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Robert Half International Inc. (NYSE:RHI)

Q1 2010 Earnings Call

April 27, 2010 5:00 pm ET

Executives

Harold M. Messmer, Jr - Chairman of the Board and CEO

M. Keith Waddell - Vice Chairman of the Board, President and CFO

Analyst

Tim McHugh - William Blair & Company

Phil Stiller - Citigroup

Kelly Flynn - Credit Suisse

Andrew Steinerman - JP Morgan

Sara Gubins - Bank of America

Vance Edelson - Morgan Stanley

Frank Pinkerton - SunTrust

Jim Janesky - Stifel Nicolaus

Gary Bisbee - Barclays Capital

Kevin McVeigh - Macquarie

Paul Condra - BMO Capital Markets

John Healy - Northcoast Research

Operator

Welcome to the Robert Half International Conference Call to discuss First Quarter 2010 Financial Results. Our hosts for today's call are Mr. Max Messmer, Chairman and CEO of Robert Half International and Mr. Keith Waddell, Vice Chairman, President, and Chief Financial Officer. Mr. Messmer, you may begin.

Max Messmer

Thank you and good afternoon. We appreciate you are joining us. Before we begin our prepared remarks, I would like to make customary comments on the call to the effect that this call contains predictions, estimates and other forward-looking statements.

These statements represent our current judgment of what the future holds, they include words such as forecast, estimate, project, expect, believe, guidance, and similar expressions. While we believe these remarks to be reasonable, but they are subject to risks and uncertainties that could cause actual results to differ materially from the forward looking statements.

We describe some of these risks and uncertainties in the press release issued today and in our SEC filings. We assume no obligation to update the statements made in this conference call.

Now let's review the first quarter results. Revenues for the first quarter were $737 million, down 10% in the first quarter of last year. Income per share for the quarter was $0.05 down 7% from the first quarter of 2009.

Cash flow from operations was $15 million during the quarter, capital expenditures were $8 million. In January we raised our quarterly cash dividend to $0.13. Our total dividend paid to stockholders was $20 million during the first quarter. We are beginning to see improvement in the demand for our professional staffing services as a result of better economic conditions in North America and abroad.

First quarter revenues for our staffing operations were up 2% on a constant currency basis from the results we’ve reported for the fourth quarter. Our permanent placement operations performed particularly well during the quarter growing 9% on the constant currency basis versus the fourth quarter of 2009.

We believe this relates directly to the depth and the severity of personnel cuts made during the recession. Many businesses have had to hire at the first sign of a pick and demand as well as immediately replace workers lost due to turnover.

At this point, I will turn the call over to Keith for more detail review of our first quarter financial results.

Keith Waddell

Thanks Max. I'll start with company-wide revenues as Max indicated reported revenues in the first quarter were $737 million down 10% from the first quarter of 2009 and essentially flat on a reported basis sequentially. There were 62 billing days in the first quarter, the same that the first quarter of 2009 and the same as last quarter.

Revenues for Accountemps were $289 million in the first quarter, this is down 12% from a year ago and flat sequentially. Accountemps is our largest staffing division accounts for 39% of company revenues. There are 360 Accountemps location worldwide.

OfficeTeam had revenues of a $141 million in the first quarter, this is down 3% from the first quarter of 2009 and also flat sequentially. OfficeTeam is our administrative staffing division, it represents 19% of company revenues and has 323 locations worldwide.

First quarter revenues for Robert Half Management resources were $93 million. This is an 18% decline from one year ago and at 3% increase sequentially. This division places the senior level accounting and finance professionals on a project basis. It has 149 locations worldwide and makes of 13% of company revenues. Robert Half Technology had first quarter revenues of $75 million, down 10% in the first quarter of 2009, and down 1% sequentially.

Robert Half Technology places Information Technology professionals on a consulting and full time basis, it operates 112 location worldwide and account for 10% of company revenues. Our permanent placement division Robert Half Finance and Accounting have revenues of $49 million in the first quarter, this is a decline of 3% in the first quarter of last year, and an increase of 7% sequentially. This business was established in 1948 operates 360 locations worldwide.

It accounts for 7% of company wide revenues. International staffing operations had revenues of $191 million, down 7% from the first quarter of 2009, and flat sequentially. On a constant currency basis revenues for our international staffing operations were down 16% compared to the first quarter of last year, but up 4% sequentially.

