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Executives

Timothy Payne - Chief Executive Officer

Robert Crouch - Chief Financial Officer

Analysts

Clinton Fendley – Davenport and Company of Virginia

Andrew Steinerman – Bear Stearns

James Janesky - Stifel Nicolaus & Company, Inc.

Mark Marcon - Robert W. Baird & Co., Inc.

Kevin Mcveigh - Credit Suisse

Thomas Robillard - Banc of America Securities

Brandt Sakakeeny - Deutsche Bank Securities

MPS Group (MPS) Q1 2008 Earnings Call April 30, 2008 10:00 AM ET

Operator

Good day, and welcome to the MPS Group Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Senior Vice President of Corporate Development, Ms. Tyra Tutor. Ms. Tutor, please go ahead.

Tyra Tutor

Thank you, and good morning. Welcome to MPS first quarter 2008 earnings conference 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 file this morning, and in our other SEC filings including our most recent 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 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 www.mpsgroup.com. Now, I will turn the call over to MPS Group’s President and Chief Executive Officer, Tim Payne.

Tim Payne

Thank you, Tyra, and good morning everyone, and welcome to the MPS Group First Quarter 2008 Earnings Release Conference Call. We appreciate your attendance. Again, my name is Tim Payne, and I’m the CEO of MPS Group, and speaking with me today will be Bob Crouch who is our senior vice president and chief financial officer.

In our call today, I’d like to briefly touch on our results for the quarter and give our assessment of the current business environment as it pertains to demand for our staffing and permanent placement services. Bob Crouch will be providing us with a detailed financial analysis of our first quarter and will also talk about guidance for the second quarter of 2008. At the end of this section, we’ll wrap up our presentation and take questions from all participants.

With respect to our first quarter, we’re pleased with the results and we believe that the quarter came in really just as we expected. Our revenues were $568 million, up 11% versus last year, and earnings per share were $0.20, which is up 18% versus last year. Both revenues and earnings were within our range of guidance, and again Bob will provide you some details in just a moment.

As for the current business environment, there are clearly a lot of observers who believe that the US is experiencing a recession at present, and I’d like to just reflect a little on maybe the last recession and sort of talk a bit about what we believe we’re seeing today. The last recession in the United States began in early 2001, and it lasted until about mid 2003. Based on our experiences then, current market conditions are much more positive than what we saw during that period. I believe there is a number of reasons for this, and I’d like to go over those in a little bit of detail here.

Prior to 2001, the economy was experiencing a number of what we would call bubbles in the hiring markets which created a lot of irrationality. Telecom, Y2K, e-business, and the Internet in general had created a really frothy job market, not just in IT but in another professional specialties as well. We really don’t see any of that today, and today our base of clients really doesn’t reflect this type of bubble and sort of irrational hiring behavior. I believe that a second reason that this job market is different than what we saw in 2001 is that our client companies are no longer as reliant on the United States as their primary or sometimes even sole source of customers.

As I look at many of our clients today where we are doing a lot of work, I see customers that are selling to markets in Europe, selling to markets in Asia and Latin America. With the dollar weak as it is, American products are certainly very attractive to foreign customers at this point, and because the products are being sold abroad but a lot of the work is being done here, this of course gives us the opportunity to fill positions right here in the United States, and then I think a final important thing to remember is that part of the reason that the job market got so bad in 2001 was because of the shock to the economy that was created by 9/11 and ripples that came after that, and fortunately we have not seen a disruption of this sort of magnitude since then. So with all this being said and comparing 2001 to now, I believe it is fair to ask how the current job market compares to the period of 2004 to 2006, which we view that as probably the most period within the current hiring cycle that we are in right now.

Without a doubt, client demand was stronger in those years, and placements were certainly easier to come by, and you could look at our numbers as evidence, as during those years, we would tend to see quarter-on-quarter revenue growth rates in the teens, and then when we look here at the first quarter, our organic growth rate was about 6%. So there’s no doubt that revenue growth has slowed a little bit. At the same time, the hiring conditions that we are seeing now are actually pretty good, and we believe that if we work hard and if the economy does not deteriorate too much, we will continue to be able to grow our business.

Another important point is that since the unemployment rate for college-educated workers is still just a little over 2% and because we only place candidates in that category, we believe demand for our services should remain reasonably strong for the foreseeable future. With that as a backdrop on the environment, I’d like to ask Bob now to provide some financial details.

Robert Crouch

Thanks Tim. I will give a brief summary of the solid net results of the company and include detailed breakdown of our segments and also discuss our balance sheet highlights. Then I’ll provide some recent trending information and try to outline our guidance for the second quarter of ’08.

For the first quarter, as Tim said, we reported revenues of $567.8 million, which was in the range of our guidance of $550 to $580 million and, and earnings per share of $0.20, which was in the range of management guidance of $0.18 to $0.22 given in February.

As far as our consolidated results on an year over year basis, quarterly revenue was up 11.3%. Without the impact of currency, quarterly revenue was up 10.2%, and finally without the effect of both currency and acquisitions, revenue increased 6% from the prior year. Total permanent placement revenue was 5.8% of consolidated revenue for the quarter, which was up from 5% in the first quarter of ’07. We are pleased to report a gross profit margin of 28.6%, which was an increase of 120 basis points compared to the prior year. Our SG&A expenses were 22% of revenue, as compared to 21.3% in the prior year.

