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Executives

Tyra Tutor - SVP of Corporate Development

Tim Payne - President and CEO

Bob Crouch - SVP and CFO

Analysts

Kevin McVay - Credit Suisse

Andrew Steinerman - JPMorgan

Tobey Sommer - Suntrust Robinson Humphrey

Mark Marcon - R. W. Baird

James Janesky - Stifel Nicolaus

Michael Baker - Raymond James

Clint Funley - Davenport

MPS Group Inc. (MPS) Q4 2008 Earnings Call February 5, 2009 10:00 AM ET

Operator

Good day everyone and welcome to this MPS Group Inc. conference call. Today’s call is being recorded. At this time for opening remarks and introduction, I'd like to turn the call over to Senior Vice President of Corporate Development Ms. Tyra Tutor. Please go ahead.

Tyra Tutor

Thank you and good morning. Welcome to the MPS Groups fourth quarter and full year 2008 Earnings Call. Before we get started today, the company would like to caution all listeners that the information provided today that is not historical should be considered forward-looking information.

All forward-looking information is subject to uncertainties and risks that may be described in today's call or described in our press release issued this morning that was furnished with our Form 8-K also filed this morning, and in our other SEC filings including our most recent Form 10-K.

Should any of these risks, uncertainties or other factors materialize or should underlying assumptions prove incorrect, actual results performance or achievements of the company may vary materially from those stated or implied by forward-looking statements made today. As you all know, forward-looking statements are made based on information available today, and are not guarantees of performance.

In addition, during this call and in our press release we have presented certain non-GAAP financial measures. Please consult both the press release and our Form 8-K for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measure. Today's press release and the Form 8-K are now available on our website at mpsgroup.com. Now I will turn the call over to MPS Groups President and Chief Executive Officer, Tim Payne.

Tim Payne

Thank you. Good morning everyone. We appreciate your attendance today. Again my name is Tim Payne and I'm the Chief Executive Officer of MPS Group. And speaking with me today will be Bob Crouch, who is our Senior Vice President, and Chief Financial Officer. It's appropriate today for us to state right up front that we have experienced a noticeable decrease in demand for professional staffing services.

This drop in demand, which is affecting both temporary and permanent placement services worsened throughout the fourth quarter and had a negative impact on our fourth quarter results. With this said, we believe the company is very well positioned for the long haul, and we believe we are currently taking the appropriate steps we need to, to respond to current market conditions.

On our call today, what I would like to do is briefly review our results for the quarter, then talk a little bit about how we are positioned as a company going into this downturn, versus how we looked going into the downturn of 2001. And after that, Bob Crouch will be providing us with detailed financial analysis of f the fourth quarter and whole year results and will also be outlining the steps we are taking to better match our cost structure to current mark conditions.

He is also going to be providing guidance for the first quarter of 2009, and after that we will be taking questions from call participants. With respect to our fourth quarter our revenues were $480 million, a number which was impacted negatively by foreign currency conversion rates. During the quarter, we did incur a non-cash goodwill impairment charge in according with FAS 142 and Bob is going to provide some more information about this in just a moment.

Before this charge, our EPS was $0.12, which was at the high end of the range of guidance we've provided in October. Given the backdrop of very poor market condition, we were actually fairly pleased with our results for the fourth quarter. Now I would like to do is to comment really on how the company is positioned today going into this hiring downturn that we are seeing.

Last time around you may recall the employment downturn lasted from 2001 to 2003 and as we were going into that we as a company faced a number of challenges. First of all, at that time we had over $200 million in debt. Secondarily, we were also very heavily focused in just one specialty, information technology and we had very little diversity derived from some of the other specialties today.

We also at that time carried a fairly sizable bench of billable consultants and the reason this is important is because it makes it tough to deal with employment downturn, because labor costs tend to remain in place even after the consultants come off of assignments. So, poses a little bit of a challenge. So despite these challenges last time around, we were able to successfully navigate through the downturn of 2001 to 2003 and we remained profitable and cash flow positive that whole time.

However today, because of some of the changes that we have made in the company over the intervening years, we feel we are really much better positioned now, as we enter the current downturn. So, first of all this time around we have more minimal debt and we have over $90 million in cash reserves. And we have been able to build and keep this cash position, while we have also been completing a number of strategic acquisitions over the years and also buying back company's stock and retiring those shares.

Secondarily, another reason we feel we are better positioned is that today we are also less focused on just the IT specialty. We start a fair amount of IT business and we certainly believe in that business long-term, but what we have also done is we've grown sizable businesses in the areas of law, engineering healthcare and accounting, and we believe that this diversity is going to serve us quite well as we move through these tougher times.

And then finally, another big change that's happened in the company overtime is that today our billable labor model today has become better almost entirely a variable cost hourly pay model, and today less than 5% of our billable consultants are on a bench model. And the reason this is important is that when the assignments end and that they do tend to in downturn such as this having this flexible model insures that billable labor costs get adjusted immediately and that we don't carry any excess cost.