We have staffing operations in a 103 locations in 20 countries outside the US; international staffing operations represent 29% of total staffing revenues. First quarter revenues for Protiviti were $90 million, 11% lower than one year ago and 6% lower than last quarter. Formed in 2002, Protiviti is a global business consulting and internal audit firm providing risk, advisory and transaction services. It has 61 locations in 17 countries and accounts for 12% of total RHI revenues.

Protiviti's international operations represent 29% of total Protiviti revenues. Turning to gross margin, first quarter gross margin in our temporarily and consulting staffing operations was $201 million or 33.6% of applicable revenues. This compares with 34.7% of revenues for the first quarter of 2009 and 34.5% of revenues for the fourth quarter of 2009.

The first quarter sequential decline is the result of higher state unemployment insurance cost and the absence of prior quarter workers' compensation credits. This was partially offset by higher temp-to-hire conversion fees.

Overall staffing gross margin was $250 million for the first quarter or 38.6% of staffing revenues. This includes the gross margin from our temporary and consulting operations, as well as our permanent placement division, which grew from 7.1% to 7.5% of staffing revenues during the quarter.

First quarter gross margin for Protiviti was $18 million or 20.6% of Protiviti revenues. This compares to 10.4% of revenues in Q1 2009 and 28.7% of revenues in the fourth quarter of 2009. Gross margins declined from the fourth quarter largely due to seasonal factors. These included low revenues and lower payroll credits for less time charged the vacation and holiday accruals. Protiviti’s direct costs for the quarter were down $19 million versus a year ago and up $3 million sequentially or 21% and 5% respectively.

Turning to Selling, General and Administrative cost, staffing SG&A cost for the quarter were $230 million or 35.5% of staffing revenues, this compares to $247 million or 34.3% of revenues for the first quarter of 2009 and $229 million or 35.7% of revenues for the fourth quarter of 2009. Staffing SG&A cost for the quarter were down $17 million versus one year ago, and up $1 million sequentially or 7% and 0% respectively.

First quarter SG&A cost for Protiviti were $26 million or 29% of revenues, this compares to $30 million or 29.2% of revenues for the first quarter of 2009, and compares to $27 million or 28.4% of revenues for the fourth quarter of 2009. Protiviti SG&A cost for the quarter were $4 million lower than one year ago and $1 million lower than last quarter.

Operating income in the first quarter from our staffing divisions was $20 million or 3.1% of staffing revenues. Temporary and consulting divisions contributed $17 million of this amount or 2.8% of applicable revenues. First quarter operating income for our permanent placement division was $3 million or 6.4% of applicable revenues. The operating loss for Protiviti was $7.6 million in the first quarter or 8.5% of revenues. Protiviti's engagement demand during the quarter was strong in IT security, IT application controls, merger integrations and restructurings.

Accounts receivable were $373 million at the end of the fourth quarter with implied days outstanding or DSO of 46.1 days compared to 45.5 days at the end of the first quarter one year ago.

Now let's turn to guidance. Here the trends we absorb in our business during the first quarter and the first weeks of April. On a same day sequential basis, revenues from our temporary and consulting divisions decreased in January, decreased in February and increased in March. Revenues for our permanent placement operations decreased in January, increased in February and increased again in March.

During the first three weeks of April revenues from our temporary and consulting businesses were down 3% compared to the same period last year. For the first three weeks of April, revenues from our permanent placement division were up 28% compared to the same period last year.

As we've said before it's very difficult to gauge perm trends over such short periods of time. Taking into account these trends and the improving but still uncertain economy, we offer the following second quarter guidance. Revenues $730 to $780 million, income per share $0.03 to $0.08. As you know, we limit our guidance to one quarter. The estimates we provided on this call are subject to the risks mentioned in today’s press release. Now, I’ll turn it back to Max.

Max Messmer

Thank you, Keith. We were pleased with our first quarter results while the quarter started slowly, we picked up momentum as the quarter progressed. Unemployment levels remain fairly high in United States and in some of our other geographies. But we have started to see renewed staffing demand. As we noted earlier on the call, we were particularly pleased with performance of our Robert Half Finance and Accounting Permanent Placement division. Many companies have made deep personal cuts during recession are having to quickly hire as business demand grows or when they loose workers due to turn over.