Our consolidated EBITDA for the quarter was $37.5 million, up 20.5%, and our operating income was $32 million, up 20% from the prior year. Net income for the first quarter was $19.1 million, up 9% from the first quarter of ’07, and consolidated EPS was $0.20 which was up 18% from $0.17 in the prior quarter, and our tax provision for the quarter was 39%, which was the same as the prior year.

What I’d like to point out is if you view our consolidated P&L, you will note that our other income line item was -$730,000 in the quarter. We incurred a $1.2 million loss in our investments in our deferred compensation plan during the first quarter due to the weakness of the overall equity markets. This loss fell straight to the bottom line; therefore, this had a negative impact of a little over $0.01 for the quarter, which was not anticipated when we gave our guidance for the first quarter. For the second quarter, we anticipate our other income figure to be back to normal, which will be in the range of $200,000 to $500,000.

Looking at our segments, our North American information technology services segment reported revenue of $158.9 million, which was an increase of 7% compared to the prior year. Without the effect of acquisitions, it grew 4.1% on an organic basis. This segment’s gross margin was 30.5% for the quarter, which was up 220 basis points when compared to the prior year. The increase is due to a combination of an increase in temp margins in Modis mainly and a larger percentage of revenue contributed from the Beeline unit which carries a higher margin than the other units. In addition, Modis increased as firm placement revenue as a percentage of revenue to 2.3% from 1.7% in the prior year. SG&A expenses increased when compared to the prior year in each unit as the company made investments over the course of ’07, most notably in our Beeline unit. Our operating expenses were up over 50%, as the revenue base of the company has more than doubled through a combination of organic growth and acquisitions including the most recently announced acquisition of Chimes’ assets in the first quarter. The increase in the expenses in our Beeline unit will begin to temper as we move forward in ’08.

Operating income was $10.8 million, while EBITDA was $13 million, representing an increase of approximately 20% in both of these from the first quarter of ’07. The North American Professional Services segment reported revenue of 179.7 million, which is an increase of 10% compared to the first quarter of ’07. Without the effect of acquisitions, this segment grew 6.6% on an organic basis. This segment’s gross margin decreased slightly compared to the prior year by 40 basis points to 30.5% for the quarter, due entirely because its permanent placement as a percentage of revenue decreased to 5.8% from 6.4% from the prior year. SG&A expenses as a percentage of revenue decreased 40 basis points compared to the prior year. Operating income was $16.7 million, which is an increase of 11.1%, and EBITDA was $17.9 million, which was an increase of 9.5%.

I have to switch over to our international segments. The international IT services segment reported revenue of $81.4 million, which was an increase of 12.5% compared to the first quarter of ’07. Excluding the impact of changes in foreign currency, it was up 11% versus the prior year. The company’s gross margin remained relatively constant from a year-over-year basis at 16.6%, while its direct hire as a percentage of revenue decreased to 2.7% from 3.3% of revenue. Its gross margins increased 40 basis points year over year. SG&A expenses as a percentage of revenue were down 120 basis points from prior year. Operating income was $2.6 million, which was an increase of 79% compared to the first quarter of ’07, and EBITDA was $3.2 million, which was an increase of 56%.

As we look at the international professional services segment, we reported revenue of $147.8 million, up 17.4%. Excluding the impact of foreign currency and an acquisition, international professional segment was up 5.6% versus the prior year quarter. This segment’s gross margin was 30.8%, as compared to 28.1% in the year earlier period. Contract gross margin was up 30 basis points compared to the prior year. Permanent placement revenue accounted for 11.7% of the segment’s revenue as compared to 8.7% in the prior year. This increase in permanent placement percentage was due primarily to the previously announced acquisition of Judd Farris which has a large concentration of permanent placement revenue. The company’s SG&A as a percentage of revenue increased to 23.4%, primarily due to the Judd Farris acquisition as it carried a larger SG&A as a percentage of revenue in its model and also with some investments made in the startup operations in the permanent placements in continental Europe which resulted in overall increase in our cost structure. Operating income was $9.3 million, which was an increase of 14.5% compared to the prior year, and EBITDA was $10.9 million, which represents an increase of 21.2% compared to the prior year.

If we talk about our liquidity and our balance sheet, our balance sheet continues to be strong. Our cash position as of March 31st ’08 was $63.4 million. During the first quarter, we generated $10 million in operating cash flow which was constant with the cash flow from operations generated in the first quarter of ’07. Our CapEx was $4.7 million, and during the first quarter, we repurchased 3.7 million shares of the company’s common stock for $40.6 million. During ’07 and through March ’08, the company has repurchased approximately 11.5 million shares, or roughly 11% of the then outstanding shares of the company’s common stock. The company has 60 million remaining under its most recent stock buyback authorization.

Now, as we move and talk about a little bit of training information, I want to talk about some of the trends as we moved through the first quarter and into April, and I also want to review some of the items we discussed in the year-end call in February. As we talked about in the last call, as we transition from last weeks of December and through the holidays and into January, we experienced a seasonal falloff in temporary head count as we started out January like we did every year. The encouraging trend that we reported before on the temporary side is that the year-end falloff was slightly less than what we experienced at the beginning of ’07, and the rebound in January was very similar to what we experienced in the prior year, except when we considered certain clients that were impacted by the mortgage and housing related slowdown.