And then as a just a final note, just talking about how we are positioned today, we feel we are fortunate to have in place a very talented management team, have a lot of experience dealing with conditions such as this. Most of our folks have been with us for quite some time. And with this team, we are confident in our ability to work our way through these present day challenges that we're facing, while also working to strengthen the company for better conditions in the future. So, that concludes my thoughts on how the company is positioned for today.

And I would now ask Bob to provide us with additional financial details as well as guidance.

Bob Crouch

Thanks, Tim. I'm going to give a brief summary of our consolidated financial results for the company, and discuss our balance sheet highlights and discuss our cash flow and cost structure model. Then I'll provide some recent trending information and outline our guidance for the first quarter of 2009. For the fourth quarter, as Tim said, we reported revenue of $487.5 million, which was just below the range of management guidance of $500 to $520 million.

When we provided guidance for the fourth quarter, foreign currency exchange rates were very volatile particularly in regards to the British pound which fell to a level which is not anticipated and this resulted in us reporting revenue below our range of guidance. During the third quarter earnings call, I made special mention of the fact that we perform our annual impairment review during the fourth quarter and at the uncertainty in the economic environment combined with the decline in valuations of public staffing companies and peer group, would be considered in our test in goodwill impairment during the quarter.

We provided EPS guidance for the fourth quarter of $0.10 to $0.12 per share, before any impairment charges. So while our GAAP EPS for the quarter was a loss of $3.36, it included a FAS 142 non-cash impairment charge of $3.48. Before the consideration of this charge, our earnings per share for the quarter would have been $0.12, which was at the high end of our range of management guidance.

A few more comments regarding the goodwill impairment charge. We recorded a net goodwill impairment charge of $303 million. I would like to emphasize that this is a non-cash charge and it is comprised only of intangible assets, goodwill and other intangibles assets that were reported on prior acquisitions. If you look at our consolidated results for 2008, for the year end, we reported revenue of $2.2 billion, a gross margin of 28.7%, EBITDA of $137 million, and operating loss of $26.4 million including the impairment charge or an operating income of $115 million excluding the charge.

A loss per share of $2.64 including the impairment charge or earnings per share of $0.75, if you exclude the charge. Our cash flow from operations was $134 million, and we finished the year with $91 million in cash at year end. Regarding the fourth quarter of '08, I am going to focus my discussion of the results today primarily on our sequential quarterly results from the third quarter of '08 to the fourth quarter of '08, as we had a pretty dramatic change in demand during the short period of time, rather then looking at the year-over-year comparisons.

As we look at consolidated results on a sequential basis, quarterly revenue was down 15.6%. Without the negative effect of currency, revenue would have been down 7.8%. Permanent placement revenue was down 29% sequentially when compared to the third quarter, and 36% on a year-over-year basis. On a constant currency basis, permanent placement revenue decreased 20% sequentially and 26% on a year-over-year basis. Total permanent placement revenue has decreased to 4.5% of total consolidated revenue in the quarter, which was down from 5.3% in the third quarter of '08, and down from 6% in the fourth quarter of '07.

Our peek for direct hire as a percentage of revenue was 6.5% in the third quarter of '07 and we do anticipate a further decline in 2009. And I will talk about the current trends in a few minutes. We reported gross profit margin of 28.6%, which was a decrease of 90 basis points compared to the prior year and a slight increase sequentially. The decrease in gross margin is attributed to the decline in permanent placement revenue during the fourth quarter of '08.

Our SG&A expenses as a percentage of revenue were up, as we had a few non-recurring items combined with the sequential decrease in revenue. Our consolidated EBITDA for the quarter was $24.4 million, down 42% from the prior year and 30% on a sequential basis. Our operating loss was $360 million, which includes $379 million gross impairment charge. Without the charge, our operating income would have been $19.4 million for the fourth quarter. We had a loss per share for the quarter of $3.36, which included an impairment charge of $3.48, before the charge earnings per share would have been $0.12.

Our tax provision for the quarter was 18.9%, excluding the impairment charge, and the related tax effect our normalized provision for the fourth quarter was 42%. The tax benefit recorded on the impairment charge was $75.9 million or a 20% rate. As we look at our segments in our North American Information Technology Services segment, we reported revenue of $141.8 million, which was a decrease of 8.3% compared to the third quarter of '08.

Sequentially, permanent placement revenue was down 7% and temporary revenue was off 8%. This segments gross margin was 31.7% for the quarter, which is up sequentially, primarily due to an increase in temp gross margin. Before consideration of any impairment charge allocated to this segment, the segments operating income was $8.9 million while EBITDA was $10.8 million. The gross impairment charge recorded in North American IT segment was $205.1 million. The North American Professional Services segment reported revenue of $169.1 million, which was a decrease of 12% compared to the third quarter of '08.

Sequentially, permanent placement revenue was down 27% and temporary revenue was off 11%. This segments gross margin was 30.7% for the quarter, which was up sequentially primarily due to an increase in temp gross margin. Before consideration of any impairment charge, allocated to this segment, the segments operating income was $13.8 million while EBITDA was $15.2 million. The gross impairment charge reported in North American Professional Service segment was $49.9 million.