We’re optimistic about our business prospects as the economy continues to gain momentum. As we’ve discussed on prior calls, we’ve kept our domestic and international office networks largely intact. We’ve retained our best people. We are supporting our strong brand names to marketing activities, and we’ve invested in technology to further increase productivity in our field operations.

Protiviti has diversified as revenue base by strengthening the flat relationships in expanding its service offerings in areas such as IT security, IT applications control, business continuity and infrastructure management.

We are also encouraged by the joint opportunity we are seeing as a result of collaboration between Protiviti and our staffing division. We do believe that one effect of this recession has been wider adoption by companies of flexible staffing models in a difficult economy, the benefit of having variable labor cost becomes very clear. But the small and mid size businesses that make up the largest percentage of our client base, this type of staffing flexibility can be a liable.

At this time, Keith and I will be happy to respond the questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Tim McHugh with William Blair & Company.

Tim McHugh - William Blair & Company

Yes. Keith, if you could elaborate on the state unemployment taxes. How much of that has been pushed through, and then how that impacts that as well as the improvement in temp-to-perm conversion fees impact how you would expect gross margin to play out over the next couple of quarters?

Keith Waddell

I will say on balance we did better passing through the unemployment cost than we had projected. That our sequential change in gross temp gross margin was down 75 basis points that effectively as a combination of our 100 basis point decline due to unemployment plus the absence of the workers comp credit, we got during the fourth quarter, and we got a 25 basis point pick up in conversions. Going forward it's conserve thing to do is to model flattish gross margins for the next quarter or so. On the one hand we do expect to continue to make progress passing through unemployment. That said, the conversions can be volatile and therefore to be conservative, I wouldn’t necessarily assume we’ll see that kind of bump in conversions, although it’s quite possible.

Tim McHugh - William Blair & Company

How far have conversions fees come back for you? Can you give you us a sense of the magnitude, I know they were highly depressed or they just barely off the bottom or have they spiked back up to normalized type of levels?

Keith Waddell

They’ve gone from highly depressed to depressed, and so they’re still very low.

Operator

Our next question comes from Ashwin Shirvaikar with Citigroup..

Phil Stiller

Hi, this is Phil Stiller for Ashwin. Could you discuss the expected impact of the health care reform on your business?

Keith Waddell

As you know, health care reform and the requirement to either provide coverage or pay an excise tax doesn’t become effective until 2014, that sometime in the future, we believe much could change before then there as a staffing industry, lobbing group, that is very active and planning to get more active as we speak. Because the bill as drafted doesn’t fit very well and to the type of temporary employees.

Further given how it's currently drafted, it’s very hard to estimate what the cost is going to be, because all of the following [happened] to be met before we have to pay the excise tax first, and temporaries have to average 30 hours per week for a given month.

Second, they actually have to enroll in State Insurance Exchanges, and finally they have to have their income below certain thresholds, all of which have to be present before we’re obligated to pay the excise tax. I think the biggest uncertainty is what portion of our temporaries will opt into the state exchanges versus what portion we’ll opt to pay to personal penalty.

Understand that at least initially that personal penalty is only 1% of your income and further understand that because you can’t be excluded due to pre-existing conditions, you effectively can wait until you get set to sign up. Many pundits believe that for those reasons many will in fact opt for the personal penalty which would totally alleviate our cost on their behalf.

The point being it’s really early, there is absolutely no way to guesstimate how many will opt for the exchanges versus opt to pay the penalty and furthermore because there is another three years until it becomes effective, there is going to be plenty of attempts to change and make this be more appropriate for perm such as ourselves.

Phil Stiller - Citigroup

What percent of your current temp staff do you provide health insurance for?

Keith Waddell

We have a policy, we make available to temporaries at their cost, very few choose that either because they are covered by their spouse's plan, they are covered by COBRA, from their prior employer or they simply opt not to enter the cost.

Phil Stiller - Citigroup

Can your just comment on what the impact of pricing was in the quarter and then perhaps comment if there were areas of strength or weakness by a vertical basis?