On the direct hire side, we generally experienced stronger trends in January ’08 than we experienced in January ’07. So that’s really how we started the quarter out in January. As we moved into February, we continued to experience positive trends on both the direct hire and temporary sides of business. Traditionally, March is usually a strong month, and in a normal economic environment, we should see strong growth throughout March as we exit the first quarter and move into April. The first half of March continued to grow in line with our expectations, though we experienced a flattening of our temporary head count at the end of March and into April. Some of this was definitely attributable to the Easter holiday being in the latter half of March, which is earlier than usual. I think last year, it was in the first two weeks of April. On the direct hire side, we’ve had three of our strongest weeks of 2008 as we exited March and entered into April. So in summary, as we look at the first quarter and moving into the second quarter, we’re seeing a little bit of a mixed signal with early April temporary numbers being flat and direct hire being strong.

As we really look to our second quarter guidance and take those trends into consideration, we’re very cognitive of the economic environment around us and the many comments or forecasting of further slowdown or recession, and we obviously recognize that we will not be immune to either of these situation should they occur. However, our current trends lead us to believe we are still able to grow our business in the current environment as we sit here today. Our expectations are for the second quarter of ’08 for revenue between $560 and $580 million and earning per share of $0.20 to $0.24. The high end of the range would represent a GAAP increase of approximately 8% and an organic growth rate of 6% revenue, while the low end assumes 5% and 3% respectively. The high end of the range assumes we will experience growth in billable head count and permanent placement fees consistent with the rates we experienced in the first quarter, and the low end of the range is an attempt for us to quantify what we believe our results would be if we are impacted during the second quarter by a potential economic slowdown or any changes in the current environment.

Our earnings guidance includes approximately $0.02 per share of total expense resulting from equity comp and assumes our effective tax rate will be 39%. In addition, we estimate our share account to be approximately $92 million in the second quarter based upon our current shares outstanding as of today’s days. So that’s basically our trends and our guidance, and I’ll turn the call back over to you Tim.

Tim Payne

Thank you. To wrap things up before we take calls, I’d like to take just a moment to reflect on how the company is positioned in these relatively uncertain times. It’s been our view for some time that the company will perform its best in both good times and difficult times if we’re diverse and if we’re focused on delivering high-value services to our clients. So to this end, over the past several years, we’ve really made, I believe, a lot of strides in these areas. First of all, we have been able to consistently improve our gross and operating margins by attending to better paying client relationships and by driving more permanent placement sales. We’ve been able to bill permanent placement sales to nearly 6% of our business, and as a longer-term goal, we’d like to bring this eventually to about 10%. In addition, our business has gotten more and move diverse from a service line perspective. Today, IT services represent just 42% of our mix of business, with the remainder represented by various professional disciplines. We’ve grown our global accounting and professional business to over $650 million. We’ve grown our legal business to over $160 million, our engineering business to over $300 million, and our healthcare business to over $100 million. So we believe this service line diversity and some of the strengths we’ve built in these areas will help us to grow in good times and help us to remain more stable in more difficult time. And then finally, as the last point, as most of you know, we’ve had our eyes on expanding significantly outside of just the United States. In just 2007, just 57% of our business was in the United States, and we’ve now expanded to 12 countries. We expect that within the next few years, our business mix will be 50% US and 50% international, with a good part of our international growth occurring in continental Europe, and again we believe that this geographic diversity will help us grow, but also make us less susceptible to a downturn that might occur in any one country in the world.

Once again, thanks all of you for your attendance today. We believe we’re pretty well prepared for whatever the year ahead might bring, and again appreciate your attendance. Operator, we’re now ready to accept questions from the call participants.

Question-And-Answer Session

Operator

(Operator Instructions) We will take our first question from Tobey Sommer with Suntrust Robinson Humphrey.

Tobey Sommer - Suntrust Robinson Humphrey

Thank you. Good morning. I had a question for you on your perm trends in March and April. You said they were some of your better ones of the year so far, and I was wondering if you were describing the overall trend or you are parting out the US trends specifically.

Tim Payne

No, Tobey. That’s the aggregate. If you looked through the aggregate, we had our three strongest weeks of the year of 2008 really at the end of March and the first couple of weeks of April.

Tobey Sommer - Suntrust Robinson Humphrey

Without getting into specific segment details, would that trend hold roughly the same for the domestic piece of the business?

Tim Payne

If you look at the majority of the segments, yes. Obviously, we’re just looking at a 3-week period there, but it was strong in both the US and internationally.

Tobey Sommer - Suntrust Robinson Humphrey

Okay. I wanted to ask a question about how you ended your prepared remarks with the opportunity to expand your international business, particularly in continental Europe. What sort of specialties do you think you will focus on and could there be an introduction of some new ones and new lines of business as you look towards continental Europe?

Tim Payne

Yes, absolutely, and we’ve done this. You might recall that recently we got into the property recruitment business last year, and that’s a good example of some of the new specialties we would expect to bring at this point primarily to Australia and to Asia, but eventually continental Europe as well, but I think the two leading specialties for us as we move across Europe—three if you count perm as a separate specialty—but the two areas would be IT and accounting for us that we would focus on, but in a lot of markets and Germany is a good example, the temp market for professionals is not as well developed as what you might see in England or the Netherlands or Belgium, and so a lot of the business we might find in a place like Germany at this point would be perm, so I think part of what you will see us do is in countries where the temp market is not as well developed, we’ll do what we can with them, but we’ll also try to establish a good permanent search, and then as customs change and temp becomes more prevalent over the next years, we’ll see that grow along with that.