Switching to the international segments, I'd like to reiterate that our international results have been impacted dramatically by the continued weakening of the British pound. When we gave our guidance for the fourth quarter, the pound was trading at a level which was already down 15% versus the third quarter’s average rate and the actual average rate for the fourth quarter ended up being down 20%. So that was more than we anticipated.

The international IT Services segment, reported revenue of $66.8 million, which was a decrease of 24.5% compared to the third quarter of '08 excluding the impact of changes of foreign currency exchange rates, the International IT Service units revenue was down only 7% versus the third quarter. Foreign currency had a negative effect of 18% on a sequential basis from the third to fourth quarter of '08. Sequentially on a local currency basis, permanent placement revenue was down 34%, and temporary revenue was off 6%.

This segments gross margin was 18.6% for the quarter, which was up sequentially primarily due to an increase in temp margin, before consideration of any impairment charge allocated to this segment, the segments operating income was $2.9 million, while EBITDA was $3.4 million. The gross impairment charge recorded in the International IT Service segment was $29.9 million.

International Professional Services segment reported revenue of $109.8 million, which was decrease of 22.7% compared to today the third quarter of '08 excluding impact of changes of foreign exchange rates, International Professional Services segments revenue was down only 3.4% versus the third quarter. Sequentially on a local currency, permanent placement revenue was down 15% and temporary revenue was off 2%. This segments gross margin was 27.4% for the quarter, which was down sequentially, primarily due to decrease in temporary gross margin and a reduction in permanent placement as a percentage of revenue to 9.3%.

Before consideration of any impairment charge out here this segment, this segments operating income was $2 million, while EBITDA was $3.2 million. The gross impairment charge recorded in International Professional Services segment was $94.3 million. As far as looking at liquidity in our balance sheet, our cash position as of December 31st, 2008 was $90.6 million, and we had borrowings of approximately $7 million outstanding on our credit facility.

During the fourth quarter, we generated approximately $49 million in operating cash flow. This led to an increase in our cash balance of $27 million during the quarter as our CAPEX for the quarter was $4.3 million and we repurchased approximately $11 million of the company's common stock. As of today, we have $24 million remaining under our most recent stock buyback authorization.

I would like to spend a little time now to discuss how our company is structured to perform in a downturn. Speaking from the experiences of the prior downturn, our company generated some of our strongest quarters of cash flow from operations during the period from 2001 to 2002. This is in part related to the working capital structure of our company, the variable nature of our operating model, the goodwill amortization being recognized from a tax standpoint, and finally other cost containment strategies we can employ.

From a working capital standpoint, we primarily pay our billable employees and consultants on a weekly basis and receive payment on average seven weeks later. In the event of a slowdown of revenue, the cost for our billable employee falls off immediately, and we collect the receivable at a later date, resulting in an acceleration of cash flow.

As far as the variable nature of our business, which Tim talked about a little while ago, the majority of our operations allow that when an assignment ends the expense of the billable employer or consultant ends and any related variable compensation, the former commissions and bonuses are reduced accordingly. From an income tax standpoint, we have a tax deduction resulting from the taxable acquisitions we have completed, which last for 15 years from the acquisition date.

The majority of our acquisitions were in it were 90s, and are still being amortized for tax purposes. More specifically, this is roughly a $50 million deduction through 2011 and then smaller annual deductions in the future years. So, for the first $50 million in pretax income through 2011 in the US, we do not pay cash taxes. Finally, there are several other costs that we can manage. We are reducing our capital expenditures in 2009 from a discretionary cost standpoint. We're focusing on travel, entertainment, marketing cost among others.

In our business, the majority of our SG&A cost related to compensation and benefits. We discussed how the variable compensation is reduced above, regarding non-variable compensation is our responsibility to adjust both our employment base to appropriate capacity, which will best support the company in the future as well as provide for an efficient model in this cycle. In regard to capacity adjustments, our US operations are able to adjust a little quicker than our international operations.

Also our employment base will somewhat naturally adjust to the current economic cycle based upon attrition. In addition, we have a net hiring freeze in the majority of our units, including our corporate offices where we've deferred raises and employee benefit increases. These are just a few of the cost areas that we are managing closely at this point in the cycle.

And at this point, we are not planning on closing any offices at this time in the field. So we have talked a little bit about how we can manage our business more efficiently from a cost standpoint. As far as the demand we're seeing from our clients, I would like to discuss the current trends in our business. In our North American units, our permanent placement revenue was down during the first four weeks of January, approximately 40% in our Information and Technology segment and 60% in our Professional Services segment as compared to the first four weeks of 2008.

That was on a permanent placement basis. Our temporary revenue was down during the first four weeks of January approximately 16% in both our IT and Professional segments as compared to the first four weeks of 2008. Turning to our international units, permanent placement revenue was down during the first four weeks of January, approximately 15% in our IT segment and 19% in our Professional Services segment as compared to the first four weeks of 2008, and that is on a local currency basis.

Our temporary revenue on a local currency basis was down during the first four weeks of January approximately 20% in our IT Services segment and flat in our Professional Services segment as compared to the first four weeks of 2008. So in summary, we are clearly experiencing a more pronounced decrease in our permanent placement businesses than our temporary business, which is to be expected at this point in the economic cycle.

