones with UBS Capital Management. Go ahead please.

Yes, thanks. I had a follow up to the last couple of questions. I was wondering if you could tell us what the magnitude of the impact of the cost reductions will be in the first quarter of the year, both perhaps from an impact on the earnings from the quarter from the charges, but also the cost side. Thanks.

So Andrew, we see around three pennies a share during the quarter from our staff reduction charges. And unless revenues continue to fall off even more significantly than their current pace, that ought to get us back to at or near profitability for Protiviti and perm.

Okay. Thanks. Then I noticed that you were -- I think you reduced maybe the office count by perhaps one in the fourth quarter from the third quarter. I was wondering if this plans to further reduce the office count? The number of offices, thanks.

A massive change in office count as we have talked about before, anywhere from a quarter to a third of our leases in any given year are up for renewal. That gives us a chance to reduce square footage. That gives us a chance to reduce rate. As far as the physical closure of offices, that is not something we have done a huge amount of, nor would I expect us to do a huge amount this time. We have something what we call blend and extend, where we look at our largest leases, and let's say we've got a couple of years to go, and we're above market given the current market is so low. We'll go back to the landlord and say let's cut a new 10 year deal and we'll therefore get a blended, much lower rate than our current rate. The landlord gets a 10 year deal, we get a lower lease rate, and we get a new bite at the apple as to how much footage we need. It is that type of thing we are more apt to do to reduce our real estate cost than to physically close a branch.

Can you tell us how many you have approached in terms that have blend and extend? Changing the rate?

I think you could say all of our major leases that have three to four years or less left on them, if they are 10 year leases, we've proactively tried to manage that cost.

Okay. Great. Thank you.

And our next question comes from Gary Bisbee with Barclays Capital. Go ahead please.

Thanks. You just gave some color on how we should think about your SG&A costs and your total costs falling in the first quarter. If we were to assume this remains a negative environment for -- at the current rates throughout much of '09, is there a level at which you probably stop cutting back the SG&A like you did so well in this quarter? Or is enough of it headcount and stuff that you can continue to cut?

Well, again, compensation of our staff is our largest cost ,and we've got the various tranches that I talked about earlier, the variable portion, normal attrition, base pay reduction, additional forced attrition. But as we sit here today, we don't think we are anywhere near close to the point where we would have to say we are not going anything, a person below where we are. We are nowhere near there yet.

Well our goal is to keep our revenues and our costs in line with each other and we don't see a limit on that at this point.

Okay, great. You mentioned the competitive situation you know in your ability to gain share. I know you have not been one to do lots of big deals, historically, but is your appetite for M&A increased? Are there sort of -- holes is the wrong word, but areas in your offerings that you would like to opportunistically add to, or is it much more, the smaller guys are in worse shape than you, so you are going to take share of that?

We are always looking for geographies to fill in where we're not as strong as we'd like to be. We are always looking for functional areas where we don't participate to the extent that we had would like to. We always evaluate buying another staffing firm relative to buying Robert Half as a staffing investment. So it's not an absolute decision, it is a decision relative buying Robert Half. So all those things have to be considered because it's kind of the risk adjusted return that you are looking at when you are looking at buying other staffing firms versus buying yourself.

Okay, and then just one last one. When you were talking about the employee count at Protiviti, I noticed that you said full time employees and contractors. Has there been any change in the mix of those? I know you talked over the last year about essentially going toward more contractors and less full timers. That's still future opportunities. And I guess also, would you go to any of your full time people and sort after approach them and say this is a tougher environment, would you consider being project by project contractors both full-time? Thank you.

As Protiviti's revenues have fallen off, its use of contractors have fallen off as well because that was considered a source of variable cost labor. The long term model for Protiviti is to always have a tranch of variable labor including contractors, and just as it's flexed to some degree with the contractor base it's had so far, it continues to plan to have that in the future, hopefully to an even larger degree, and having staff you would otherwise layoff convert to contractors is one of the things that's being contemplated.

Okay. Thank you.

Next question comes from James Janesky with Stifel Nicolaus. Go ahead please.

Yes, Keith, just a little bit of clarification on what you termed the staff reduction. Is that severance and other charges that you do expect to be one time in nature rather than a permanent -- or at least permanent in terms of the current economic environment decline in profitability?

Well, they would be event related, and they would be related to a significant reduction in headcount. That's much more than what a typical reduction in headcount would look like. So I hope it's one time and that we don't have to have those kind of reductions again, but you don't know that.

Okay. Will it flow both through gross margins and SG&A? It will -- for Protiviti, it will flow through both. For staffing, it will be principally through SG&A. Okay. Your comments about and I correctly so, about the labor environment internationally, especially on continental Europe versus the United States and how it is more difficult to reduce your cost structure there versus the United States or the domestic market, is that something that as the international segment of your revenues has become now about a third, that can have an effect throughout the entire cycle of the cost structure? And that you might have to operate with the lower cost structure than if you were entirely domestic?

I think it more than likely reflects -- it takes you a little longer to accomplish what you might have accomplished in the United States on a more condensed time frame, and I think it means you have got a little larger one time cost, to use your term, when you have to do some downsizing than would be the case in the US. But I don't see it structurally changing overall, how we would react in a downturn. It's just a little more expensive, and it takes just a little longer. The UK, which is probably the most difficult economic environment we have right now in the globe is not near what it's like on the continent, as far as adjusting your cost structure. It takes a little longer, but it's not necessarily that much more expensive. When you go over to the continent, it takes a little longer it's more expensive.