Tobey Sommer - Suntrust Robinson Humphrey

Okay, and then I wanted to ask a question about Beeline. I’ll get back into queue. You had some significant success there, obviously both organically and through acquisition. Those growth rates are impressive. Over time, what do you see as the opportunity there, and just any additional color on what you see ahead of you would be terrific? Thanks.

Tim Payne

Yes, we’re pleased with what’s going on at Beeline, and we’re pleased with the results of the purchase of the Chimes assets that we did in the first quarter. For now, I think the simple goal we have for Beeline, and we’re very close to achieving this is that it really could become the standard for vendor management software, and with the size that we’ve built up now and the good client relationships that we’ve built, we feel very good about where we stand in the market place. We think we’re a clear number one at this particular point in time. It’s hard to say what could happen with Beeline in the future, and we’ve had people ask us questions about does it have the potential to be separated in some way. We are not as focused on that right now. For now, we’re really focused on continuing to build out that business, and the financial contribution that Beeline makes to MPS Group is significant, and we’re pretty pleased with where we are right now, but we know we have to keep working hard to develop that part of our business.

Tobey Sommer - Suntrust Robinson Humphrey

Thank you very much.

Operator

We will go next to Andrew Steinerman with Bear Stearns.

Andrew Steinerman – Bear Stearns

Hi Tim and Bob. My question is about pricing in this environment. Could you describe if there has been any change broadly and in any category in terms of client’s view of value for the types of services that MPS provides and go over what MPS’s philosophy is on volume discounts or competitive pricing situation.

Tim Payne

That’s a particularly question right now with certainly a lot of our clients anticipating a softer labor market, and I think what would be fair to say and some of this is based on our experience back in 2001 is that with the bigger clients they tend to operate kind of in an RFP basis—this is how pricing is set, so when are kind of early in a softening market if we assume that we are, it usually takes a little while for that process to take hold where people go to RFPs and eventually pricing and therefore labor costs ultimately get adjusted, so I guess the direct answer to your question, Andrew, would be I don’t think we’ve really seen a lot of it yet, but we anticipate that we may see it as the year unfolds, and of course for us, we’ve worked very hard over the last few years to try to get our margins up and keep them up, so I think what this is going to mean for us is that we’re going to just have to continue to be very disciplined on margin and we’re going to also have to be selective about which clients we do business with.

Andrew Steinerman – Bear Stearns

Right, and if a client did get a rational on price, there is a willingness to walk away from a client too, right?

Tim Payne

Yes, and I think we think we’ve shown in the UK. That’s probably the best example of it where the pricing with certain clients got really irrational, and we’ve done a fair amount of that in the United States as well, and what it really comes down to for us is we have a finite number of recruiters, and we want to make sure that they are working on requirements for the clients that recognize the value of what we do.

Bob Crouch

I think even if you look at Modis in the US, if you look at them year over year from the first quarter of last year to first quarter of this year, there’s one client in particular that in the latter half of last year we walked away from that is down $7 million in revenue just from last year to this year. So obviously that’s a $28-million annualized decrease in revenue from one client, so it’s a very large client. They started putting the pressure on margins, and we just ended that relationship, and we’re moving on.

Andrew Steinerman – Bear Stearns

And so obviously, MPS has taken a much more rational approach to pricing. When you look at your peer group and other vendors, does it feel like others are also in that mindset?

Tim Payne

No. What’s still difficult about this industry that we are in is that there still is a fair number of private companies out there that are—I won’t call them mom and pap, but they are smaller than we are, and they don’t seem to have the same kind of gross margin and operating margin focus that we do. To that extent that we lose out on pricing, typically firms like these are willing to do their jobs for much lower prices.

Andrew Steinerman – Bear Stearns

Okay. Makes a lot of sense. Thank you.

Operator

And we’ll take our next question from Kevin Mcveigh - Credit Suisse

Kevin Mcveigh - Credit Suisse

Hi Tim, Bob, and Tyra. My question relates to margins. Tim, you did a great job talking about how the company fundamentally has changed since the last cycle. I think from my margin perspective, my sense is even in a slowing environment, we’d see a lot less downside in terms of margins, so I wonder if you could help us frame out a range of overall operating margins across different economic environments.

Tim Payne

Kavin, are we making the assumption here that we are going to continue to hear that we’re going to see some soft of slowing in the future and how does that flow through to operating margins?

Kevin Mcveigh - Credit Suisse

That’s right.

Tim Payne

Okay. Bob, you want to take a stab at that?

Bob Crouch

I think where you’ll see us running ahead, Kevin, is in the fourth quarter I think we got our EBITDA margins up to 7.6%, or in the third quarter of last year. I think this quarter, we are at 6.6%. Obviously some of that is perm, and perm we continue to try to make that a bigger part of what we do. We are trying to push that out to 10% in the future, so if you continue in the economic environment we’re in right now, I think what you’ll see is a gradual improvement, but if things loosen up and a recovery occurs, we’re still trying to get back to an 8% or above EBITDA margin. We are trying to maintain discipline through this cycle, and we don’t think this is going to be a really dramatic economic recession for the high-end employment like it was in 2001, so we think it’s a decent environment right now. There is business to be won, and we’re going to continue to push towards our EBITDA margin goals.