As far as our guidance for first quarter, we gave guidance including a revenue range of $410 to $450 million, and earnings per share of $0.02 to $0.07 in our press release issued this morning. And calculating our guidance, we are continuing to assume a further deterioration in both temporary and permanent placement revenue trends. We are conservatively not assuming a traditional seasonal rebound in our results during the quarter.

We are factoring in the effects of foreign currency at the current levels. And the wide range of guidance on the EPS is due mainly to uncertainty relating to our permanent placement trends. In addition, we will be impacted by the payroll tax resets that we incur every year in the first quarter. While our guidance represents our best estimate of our anticipated results for the fourth quarter, we would like to caution our investors that our visibility in the current environment is limited.

Earnings guidance that includes approximately $0.02 per share of quarterly expense resulting from equity compensation and assumes our effective tax rate is to be in the 45% to 48% range. In addition, we estimate our share count to be approximately $88 million for the first quarter, based upon our current shares outstanding as of today's date. With that I will turn the call back to Jim.

Tim Payne

Thank you, Bob. And again thanks to everybody for attending today. That concludes our formal presentation. As I think, you can tell we are definitely facing some challenging conditions in terms of demand for temporary and permanent services. We believe, we are taking the appropriate steps and we believe we know exactly what we need to do to manage our way through this part of the cycle. So, with that operator, we are ready to take questions.

Question-and-Answer Session

Operator

Thank you. We'll go first to Kevin McVay with Credit Suisse.

Kevin McVay - Credit Suisse

Great, thank you. Hi, Tim, Bob, Tyra.

Tim Payne

Hi, Kevin.

Kevin McVay - Credit Suisse

Hey Tim, your thoughts in terms of perspective on this cycle versus the last one and the way the company is positioned was very, very helpful. I wonder if you could talk through the SG&A a little bit. The reason I say that is, I know probably the last downturn you folks were considering splitting off the company. I know that there was some incremental SG&A. So how we should think about variable versus non-variable costs today versus the last cycle? And you know, Bob if you had any incremental thoughts around kind of margins as we head into this '09.

Tim Payne

Okay. Yes, Kevin as you recall the last time around, 2001 we were coming off of a period of pretty rapid acquisition growth from about '96 to 2001 and there was also some plans in place to split the company into various pieces and that tended to add to SG&A as that infrastructure was built for each of those units.

I think this time around we don't have a lot of those costs in place, and we haven't been doing nearly as many acquisitions as we did back then. So the good news is we are probably a little more cost efficient now, but maybe the bad news on that is we don't have a lot of real easy costs that we can cut like we did last time around.

But, we are looking at things very carefully. And as Bob mentioned, you know, some of the costs will actually adjust automatically as the business declines and Bob do you have any other thoughts on that.

Bob Crouch

No. I think just a couple of things different this time. Obviously, when you look at margins from operating margin standpoint, you have got equity compensation that wasn't there last time, and we've got V/Line which we didn't have last time, which is a little more of fixed model structure but otherwise it's, we will manage it similar to the way we did time, Kevin.

Kevin McVay - Credit Suisse

Okay. And then Bob, can you just remind us what percentage of EBIT idea was last cycle as opposed to today. There was a high margin business that declined pretty quickly. So, I'd imagine you are not going to have that type of headwind heading into '09 to just as a percentage of EBIT, if you have got that handy.

Bob Crouch

The percentage of EBIT, that idea was of the total?

Kevin McVay - Credit Suisse

Yes.

Bob Crouch

I do not have that handy but Kevin it was probably a $200 million business doing 15% last time. And I don't know what year you are referring to, but I do not have those numbers in front of me.

Kevin McVay - Credit Suisse

No. That's helpful. I will get back in queue. Thanks.

Bob Crouch

Thank you.

Operator

We will take our next question from Andrew Steinerman with JPMorgan.

Andrew Steinerman - JPMorgan

Hi. I thought the real kind of shine in terms of management in the quarter was the gross margin line, and could you just make any comments past kind of normal payroll tax, when you think about first quarter’s gross margin, and maybe it's more helpful to think year-over-year?

Tim Payne

You know, one comment, Andrew on gross margin is using the last downturn kind of as our guide, what we will start to see and are already seeing a little bit is customers starting to push back. They're trying to save money just like we're trying to save money and some of them are starting to ask for volume discounts and lower bill rates and things of that sort.

And what normally happens, at least what happened last time is you get a little bit of blip, where you start to see some downward pressure on margins and that overtime particularly with our kind of our hourly W2 model that we have used primarily, overtime we are able to manage those labor costs back down and then the margins stabilize a little bit.

And then, what we saw last time as the cycle freshened, then we saw margins improve again. So, what you might be seeing from us and some other companies in the short-term is some downward pressure on the margins.

Andrew Steinerman - JPMorgan

Right. And in the first quarter, year-over-year, do you think it's going to look much different than kind of change that we saw in fourth quarter year-over-year?

Bob Crouch

It's going to be down obviously on the payroll tax resets, and with the US having more of an impact now, Andrew you are going to get a little bit more of an effect from that as the percentage has decreased from Europe with the currency. But, otherwise, you know, we are getting a little bit more pressure than had in the fourth quarter right now.