Keith Waddell

Okay. Pricing, year-over-year prices were down 4.8% that's roughly in line with what it last quarter. Sequentially compared to last quarter price were down 1.4%.I would observe that we noticed in our count of separation particularly that our more transactional positions which carry lower bill rates did better than did the higher level positions meaning there is a mix impact in that minus 1.4%.

Phil Stiller - Citigroup

Lastly on the balance sheet, you guys have $350 million of cash in the balance sheet, you didn't do buyback this quarter, could you comment on the level of cash you think is appropriate and what you want to do with that cash?

Keith Waddell

Long term our strategy hasn’t changed. We continue to look for opportunistic acquisitions. We’ve also been fairly consistent in returning cash to shareholders either to dividends or repurchases. We bumped our divined this quarter as Mac said, we spend $20 million of cash flow for that purpose. We will continue to buyback stock over time, we just chose this quarter not to do so.

Operator

Next question comes from Kelly Flynn with Credit Suisse.

Kelly Flynn - Credit Suisse

So a fair amount has been made in this recovery of the thesis that, companies are going now favor temps over permanent employees due to the shellshock of the recent downturn and related themes. But your perm turnaround is quite striking. I'm wondering in might of what you're seeing in perm versus temp, if you may revisit that thesis give us any related thoughts?

Keith Waddell

Well clearly the good side of that thesis is as perm doing much better early in the cycle relative to temp that it hasn’t times past, and as we said in our comments, we believe because in many companies cut so deeply they are aggressively at least reinstating those levels when either get more demand or they have turnover.

As to our how are they impacts temp traditionally light industrial and manufacturing lead the professional level temporaries whether that will play out this time or not remains to be seen, but that's typically the traditional pattern. Clearly perm is stronger and we’re pleased that perm is stronger than you would expect it to be at this time.

Max Messmer

I'll add to that Kelly, as we've said in one of our prior conference calls that we have had an internal program in terms of our marketing efforts and which we’re stressing to our small and midsize class, that the quality of candidates available has never been higher, and to the extent they want to upgrade their staffs, this is an outstanding time to hire people that frankly they may not been able to attract otherwise. So it's hard to say how much of a success due to that program and how much is due to other factors, but my guess is that all involved in the success so far.

Kelly Flynn - Credit Suisse

Okay. Just going back to that there was the thesis I'm talking about is serve the opposite of what you're saying. A lot of people are saying that they think perm is going to lag temp because companies are going to want a lag temp by a greater margin than it normally does because companies are going to feel more comfortable using temps because of all the turmoil we have seen over the last couple years. Is it fair to say that's not how you see it?

Keith Waddell

I think the numbers speak for themselves when at least so far as companies cut so deeply they’re willing to reinstate part of that permanently. I think the numbers speak for themselves so far.

Operator

Next question comes from Andrew Steinerman with JP Morgan.

Andrew Steinerman - JPMorgan

Could you go into the Protiviti losses a little bit more? Was there anything in there that would be one time in nature in the first quarter? And how do you see Protiviti and Protiviti margins faring in the second quarter?

Keith Waddell

In the first quarter Andrew we did have some severance cost related to our non-US operations, and those severance cost were over a $1 million that we would consider non-recurring. The second quarter, we would expect a return to profitability in the United States. We expect improving operations outside of the United States, they may still have a small loss, so overall our thinking is Irotiviti will breakeven to having another small loss, but clearly an improvement over what was just reported. As we said in our remarks, the first quarter is Protiviti’s seasonally slowest quarter and that played out again and it is not only impacts revenues, but they cause you charge less of your payroll to of vacation and holiday accruals. Your payroll cost that you report in your P&L actually increases well.

Andrew Steinerman - JP Morgan

And how do you see revenue trending for Protiviti in the second quarter versus the first?

Keith Waddell

We see it up even and if you look at the seasonal soft this into first quarter just ended, and if you look back overtime. It was not unusual order to see double digit sequential declines this quarter was better than that, this quarter was only 6% and that’s in large part because they have done a really nice job of diversifying away a focus on Sarbanes-Oxley.

Andrew Steinerman - JPMorgan

But you wouldn't say the Protiviti second quarter particularly is the best quarter, right?

Keith Waddell

Absolutely not, the second half seasonally is much better for Protiviti but the current taking for the second quarter is that they will see sequential improvement in their revenues, both in the United States and outside the United States.

Operator

Next question comes from Sara Gubins - Bank of America.