Tim Payne

I think one of the biggest moving parts to look at there if you are trying to develop a model, Kevin, might be to make some assumptions about perm placement revenue, and depending on the severity of a potential downturn, how much would that fall off because Bob, could you maybe comment on the contribution that $1 of perm versus $1 of temp.

Bob Crouch

Yes, obviously for every new dollar of temporary type of assignment we bring in, depending on the unit or the segment, we’re looking to put anywhere from 10 to 20% of the bottom line from that new dollar, but when you look at it from a perm standpoint, you could put 50% or above to the bottom line—40% to 60% depending on the unit, so obviously Tim is right. It depends on that perm does in the cycle.

Kevin Mcveigh - Credit Suisse

Okay. I know I asked this last quarter; I’ll ask it again. You did a great job with the buyback and shrinking the share count, and I was just wondering if you could talk about capital allocation between, again, balancing acquisitions versus the buyback, and how you think about that, and particularly given the $60 million cash on your balance sheet and the unused revolver.

Tim Payne

Yeah, a good way to look at, and we probably will give the same answer, so I apologize if we do—but the way we look at it and trying to think of things is we’re trying to predict our cash flow and really allocating our operating cash flow right now to buying back stock. Obviously the first quarter is always our lowest cash flow quarter, so we went above that, but I think if you think about it, cash flow from operations goes to buying back stock right now and maybe a little bit more if the stock weakness and then the acquisitions are really coming from cash we have on hand and what we have on our facility. I think you’ll see if our stock really got weak, if the economy really turned, and we felt our stock was undervalued, I think you’ll see us step it up on that side, but that’s really the guidelines we’re using.

Bob Crouch

And we continue to try to be opportunistic about acquisitions. In fact, we just closed a mid-sized deal on an IT staffing company in Germany and we’re very pleased with that. We think that’s going to give us a real nice platform to grow on there, so even in these relatively uncertain times, there are still some decent opportunities to do some of the acquisitions that we want to do.

Kevin Mcveigh - Credit Suisse

Thank you.

Operator

Our next question comes from Brandt Sakakeeny with Deutsche Bank Securities.

Adrian - Deutsche Bank Securities

Hi, it’s Adrian for Brandt. I was wondering if you could give us what the share count was at the end of the quarter.

Bob Crouch

Yeah, the share count should be about 92 million based on where we were at the end of the quarter, so if we did not buy back any more shares in Q2, it would be 92 million for the second quarter.

Adrian - Deutsche Bank Securities

Okay. That’s helpful, and I was wondering if you could update us as to what we should expect in terms of SG&A the remainder of the year, at least into next quarter, given that you are still working on the integration of the Chimes acquisition, and it sounds like some of the Judd Farris acquisition even in the third quarter—if we should expect SG&A to stay at this level and maybe also as you push towards your goal of raising perm, if we should expect to see SG&A be slightly move elevated.

Bob Crouch

Yeah, I think right now, in the first quarter, we’re at 22% SG&A as a percentage of revenue, and we’re trying to stay under that number, so 22% is sort of a target line we’d like to stay below, and obviously in the first quarter, we do have a lot of payroll tax resets in the US that increased that number, so I think keeping it below 22% will be possible as we move forward.

Adrian - Deutsche Bank Securities

Thank you.

Operator

We will go next to James Janesky with Stifel Nicolaus & Company, Inc.

James Janesky - Stifel Nicolaus & Company, Inc.

Good morning. A couple of questions—shifting back to perm, your revenues that you are experiencing as you exited the first quarter and into the second quarter certainly are bucking the trend that others are experiencing especially domestically. Could you give us an idea why that is? Did you have a large hiring engagement for a particular client or why your perm trend seems to be stronger than almost everyone else in the business?

Tim Payne

Jim, I think it’s because our perm doesn’t just come from, say, one specialty like accounting. We do a lot of perm in our legal business, which actually really had a pretty darn good first quarter in that business. We do an increasing amount in IT, and the IT perm market has been surprisingly strong as well. We do a little bit in healthcare, very little in engineering—not much there at all, but it’s really because we’ve got maybe a few more moving parts than some folks do.

James Janesky - Stifel Nicolaus & Company, Inc.

Okay. How about your recruiter head count within perm? Have you stopped hiring and are just focused on increasing productivity of your current staff?

Tim Payne

We have not made any substantial increases in the first quarter, if that’s your question. Obviously, we hired last year, but we have not made any substantial increase in the first quarter.

Bob Crouch

We’re making replacement hires, and what we’re doing is we’re also making, again, opportunistic hires. We don’t think certainly at this point things are so bad that it’s time to screech to a halt here. We’ve still got to run the business, so again we’ll monitor the marketplace and our hiring will reflect what trends we think we’re seeing.

James Janesky - Stifel Nicolaus & Company, Inc.

Okay. Shifting to IT flex both North American and international, can you give us an idea of what your customers are communicating to you? Are they saying, listen, we have projects that are ongoing that there’s no way that they’re going to get cut despite what the economic trends are, or are they saying right now, we continue to use you but hold on if the economy continues to soften—we’ll definitely reduce our usage, or just in general, has the sales cycle extended although the revenue trends are nowhere near where they were in the ’01-’02 timeframe?