Andrew Steinerman - JPMorgan

Right. And is there any segment to point at in particular when it comes to first quarter gross margins?

Bob Crouch

Yeah. I mean I think you are going to, in our IT segments when we have a got lot larger customers that's where you will see a little bit more of the pressure and maybe in our International Professional Group.

Andrew Steinerman - JPMorgan

Okay. Thank you so much.

Tim Payne

Thank, Andrew.

Operator

We will take our next question from Tobey Sommer with Suntrust Robinson Humphrey.

Tobey Sommer - Suntrust Robinson Humphrey

Thank you. I have a question on the International Professional units. On a constant currency, it seems to be holding up pretty well in January. Could you give some color there and whether you are expecting a more pronounced shift?

Bob Crouch

Yeah, Tobey, we in that particular unit had some financial services business but that wasn't the predominant part of our business. I don't know exactly what it was right now, but over the past 12 months a lot of that financial services revenue has kind of gone away, and so we don't expect a big blip going guard from the financial services sector, but what we are fortunate to have there in that unit is that about 60% of our revenue comes from the public sector.

And, this is across multiple specialties, accounting, housing, IT, and so forth. The good thing about that is that type of spending is expected to hold up pretty well relative to some of the other sectors that we might see over there. The kind of the down side of it is that it does carry a little bit lower gross margin than some of the other business and I think you might have seen that reflected in the first quarter.

But, we feel like we're in the public sector in the UK, we are one of the premier companies that's servicing the public sector and we think that’s actually is going to be positive for us as we go through this downturn.

Tobey Sommer - Suntrust Robinson Humphrey

Thanks. And then, I apologize if you've already touched on this because, I joined the call a little bit late, but the impact of V/Line in quarter, seem it was quite favorable. What was the extent to which you could give us some additional color on the impact of revenue or margin and kind of how you see the momentum of V/Line, which seems to be kind of a star these days progressing into 2009?

Tim Payne

V/Lines, has done very well. We had a very good year particularly on the sales and implementation side. But, we're in a little bit of a challenging time right now, because for a good reason actually. But what you would expect to see in V/Line and times like this is that we're seeing is declining volumes.

And, if you recall how the revenue model works as throughput or volume declines, revenues tick down as well. So we are seeing a little bit of a tick down in revenues, but at the same time we had really a kind of record year for sales and implementations, and so we are still incurring a lot of the costs that come with getting those things up and running. And at the same time, another I think, positive there is we are still seeing a lot of sales activity, which means that companies are still adopting that kind of software to do this kind of a function.

So, it's going to be a period here where it's going to be a little tough for us to manage through, because the costs will stay fairly high, but revenues are going to be a little bit flat-to-down. So we are working our way through that but in the long-term, we still feel like you know, we are the market leader there.

We are very well positioned and we also again believe that the adoption rate for that kind of software is going to be continuing to go up in the years ahead. So we will continue to make sure that we give V/Line what we need to make sure it reaches its potential.

Tobey Sommer - Suntrust Robinson Humphrey

And do you have a sense for the impact to how it influenced the segment results?

Tim Payne

In the first quarter?

Tobey Sommer - Suntrust Robinson Humphrey

In the fourth or first.

Bob Crouch

We don't break it out separately but are you talking about as far as from our earnings standpoint?

Tobey Sommer - Suntrust Robinson Humphrey

I'm just curious on the influence on the segment gross margin and revenue performance in the quarter.

Bob Crouch

V/Line Freight stayed pretty static from Q3 to Q4 from a revenue standpoint. So it didn't increase at all the gross margin there from that unit.

Tobey Sommer - Suntrust Robinson Humphrey

Okay, and then, I guess I wanted to ask a question about any kind of expansion opportunities that you may have. I know it's kind of an odd thing to ask in this market, but whether it's Central Europe or other areas, whether even in this kind of market you may opportunistically on a restrained basis continue to look at new branches.

Tim Payne

We are probably not going to open a lot of the new branches right now but as Bob pointed out, we are not going to close a lot either. In terms of acquisition expansion, it's a little tough in times like these, because we typically buy private companies where there's a single owner and a lot of times they don't like to sell when their results are down because they will be getting less for their business.

So, we would probably see some limited opportunities there, but probably not a lot. I think, we are going to be pretty conservative on the acquisition front, but to your point, there are some pockets where it varies and actually Eastern Europe is one of them where there does seem to be some business that we can go after. And we will attempt to do that.

Some, as we move forward in this cycle, we believe some specialties will get affected more than others. We believe areas like healthcare might have some potential relative to some of our other businesses and we make sure that we do the kind of expansion there that we need to do. But, for right now we probably wouldn't see a lot of acquisitions or new branches.

Tobey Sommer - Suntrust Robinson Humphrey

Thanks. One last question you mentioned V/Line probably being the number one market share. Do you have any estimates for what kind of market share V/Line has and then I will get back in the queue. Thanks.

Tim Payne

I really don’t. I guess I am basing that primarily on the fact that there is a very limited set of competitors and it's pretty well known who has what clients and what the estimated revenues are for those. So I can probably tell you just some scope based on revenue, but I don't really know about the market share.