Sara Gubins - Bank of America

Could you talk a bit about who is doing the hiring and that is driving your perm business?

Keith Waddell

It’s our small business clients. it's broad based. It's not necessarily any one vertical maybe financial services are little strong than some of the other industries. Because we are so diversified at the client level, because of our small business focus so is the demand. But what was uniform is how our company’s cut very severely their full-time staff, and as we just said they are certainly willing reinstated at least some tranches of that.

Sara Gubins - Bank of America

And then you mentioned in terms of priorities for uses of cash, potential acquisitions. Could you give an update on the acquisition pipeline?

Keith Waddell

For over 20 years are always looking to smaller deals and new verticals, new geographies that pipeline continues every single quarter we look at something, that hasn't change, so the pipeline is there. I think we have a very high bar as far as what we actually do which time shows. But we are still active in working.

Sara Gubins - Bank of America

How multiples are trending at this point?

Keith Waddell

Our view into that market is comprehensive enough to make a statement about multiple trends.

Operator

Next question comes from Vance Edelson with Morgan Stanley, go ahead.

Vance Edelson - Morgan Stanley

As long as perm is currently exhibiting a faster growth rate, could you provide a little color on the margin implications from the perm side of the business picking up, especially we assume it will continue to be the faster growing business. What impact do you think that will have on the overall margins?

Keith Waddell

It will have a very good impact than in fact if you look at this quarter virtually a 100% of the incremental revenues fell all the way to the bottom line. We’ve talked about traditionally, your incremental margins in perm are more like 35%, at least kind of measured in one year increments, but this past quarter, the incremental margins were even better for perm coming up a very little base obviously, so we’re very optimistic that we can get outsized incremental margins for perm as perm recovers.

Vance Edelson - Morgan Stanley

How do you expect SG&A to trend from here? You kept it fairly flat sequentially, and it’s still well below the year ago levels and the peak levels and yet you’ve also managed to keep sales teams largely intact. So, is that a reason for optimism that you maybe able to continue to contain spend going forward?

Keith Waddell

Well the largest portion of our SG&A as a payroll cost for internal staff. They have very variable compensation plans, so those cost will float with revenue, so as revenues improve so well the payouts to those people. So rather than looking at it on an absolute basis, I would look at it relative to the revenues than we will begin to leverage our fix cost, but the larger cost is largely a variable cost.

Operator

Next question comes from Tobey Sommer with SunTrust.

Frank Pinkerton - SunTrust

Hi. This is Frank in for Tobey. Can you give a little color on bill pays spreads in some of the temp segments in terms of Accountemps, OfficeTeams and Technology?.

Keith Waddell

There are huge differences relative to the bill rate changes I just talked about in the aggregate, because in customers are largely the same, the spreads by division haven’t changed that much. As we said earlier, we were pleased with the amount of the unemployment, we were able to pass through, we still got work to do, but we are well on our way there.

Frank Pinkerton - SunTrust

Can you highlight any areas of geographic strength or weakness in Europe or Asia?

Keith Waddell

Well, in the United States, the West Coast and the Southeast didn’t have the February storms, so clearly for the quarter they did better for that reason alone. If we want to take a quick tour of the world, we did sequentially better in Belgium, we were up in the UK, we were up in France, we were down slight in Germany, we were up nicely in Australia, and we were down in Japan.

Frank Pinkerton - SunTrust

Okay, great and if I could sneak in a couple of numbers questions. What was equity based comp for the quarter and how much is left on the buyback program?

Keith Waddell

The buyback program we have little over 5 million shares, equity based comp was 14 million which is about what has been around and maybe a little bit lighter what’s it been around per quarter.

Operator

Next question comes from Paul Ginocchio with Deutsche Bank.

Paul Ginocchio - Deutsche Bank

Revenues came in just below the midpoint of the guidance range, which seems a little unusual for the economic indicators, we've been seeing for the last couple of months. Where was the weakness versus your expectations three months ago?

Keith Waddell

I think we got off to a little slower start in January than we expected. As we talked on the last call particularly in management resources and technology you restart projects and getting those restarts to happen is always somewhat challenging. It was little more challenging than we expected. You didn't get to February which is already a short month and that was exacerbated by the weather in the Northeast. We get to March, we had an extremely good March. We were very pleased with March. We just had two big hurdles to overcome with what had happened in January and February.