Okay. Thank you.

Next question comes from Paul Ginnochio with Deutsche Bank.

Thanks for taking my question. Can you just comment on some of your other major European markets like Belgium, Germany and France and how they trended in the quarter relative to fourth -- or relative to the third, thanks.

So the good new is on the continent, as I said, we had -- on a constant currency basis, we had sequential growth and we had year-over-year growth, and our big three are Belgium, Germany, France, in that order. They did very well for the quarter in its totality, but clearly, conditions deteriorated over the course of the quarter such that for the quarter, we are in, we would expect negative sequential growth in a constant currency way for all three countries.

Of those three, they are all about the same, or is there any divergence between the three?

I would say Belgium and Germany a little stronger than France.

Thanks very much.

(Operator instructions). Our next question from Vance Edelson with Morgan Stanley. Go ahead, please.

Hi, thanks a lot. Just a follow up on the market share commentary. Do you have any feel for recent market share trends at the margin? In other words, do you feel you are already staring to take some share, or is this more something you hope for as the cycle plays out? Thanks.

I think it is more a reflection of what we know from prior down cycles as to what happens, and this is playing out. We are beginning to see smaller businesses -- smaller competitors go out of business as we speak. And by default there are fewer of us standing, and there are some market share gains you get from that. We don't have a metric that we measured last week that we can quote you.

Okay. That's helpful, thanks.

Our last question comes from Mark Marcon with RW Baird. Go ahead, please.

Wondering if you could talk about a couple of things. One, just because of the environment being as bad as it is, you mentioned bad debt expense was up. What are you seeing in terms of that level of experience with your small and medium sized businesses? And do you think it is going to be materially different this time than last time?

It's interesting. What we have seen so far is very -- there is very little difference between this time and last time. That said, because of the expectation the conditions are going to get worse, we subjectively added money to our bad debt reserve. We didn't have to, and it wasn't because of a write off trend we are actually seeing, it's more because we thought it was appropriate to be conservative, given overall economic conditions. As to -- and we are talking about receivables, we actually went back for the twelve quarters during '01, '02 and '03 during the last cycle and compared the change in revenues to the change in receivables, and they tracked remarkably closely, which means as you -- at least during the last cycle, particularly during the last cycle, as your revenues come down, so do your receivables, which becomes cash, and if you look at the last couple, three quarters during this down cycle, our receivables have also come down in lock step with revenues.

Which the good news is, the cash flow will benefit significantly from the reduction in receivables from the non-cash charges related to stock compensation and the fact that you won't spend all of your depreciation on CapEx. So from a cash flow standpoint, the numbers look a hell of a lot better than they do on a pure earnings basis.

And they usually do during these time periods, which gives you more ammo to buy stock when prices are down. Can you also talk a little bit about Protiviti with regards to -- what are you seeing in terms of IFRS? Any change from the current administration and what your expectations are there?

IFRS, because the compliance date is 2014 and out, as companies are looking to control their costs right now, IFRS isn't the number one item on many companies' dockets. So whereas there is some analysis of technical requirements of GAAP versus IFRS, that isn't the lion's share of the work. The lion's share of the work will be the control changes, the process changes, the documentation that has to come, and that's out some. Interestingly though, when you talk about administration changes, in the last couple of days, the new chairman of the SEC, Ms. Shapiro, indicated that it was time for the small cap companies to comply with Sarbanes-Oxley. As you know, they have gotten numerous passes in the past, and she came flat out and said in the last two or three days, it's time for them to comply when they -- and 2009 is the year where they are supposed to first get an audit of their controls.

So there could be some meaningful demand, if in fact that follows through, which will be uniquely positioned to deal with between management resources and Protiviti. So we were encouraged. In that same release, there is discussion of on a non-audited basis, these companies reported about their controls last year, and I believe 30% of them reported that their controls were not adequate. And that percentage was more than double the similar percentage when large companies first reported several years ago, point being, these smaller companies have more controls issues than larger companies did, and there is some work to be done. So it will be interesting to see whether that follows through the way she says, but we certainly took note of her comments.

How are you going to manage that? Because on the one hand, you're trying to reduce expenses in order to get the profitability, but it sounds like there is a pretty big carrot out there.

I can assure you, we believe we have the people power, the phone power and the message between Protiviti and management resources to A, get the message out there, B, come up with a strategy as to how they comply, and by using both management resources and Protiviti, do it in a cost effective way.

Great.

Just two points. Smaller companies are less likely to have the internal capability to do much of this work themselves, so we are uniquely positioned to help, and we have talked a lot about aligning or cost structures with revenues as our revenues decline. But just so we are clear, we are all for the revenues going up and we are more than confident we can handle the cost on the way back up as well.

Understood. Thank you.

Thank you.

I think that's all the questions we have time for today. Thank you for your interest, and we appreciate your time.

Thank you. This concludes today's teleconference. A taped recording of this call will be available for replay later this evening through 8:00 pm eastern on February 4. The dial-in number for the replay is 800-839-5685, or for outside the United States, country code plus 1-402-220-2567. Once again, the number for the replay is 800-839-5685, or for outside the US, country code plus 1-402-220-2567. This conference call will also be archived in audio format in the investor center at www.rhi.com.