The market share is kind of tricky, because it's really a moving target because the adoption of that kind of software is increasing very rapidly. And so, the market about three or four years ago was actually very small and the potential market today is much, much larger than that. So, no I'm sorry I don't have anything better than that for you.

Tobey Sommer - Suntrust Robinson Humphrey

Okay. Thank you very much.

Operator

We will take our next question from Mark Marcon with R. W. Baird.

Mark Marcon - R. W. Baird

Good morning. I was wondering if you could talk a little bit about the pay bill trends that you are seeing on the North American IT side, and to what extent -- during the last downturn the way you structured some of your contracts, it was a little more difficult to adjust to bill rate decreases.

I am wondering if this time around it may be -- if you can pass those along to the workers and what sort of magnitude in terms of bill rate declines would you expect from some of the larger employers?

Bob Crouch

It's a good question, Mark and actually if you go back over time, and you look at the last cycle, we were able to pass down a lot of bill rate decreases to consultant side. I just remember, 2001 was kind of like the year of cutting headcount and then 2002 was the year of adjusting bill rates.

We were actually able to adjust our bill and pay rates to get a constant gross margin as we moved out throughout 2002. Will that be the same case going forward, don't know, but certainly I don't think we are contractually much different than we were back then. So we will be able to operate I think fairly, fairly close to how we did in the former downturn and hopefully we will be able to adjust there.

Tim Payne

Mark one other comment. And this is really just looking at North America not Europe is we talked over the past couple of years about how there are certain clients in North America, maybe we don't want to do business with. That we have been weaning ourselves away from our certain profiles of clients that we'd try to avoid, and what we are really talking about is clients that work on a fixed mark up as opposed to a bill rate type pricing.

Mark Marcon - R. W. Baird

Right.

Tim Payne

And part of that was, we are very aware of what happens in downturns such as this and with a mark up type client, when a downturn comes, they have got nowhere to push other that on the mark up itself. And so by definition, your margin is going to going downwards. We feel like it's really better for everyone, if we can allow the labor cost to float and the bill rate to float a little bit more. So, that’s why we have been a little bit picky over the years, as we want to make sure we've got that flexibility.

Mark Marcon - R. W. Baird

And that’s specifically what I was referring to was those fixed mark up contracts. So, I mean what are you hearing from some of the larger clients that you have at this point in terms of how far along are we in terms of the potential bill rate compression.

Tim Payne

I would say we are in the fourth inning maybe. It's really just kind of starting. I think a lot of the problems that we are seeing now really accelerated really just back in September. And so, I think we are working through last year's budget through year end and now people have their new budget for the year, and so we are starting to see it accelerate a little bit. As you can imagine, particularly from financial services clients who are very cost conscious these days. So we will just again, you know, if we pick the right clients and we are disciplined, this is just something we will manage through.

Mark Marcon - R. W. Baird

What sort of magnitudes are you experiencing?

Bob Crouch

Not a large magnitude on bill rates side right now, Mark. This is Bob. If you look back at the last cycle, it was very clear that bill rates for IT in the US were out of control. I mean, there were 30%, 40% above like a consultant was getting 30 or 40% above what an internal IT worker was getting for the same job.

Had that discrepancy is not there, had that magnitude anymore. It is very rational hiring environment coming into this cycle. Bill rates came down and really never got back to where they were in the last cycle. So, I don't think you are going to see that type of, I don't think there's room there. I just don't think you are going to see that type of correction.

Mark Marcon - R. W. Baird

That's good to hear. And then, in terms of the write off, can you mention which specific units you ended up taking goodwill charges on?

Bob Crouch

We took a goodwill charge in each unit, so every segment.

Mark Marcon - R. W. Baird

Where the majority of them were on the IT side?

Bob Crouch

It was in every segment. It was $49 million in North American professional, $94 million International Professional, $205 million in IT in the US and $29 million in IT internationally.

Mark Marcon - R. W. Baird

So in North American IT, what specifically did you take out or write off

Bob Crouch

Just goodwill.

Mark Marcon - R. W. Baird

Was it anything that you have done recently?

Bob Crouch

No, we haven't really done any acquisitions in that group recently.

Mark Marcon - R. W. Baird

And what about on North American Professional is it anything recent?

Bob Crouch

Well, Mark the way it works is you put, you have done acquisitions you sort of integrate those into the whole unit.

Mark Marcon - R. W. Baird

Right.

Bob Crouch

Then you take a look the whole unit unless you have done a real recent acquisition which has had a large turn for the worse.

Mark Marcon - R. W. Baird

That's all I was trying to get at. It doesn't sound like there has been anything that you recently acquired that just took a big turn.

Bob Crouch

I mean, we had a couple of recent acquisitions that were included in this group and obviously their value is down also. So they were included as part of it. There's no doubt about that but just to look at how deep it went, North American IT $205 million was the biggest write down, and we haven’t done really any IT acquisitions in five to seven years.

Mark Marcon - R. W. Baird

Okay, great.

Bob Crouch

So, really it wasn't a recent acquisition type event. It was just a whole valuation.