Paul Ginocchio - Deutsche Bank

Any idea what the weather impact was, can you size that at all?

Keith Waddell

We will not dig on weather impacts, we kind of noted smiling that one of the banking firms did a temperature adjusted snow analysis, and what’s more important than precipitation is temperature. So I think that kind of puts in the context, we don’t go there.

Paul Ginocchio - Deutsche Bank

Is your tax rate was a little low in the quarter. What do we expect for the rest of the year?

Keith Waddell

Tax rate was low. We had a non-recurring credit of about $1.4 million during the quarter. We would expect the go forward rate to be below 42%. But we did get a little credit.

Operator

Next question comes from Jim Janesky with Stifel Nicolaus. Your line is open.

Jim Janesky - Stifel Nicolaus

It seems Max and Keith, like now you’ve bucked two trends within perm. In your favor, we are hearing that folks are using more temps, and then we’re hearing that the small to medium-sized business market is pretty weak as well. Are you entirely attributing that to just back filling in jobs. Were folks holding off on senior level jobs as well, is there any expectation that after you back fill in, because of the other trends that we’re hearing, that might come back down?

Keith Waddell

I think it is a simple last company collectively said, we cut too much, and we need to reinstate at least part of that, I think it's no more complex than that.

Max Messmer

As I said earlier, Jim all I would add the Keith comments, the typical small to mid size business owners very entrepreneurial and they recognizes opportunities when they present themselves right now they do have the opportunity to hire people they couldn’t higher before, and we have been banging away of that for a quite a few months, and I do think some of it is simply they are upgrading, they hiring people, they weren’t available in the past to them.

Jim Janesky - Stifel Nicolaus

Okay. And then on the margins going forward, definitely that is the incremental margins are very high in perm. But you haven’t changed anything to the model or to the pricing structure or to the number of people in there versus the placements you expect that should change the trajectory of the margins cycle to cycle, right? They should be as strong at the peak in this cycle as they were in past cycles. Is that correct?

Keith Waddell

That's correct, no structural changes and how we compensate or our business model would generally in perm placements.

Jim Janesky - Stifel Nicolaus

A quick follow-up on the compensation, non-cash charge. Is there a separate one, than that $14 million, Keith, for restricted stock?

Keith Waddel

That is restricted stock.

Jim Janesky - Stifel Nicolaus

Okay.

Keith Waddel

The options are not de minimis. That's we stop doing that in 2004.

Jim Janesky - Stifel Nicolaus

Right. I must have misheard. Thanks for the clearing that up.

Operator

Next question comes from Gary Bisbee with Barclays Capital.

Gary Bisbee - Barclays Capital

In the list of areas where you said that Protiviti has seen some strength in engagement, I might have heard it wrong, but it sounded like three of the four you mentioned were more sort of technology based or IT-type skill set. What is the mix of your consultants? I assume people who are doing IT are not also finance and accounting people. And is demand, as you see it unfolding here, positioned with the mix and skill set of your people? Or could we have a situation where demand picks up, but you still have part of the work force that's going to be far underutilized for a while?.

Keith Waddell

Well, clearly the IT area, the IT controls more specifically area has been more robust for us, that said we've had some very good internal audit renewals this quarter. We had a very high profile competitively bid new internal audit win for the quarter. We didn’t mean to leave internal audit out, but the facts are that everything technology related, particularly, technology development related has been hotter, but we’ve evolved Protiviti resource based to match its revenue opportunity. So as we sit here today, we don’t have some major add a balance between our resource base and demand.

Gary Bisbee - Barclays Capital

Is there anything else are you seeing on the horizon here other than just companies, maybe starting to comeback from projects that delayed, that it could give a jump start to demand for this business?

Keith Waddell

Well I think the companies have been particularly tied on many discretionary spending, I think they lose in those for streams as things get better. Even internal audit budgets have been under pressure, because in company’s quest to save cost, they’ve also reduced their internal audit budgets. I think those begin to comeback. We’re getting more and more traction with joint staffing and Protiviti engagements, many times staffing introduces Protiviti provides the project management skills, staffing provides the arms and legs, we’ve had some very nice wins of nice seven figure projects, where we’ve gone to market together.