Tim Payne

It’s all over the board, and we’ll have one client that will say, hey, we’re not going to hire any new people—in essence, we have a hiring freeze—and then we’ll have another one that says, hey, we’re going to hire 300 people in the next quarter. We see some pretty strong demand in the UK market, continue to see it in IT flex, but as we pointed out in the past, the margins are not great there, so we’re probably not going to take advantage of a lot of that demand that we see there, but it’s really a case of mixing. It’s all a question which industry—I think you would see a little more cautiousness coming out of the financial services industries and industries related to real estate, but then you look at other areas—manufacturers and people that are exporting a lot of good right now—and their demand has remained pretty good, so it’s back and forth, but I think the net of it all is that it’s just kind of flat.

James Janesky - Stifel Nicolaus & Company, Inc.

Okay. Thank you.

Operator

We will go next to Clinton Fendley with Davenport.

Clinton Fendley – Davenport

Good morning Tim, Bob, and Tyra. Tim, I’m wondering at Judd Farris, he perm trends there don’t appear to suggest any slowing at all. Could you remind us how much of their perm is solely within the UK versus the rest of Europe?

Tim Payne

Are you talking about Judd Farris in general?

Clinton Fendley – Davenport

Yes.

Bob Crouch

Or are you thinking of Badenoch and Clark—the bigger piece?

Clinton Fendley – Davenport

Well, I mean actually both, if you could comment on overall trend there. What I am hitting at, we seem to be reading that we’re slowing within London, but yet your trends here appear to be pretty strong in light of that.

Bob Crouch

I’ll try to answer it for you Clinton. If you looked in certain segments, like we have a pretty strong practice within Badenoch and Clark in the UK on the financial services side. That’s obviously taken a little bit of a hit there in the first quarter, and traditional B&C, that group has suffered a little bit. Obviously due to the environment over there and the environment here, but if you look at Judd Farris who are the property specialists, they’ve done well. They continue to do well, and I think they’re looking forward to a good second quarter, so they are doing fine there, and as far as their perm, I don’t have it at the top of my head, but I would guess that it’s about 70% in the UK, about 30% from the other international operations they have which are a little bit in Asia and mainly Australia, but it really depends on segment, but perm has held up well, and I think IT perm in the UK is—they are looking forward to a good second quarter there also.

Clinton Fendley – Davenport

Okay, thank you. That’s helpful. Switching gears, on the M&A front, how are the valuations currently there given the slowing economy.

Bob Crouch

Not as bad as ours.

Tim Payne

I think we see a maybe a little bit of softening in valuations, but good quality companies still command a good price, and some of it is a matter of geography. Some markets like the German market, the company that I just mentioned there, the values have remained pretty strong there because there’s a lot of anticipation that’s the German market is going to be strong for some years to come. I think what we’re seeing now, and I think we talked about this a little bit in the past, we’re reaching this employment which has been going from mid 2003, and here we are almost 5 years later, there’s a fair number of owners of business that maybe don’t want to for whatever reason sit through another down cycle and then an up cycle, so we are actually seeing some pretty good opportunities right now where it’s a just a good timing issue for the owner, and we’re able to come in and buy up some companies that we believe are really good quality companies, so it’s a pretty good environment right now.

Clinton Fendley – Davenport

Within the US, are you sensing any urgency given a less favorable tax environment, given the election?

Tim Payne

That’s a great question. That’s one thing that has not come up. I have not heard that comment, but I’ll follow that myself too that if you want to get something done, get it done now, and I think even the accounting rules are changing a little bit as move forward into ’09, which will affect the way companies report acquisitions certainly. There’s impetus to get them done now, if somebody is out there.

Clinton Fendley – Davenport

Thanks guys.

Operator

(Instructions). We will go next to Mark Marcon with Baird & Co., Inc.

Mark Marcon - Robert W. Baird & Co., Inc.

Good morning. I am wondering with regard to your IT business both in North America and Europe, what are some of your earlier indicator whether its number of orders, length of assignment, how long it takes your clients to make a decision?

Tim Payne

There are some things. I think what you are referring there are things you can look at before the actual sale takes place or what happens in the process, and we’re still seeing

a fair number of the job orders which is what the clients give us that maybe slowed a little bit from what we’ve seen in the past, maybe not quite as robust. Some of the things that we see too, you can look at are whether assignments tend to finish when they are expected to finish. In a more robust time, what you see is you see a lot of renewals or see a lot of 4-month contracts being extended to 6-month contracts, and in times like this, you tend to see things kind of finishing right on the button; so, I think if we did look at it, some of those indications may be a little bit of negative change, but again, just to stress, having been through the environment of 2001 to 2003, what we’re seeing now is nothing like that – the job orders involve projects that are under way, so, again maybe not as go-go as times were maybe in 2004 to 2006, but still pretty good environment for IT.

Mark Marcon - Robert W. Baird & Co., Inc.

And how are you thinking about the expenses, and just in terms of your head count, you’ve done just a great job in terms of managing that thus far in the early part of this slow down, how are you thinking about your internal head count going forward, and internal investments going forward to the balance of this year and going into the next year, particularly since you’ve got some areas that are experiencing some good growth and are less cyclically sensitive and other that maybe slightly more cyclically sensitive.