Mark Marcon - R. W. Baird

Okay. You gave us the January numbers. Obviously things got worse as the quarter went along, but can you give us a sense for how December was for the various units, so that we can get a sense for what the magnitude of the step down was going?

Bob Crouch

Yes. Obviously December was slowing down, because of last two weeks. If you cut out those two weeks and that December was very much like November, the early weeks. So you really had a quite a step down at the end of December, and it carried through January. But, early December wasn't too far different from November.

Mark Marcon - R. W. Baird

Okay. Thank you.

Bob Crouch

Sure.

Operator

We will take our next question from Jim Janesky from Stifel Nicolaus.

James Janesky - Stifel Nicolaus

Yes. Hi, Tim and Bob a couple of questions on both North American Professional as well as the IT. I mean, while down 16% in the first couple of weeks of the year is not desirable, I mean though we have seen competitors in both spaces report much higher declines in the temp side of the business.

Obviously, the perm is a different story. Are you finishing up some large projects, do you think that you are taking market share? If you give us an idea of those declines.

Bob Crouch

Yes. James, on our legal side we are doing a very good job. We are actually up versus the fourth quarter there on the temp side. So, where we want some projects, I think we're taking market share there. In engineering we have stayed pretty strong, relative and in healthcare, we have done a good job. I think we're taking market share there. So, we've got a lot of diversity in our Professional group and the accounting has been hit pretty well, as you have probably seen some of your competitors.

James Janesky - Stifel Nicolaus

How about with within IT?

Bob Crouch

Within IT, you know we are working hard- versus all of the competitors out there, I haven't seen all of the information. But, I know, we are down. We are not excited about being down, but we are working.

Tim Payne

One comment about the IT and this whole time that we are in right now, is that it's a little hard to separate out the normal seasonal stuff from what's being caused by the, the recession. Normally in IT, we would see a big fall off at the end of December and then we would see a reclaiming of those heads, you know by mid February.

And, so our sense thus far is that the, the fall off got a little magnified and the bounce back is much more muted. It's really not a bounce back at all at this point. So, when we look at IT, it's definitely down and the headcount is definitely down, but we think it's going to stabilize or we hope so because we think some of it is just year end stuff that's going on.

James Janesky - Stifel Nicolaus

Okay. And, within the healthcare segment, we have heard about some pretty dramatic declines as at the end of 2008, especially with respect to nurse travel. Is it your regional focus or customer focus that has allowed you to outperform in that area?

Tim Payne

We think that's the case. We're hearing the same stories of people that are on very large hospital contracts that have a lot of nurses coming off. We don't tend to have a lot of nurses at any one hospital and we think that that helps, but the other thing is travel nursing for us is really only a portion of what we do.

We built a real life business in school therapy and a number of different specialties there. And what's nice about that is those are nine month contracts, and so you wouldn't see a big blip in the middle of that kind of thing.

We have done I think a good job in Allied Health, we've got a sizable pharmacy business now. So, I think what's good about us and this is something we strive for really in all of our businesses, is not to get too tied to any one thing. And so, for right now, the Travel Nursing market is not great, but it's not hurting us too badly.

James Janesky - Stifel Nicolaus

Okay, make sense. Bob, what tax rate did you say for the first quarter and did you even mention a range for 2009?

Bob Crouch

We did not, but we said the fourth quarter was 45% to 48% and that number is just going up as your taxable or your income goes down, your pretax income.

James Janesky - Stifel Nicolaus

Okay. But that wouldn't be a bad range to use for '09, if you assume that it's going to be a pretty tough year on the revenue side?

Bob Crouch

If we stick at the levels of the profitability levels on the first quarter that's not a bad range, if profitability gets worse that effective tax rate is going up because of all of the, you know, the prominent items.

James Janesky - Stifel Nicolaus

Sure. Okay, thanks Bob.

Bob Crouch

All right. Sure.

Operator

We will take our next question from Michael Baker with Raymond James.

Michael Baker - Raymond James

Thanks. Tim, as we have seen, the governments roll has certainly increased and likely won't diminish anytime soon across all your markets. I was wondering that if you could give us a sense of how you think you are positioned in North America, given your success in the UK with respect to some of those potential opportunities that come downstream?

Tim Payne

That's a good question and it's one we have been thinking a lot about. Unfortunately, we're really not very well positioned in North America. There is kind of a historical reason for it. If you look back at us over the last three years, you see pretty in North America, really across all of our specialties, you see very nice increases in gross margin.

And we've been able to do that by being selective on our client base, but part of what happens when you get selective is you move away from both State and Federal and even local Governments because the contracts not have very good terms and also the margins tended to be not very good on those. Now I think, where we can sort of play in that is that on both the engineering and the IT side, we have done a lot of business with some of these Government contractors, where we've been able to get a little bit more favorable rates.

So we would anticipate that we will be able be the beneficiary of some of that but candidly we'll not probably use what position these some other companies might be because of the margin issue.

Michael Baker - Raymond James

Are there any steps you are looking to take or is it a just a wait and see approach given the dynamics have changed around the government itself at this point.