Tim Payne

That’s certainly been by design for us. We’ve been trying to get the business more and more diverse; a good example is, our legal business was very strong in the first quarter, but a year ago maybe it had a quarter that wasn’t as strong but that was made up for by one of our other specialties, so that’s been very much a part of the game plan for us, but in terms of our internal staff, we’re very aware of that. The company is driven by what we call the producers, the sales people and the recruiters and the managers, and all other folks that serve our clients every day – if we do going to kind of a downturn, we’re going to definitely need these same strong people coming out of that and going into the next upturn, so I think what you’re probably not going to see from us is – if things do get worse, you probably are not going to see us pressing a lot of panic buttons and trying to cut cost in a lot of ways – we would probably do, if there was a little bit more severe downturn, we would probably view that as the time to kind of make sure we’ve got all the right people on board and that we’re taking good care of folks and giving the right training and those sorts of things in place – Bob you might like to add something to that..

Bob Crouch

I think that’s right, and I think if you look at what we have added head count, obviously our Beeline unit, we talked about that, where costs are up, but that’s a high growth area like you said, and some of our expansion in Europe through B&C, Badenoch and Clark over there – we’ve added head counts there, but otherwise everybody has been pretty rational. I think one of the earlier questions was what have you done. We have not got any substantial additions to head count this year and last couple of quarters except for those units that not specifically mentioned.

Mark Marcon - Robert W. Baird & Co., Inc.

Can you talk a little bit about if the head count stays somewhat flattish in certain divisions and if there is a revenue decline and a gross profit decline – can you talk a little bit about the flexing with regards to your operating expenses since a lot of it is commission based?

Tim Payne

Yeah, I think we talked about obviously perm. I’ll leave that separate, but if you look at the temp side, in theory, the way it should work is that when we grow without adding people, every dollar of revenue creates 15% let’s say incremental operating margins, so obviously every dollar of temp we lose if we do lose, we would lose 15 cents, 15% on the bottom line. So, it should work that way – we’re looking to keep the best people, and what naturally happens though if we had a period, say, a couple of quarters where revenue decreased, you obviously naturally see lower performers attrite away pretty decent turnover in this industry, so that would naturally take care of it, so you would lose from the fixed cost and things like that for people who are not high performers, but I think like Tim said, we are to make sure our good performers are taken care of and know that they’ve got a great place here at MPS.

Bob Crouch

There would be general adjustments in commission cost – there was some kind of a downturn, you were correct about that.

Mark Marcon - Robert W. Baird & Co., Inc.

Sure, and then can you talk about two areas of exposure – one domestically how much of your business is, generally speaking, coming from financial services firms?

Tim Payne

Financial services which we talked about like about 20% of the top 20 is coming from financial services, so there is a good component of financial services in our portfolio, and obviously one of the clients we mentioned before we actually walked away from – that’s been a decrease in financial services to us.

Mark Marcon - Robert W. Baird & Co., Inc.

Okay, and then out of your international business, you’ve been expanding outside of the UK, what is the UK now as a percentage of both professional and IT – of your international?

Tim Payne

Of our international what is UK? It’s probably about 70% I would say or is that right – 60%, some 65% it looks like

Bob Crouch

Of overall international which, in turn, is I think 43% of it the total.

Mark Marcon - Robert W. Baird & Co., Inc.

Okay great. On the international IT, you’re experiencing good growth there with the margins picking up – can you talk a little bit about what you’re seeing in the IT market in the UK?

Tim Payne

It’s kind of an interesting market because the demand appears to be good, slightly better than what we’re seeing in the United States, however, again as we mentioned, the pricing is not particularly good, it tends to be low margin mark of pricing, so it’s a high demand market, but unfortunately for us, it’s probably not one we’re going to be able to really take advantage of a lot of growth and because the margins are generally too low.

Bob Crouch

It is surprising that it’s holding up as well as it is given that there are some early indications that particularly London may be rolling over.

Tim Payne

Well, it’s interesting – I think a lot of the financial institutions that we do business with a number of large banks there, and I think some of them have not been probably hit as hard as some of the banks in the US, and I think it goes back to like I was talking about before on B&C on the perm side, we have a financial services practice, and that has taken a hit. It certainly has but it goes back to rational hiring, and I don’t think there has been irrational hiring leading up to this like it was in 2001 – so I think when people look at their technology platforms and things like that, I don’t think that’s where they had irrational hiring, but certainly it has rolled over a little bit on the financial services side over that, and we’ve felt that impact, and I think others may have talked about that, like Michael Page and things like that where they are heavy into perm on the financial services side.

Mark Marcon - Robert W. Baird & Co., Inc.

Right, perfect, thank you and good job in a tough environment.

Tim Payne

Thanks Mark.

Operator

Thank you, and then just to remind everyone that it is *1 if you would like to ask a question. We’ll go next to T.C. Robillard with Bank of America Securities.

Thomas Robillard – Bank of America Securities

Thank you, good morning. Just wanted to dive in on the North American IT side, if my math is correct, was like you had some good strength on the contract gross margins – can you just give us a little color there – is that a situation of mix within that revenue mix there or is it a situation you guys have been able to command some better pricing?

Tim Payne

I think T.C. if you look at that, I think we are consistent with the prior quarters that we did experience a little positive bill rate environment – we had bill rates go up; like I said before, we’ve been disciplined and that example of the one customer of 7 million from last quarter are one gone and this quarter we walked away from some business, that’s lower margin, we’ve been disciplined, bill rate environment is positive, so I think we’re doing a good job. I certainly think we can grow up more in the top line if we really want to do – it will be a little less disciplined but it’s really not what we’re after, especially in this environment.