Tim Payne

Well, we have some of the contract vehicles in place to be able to do more Government business. So that's a fortunate thing, and it's really going to be for us, it's going be more a question of figuring out where the pockets of business going to be and making sure that we've got people assigned to chase after it.

So, it's not like we're blocked out from doing these things. It just we haven't done as much of it in the past. But, we're definitely going to make a run at it. I think, some of those things that are being talked about probably should be fairly beneficial to companies like us.

Michael Baker - Raymond James

And then in terms of the UK, can you give us a sense in terms of timing as to where they might be in terms of letting out bigger projects?

Tim Payne

When you talk about the public sector in the UK, there's multiple levels of that, different groups if you will and there's a lot of variance in that right now. We have done a lot of work in the past in the housing area and that's kind of muted right now, as you can imagine with what's going on with real estate.

But I think at this point what we are hearing from public sector customers over there, is that they do expect to see some increases in purchasing and some new projects coming on line some time in the next little while. The only thing I would caution a little about public sector and some to think about going forward is just like in the US, where we have this year end kind of fall off in billable focus, we have a similar impact in the public sector in the UK at the end of March when their fiscal year ends as well.

So, I think what you probably see for us, is if we can get a little momentum in the public sector in the first quarter, it's probably going to be a little bit of a chunk taken out of it at the end of March. But, if all goes well, what we should be able to do starting about the April, May timeframe, if the money is available we know we'll get our share of the business. We should be able to build that business through the course of the year, and that’s what we're hoping for and counting on at this point.

Michael Baker - Raymond James

And then finally, you kind of mentioned healthcare as an opportunity, I was wondering if there were any kind of new areas or sub segments you were interested in along those lines.

Tim Payne

Not so much right now. We spent a lot of time in the last couple of year's really digging into the pharmacy business. And we think that's going to be in the long term, we think that's going be a real good business for us.

But, right now, we are not, there's no real new subspecialties that we are looking at. One we did get into and we didn't, we are still fairly small and it is the local tenants business, the profitability of that business from what we have seen in other companies overtime has not been particularly good, but we think we have got some hopefully new approaches to that business that allow us to not only do that business and grow it but also do it a little more profitably maybe than some of the competitors do.

Michael Baker - Raymond James

Thank for the update.

Tim Payne

Thank you.

Operator

We'll take our next question from Clint Funley with Davenport.

Clint Funley - Davenport

Good morning, Tim, Bob, Tyra.

Tim Payne

Hey Clint.

Clint Funley - Davenport

Tim, thanks for your commentary on how you guys have positioned yourselves relative to the '01, '03 timeframe. I mean, clearly you guys have learned from the last downturn - you are in several new niche markets today.

How are some of your newer, smaller regional competitors fairing today relative to that time period and how well do you think they're positioned to possibly, you know last during a what would be a prolonged downturn here?

Tim Payne

Well we are definitely seeing some pain on the part of the smaller competitors, anecdotal and just, it's definitely going to be a problem for some of them. There's one kind of nuance difference between the last downturn and this one, last time if you recall we had a big, big fall-off in staffing and virtually every staffing company, no matter which specialty they were in, but particularly in IT was hit very, very hard last time around.

But, if you recall at that time also that 2001-2002 time frame there was still very ready supply of credit out there. People had all sorts of options for getting credit and rates were very cheap. So what I think happened last time is a lot of the smaller private companies suffered, but they were able to get the credit that allowed them to fund payroll and allowed them to actually stay in business until the up turn that took place in 2003.

Lot of these mom and pops -- they even used things like home equity loans and so forth from their payroll. I think this time around the real wild card is going to be the availability of credit. You know, Bob spoke just talking about our model, how about how we pay the contractors today and then we don’t get paid for seven weeks. Well that can actually cause you to have a fair amount of float that you need to have in order to run a business like this. So, it could be really interesting to see what happens to some of these mom and pops when they can't get access to the credit that they need to float that.

Clint Funley - Davenport

That’s helpful. I mean, given the credit constraints, do you guys foresee any opportunities to possibly add to your offering given the drop that we have seen in valuations, any near term M&A?

Tim Payne

Probably not near term for us. I think part of that is, we are trying to be a little conservative from a cash standpoint. These are clearly different probably than a lot of downturns that have been seen in the past. And, so we want to make sure that we are kind of cautious on the cash side until we figure this out.

But, I think what you might see is over a little bit of time, as we start to get a little more visibility in the business, we start to get a little bit more comfort with way this is all heading. I you could see us start to make some opportunistic M&A type moves in the specialties that we like. We are still trying to build out a network in Western and Eastern Europe. And again, while we don't plan to do a lot there right now, overtime that would probably be something we would look at.

Clint Funley - Davenport

Great. Thanks Tim.

Operator

And it appears we have no further questions at this time. I would like to turn the call back to Mr. Tim Payne for add any additional or closing remarks.

Tim Payne

Okay. Well thank you all once again for participating with us today. And we'll certainly feel like we know what we need to do to move toward. And, we look toward to updating everyone next quarter on how things are progressing. Thank you all very much.

Operator

Thank you. Once again that does conclude today's call. We do appreciate your participation.

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Source: MPS Group Inc.Q4 2008 Earnings Call Transcript
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