Thomas Robillard – Bank of America Securities

Okay, makes sense. And then, shifting over to North America Profession was hoping to get a little more granularity and a couple of things you called out in your release – first on the special counsel, the legal business, really strong organic growth in the quarter and you said it was attributable to both execution and demand for document review projects – is that kind of a large single document review project, are they short-term in nature – I’m just trying to get a sense as we think about the organic growth trajectory throughout the year, how much tail wind should you be able to get from that?

Tim Payne

What we’ve been doing over the past several years is we’ve been building out a network of what we call turnkey legal centers, and what these are is, these are facilities and they really are only in the major markets; they are in the New York, D.C., Chicago, Houston, and what they’re designed to do, they are facilities that are near where the large firms are based, and what typically happens is a firm will win a very large project, and when they do that, they need to very quickly get a lot of attorneys and paralegals on staff to review documents related to those things – it could be a big class action suit, it could be anyone of a variety of different types of suits, but what they do need is they need a facility and they need people very quickly, and demand for these things kind of goes up and it kind of goes down, but right now, we’re seeing very good demand for these kinds of document review projects, and we’re doing I think a very good job winning these and also fulfilling them as well. So that’s been something over the past couple of years – we’ve been just sort of quietly building out as part of our overall legal business, and we feel in the first quarter we’d certainly perform very well.

Thomas Robillard – Bank of America Securities

It sounds like it’s as much kind of a secular trend as well as kind of a share-gain trend for you guys as opposed to just any specific client in special counsel.

Tim Payne

Yes, that’s absolutely true.

Thomas Robillard – Bank of America Securities

Okay, and then just looking at some of the comments you made again in your release on the accounting principal side – the elimination of the large client, was that in the first quarter or did that happen in the fourth quarter? I’m just trying to get a sense as to when that would anniversary for you guys.

Tim Payne

Yeah, do you see that, that was in the fourth quarter – so that is 100% gone by the first quarter this year, but we had in our last year.

Thomas Robillard – Bank of America Securities

Okay, and then any comments around the lengthening and hiring timelines – it sounds like that’s just anecdotal but I was just wondering if that’s something specific you’re seeing whether its particular region, particular job types.

Tim Payne

Well, I think we’re seeing it primarily in our accounting side and accounting has to be very firm oriented – people tend to hire these folks to full-time jobs, so in times like these where people are a little uncertain, it would make sense that we’re taking a little more time and care hiring full-time people than what they might do if it were a temp or something like that, but it is a little bit anecdotal but it’s definitely there, and again what we’re seeing is primarily on the accounting side.

Thomas Robillard – Bank of America Securities

Okay, and then just lastly, can you give us a sense as to your thoughts on your tax rate over time – I mean you’ve got 40% or so of your business internationally – I’m just wondering if there is anything structurally different with you guys that would prevent your ability to lower your tax rates or does it have to do with the fact that you have just such a bigger exposure to the UK – just any thoughts you can in terms of tax planning over the next couple of years.

Tim Payne

Obviously, one thing that’s – if you don’t seen in our provision and I’ll get to your question I think, but what you don’t see in our provision is that over the next few years we still have a lot of deductible goodwill that obviously gives a say for the first 50 million of free-tax income in the US, we don’t pay cash taxes on, we still book the provision – so that is in there, and that will last. We did most of those deals in late 90s, so 2010, 2011 and it will start to change the dollar amounts if you will, but if you look at early tax rate, if you look internationally, they have lower tax rates than US, and also in the US we get to deal with the joys of state tax rates too, so the US is a higher tax rate environment than it is in England, so the more income we get from over there, it will lower our provision. So, there’s not a whole lot of massive tax planning that really works anymore, so I don’t think you will see anything crazy there, I don’t think you’ll see the provision go up dramatically and it may actually have opportunity to decrease as some of the foreign countries lower the rates.

Thomas Robillard – Bank of America Securities

How should we think about that rate as we’re thinking about you getting too kind of a 50:50 revenue mix over the next several year – I mean are we talking to not get down to 36%, 37% or are we talking more like 100 basis points of differential.

Bob Crouch

You’re talking more in latter.

Thomas Robillard – Bank of America Securities

Okay.

Tim Payne

It’s not going to be greatly dramatic.

Thomas Robillard – Bank of America Securities

Okay, great. Thank you.

Tim Payne

Sure thank you.

Operator

Thank you. There are no additional questions in the queue. I’d like to turn the conference back over to Tim Payne for any additional or closing remarks.

Tim Payne

Okay. Thank you. Again, thanks to all of you for attending. I think you can tell we’re certainly aware of what’s going on in the current environment. We were actually kind of encouraged with our first quarter and how that came in. We were certainly seeing varying economic conditions before going backward, and we think we know how to respond appropriately; so, again, now we’re looking forward to a good year and if things change a little bit, up or down, we’ll just accordingly. So, thank you all once again, and that concludes the call today.

Operator

Thank you. This will conclude our MPS Group Conference Call today and we appreciate your participation. You may disconnect at this time.

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Source: MPS Group Q1 2008 Earnings Call Transcript
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