So there are a lot of small incremental wins that collectively add up, we’ve done well e-discovery, we’ve done well on our restructuring operation, we were bullish about the Protiviti future. We’ve tried very hard to keep the resource base in tact as best we can, clearly we can take it lower and now and get better short-term results from that. It just seems unwise giving that where right of the end of the great recession or right at the beginning of the great recovery to make a major further reduction in your resource base. So again might we loose a few million dollars next quarter because we are hanging tight to our resource base that possible, but in the long term we think that’s the right thing to do.

Gary Bisbee - Barclays Capital

That makes sense and the last question. From what you can see right now, is there any reason to believe that this business would recover, at say a different pace than the temporary staffing business? Are there different things going on, demand drivers that make you think it would come back more quickly?

Keith Waddell

What’s been really interesting is that at the top line for the last couple of years it's pretty interesting to us how closely the top line for Protiviti has move with the top line of staffing. They are within the few percentage points of each other. Of the top line haven't been very different, Protiviti's cost structure is less flexible and strategically that something will work on for the future, but Protiviti's top line hasn’t acted much differently this staffing top line, and that’s been on the down size, so I am not so sure on the upside it should acted differently either.

Operator

Next question comes from Kevin McVeigh with Macquarie.

Kevin McVeigh - Macquarie

If I read your comments right, it seems like perm is trending a little bit better, as is Protiviti on the top line, it moves it the range of the guidance overall, it is probably as expected relative to the street. Are there any areas that are underperforming expectations or is it just more conservatism in the guidance?

Keith Waddell

Well, we try to be conservative, what we reported this quarter was within the range of guidance we gave last quarter. It seems that the better you do historically, the more people are jumped at the high end or above your guidance, but we always try to be conservative. Sometimes it ends up being conservative, sometimes it doesn’t. We’re just trying to call it as we see it.

Kevin McVeigh - Macquarie

What run rate is Protiviti sized for now? If you look at the people that are in the unit, what type of revenue could they generate, annualized?

Keith Waddell

Well, again using the resource base being essentially we broke even in the fourth quarter of last year, we made a little money in the third quarter of last year. We’ve taken the resources down a little bit from that time, so you don’t have to look back very far to see what the revenue base needs to be for Protiviti to make money, and just like their higher fixed cost structures worked against us on the down side, it should work for us on the up side.

Operator

Next question comes from Paul Condra with BMO Capital Markets.

Paul Condra - BMO Capital Markets

On the stock comp really quick, what was your expense in the quarter?

Keith Waddell

That was the number I gave it was $14 million in change.

Paul Condra - BMO Capital Markets

$14 million for the quarter?

Keith Waddell

For the quarter that’s correct.

Paul Condra - BMO Capital Markets

Okay

Keith Waddell

And that’s down I think it was 15 last quarter. It has been in that range 14, 15 for our few quarters in a row now.

Paul Condra - BMO Capital Markets

The actual expense from the cash flow statement?

Keith Waddell

That’s the expense that’s added back to the cash flow statement.

Paul Condra - BMO Capital Markets

Okay and then just want to return to healthcare really quickly. Not so much about how it might impact your healthcare offerings. Have you heard anything along the lines of clients who may see this bill as requiring them to somehow augment or change the way they’re accounting for their own healthcare?. Something that might create a tailwind for your business in the future?

Keith Waddell

Well, to the extent this makes a full-time person relatively more expensive, they need to be more confident then ever that they have a full-time position. And therefore, one could argue that from a demand standpoint that supplies.

Paul Condra - BMO Capital Markets

Okay. There’s nothing specific about the legislation though, that maybe requires some accounting overhaul that you might expect a benefit from. I realize it’s a ways down the road?

Keith Waddell

No accounting overhaul, it's essentially either provide minimum levels of coverage as defined or pay an excise tax in lieu of that and again this staffing industry where you have very short periods of stay with certain employees, they come in, they come out, they come in, they come out. It’s just not very conducive to the intent of the bill, and as I said earlier, we are going to work hard with our industry group to make it more appropriate for the industry that we’re in.

Paul Condra - BMO Capital Markets

Can you give any detail around capital expenditures, what you’re looking for this quarter?

Keith Waddell

We gave a $40 million to $45 million estimate for the year. The biggest piece of that we’re moving our back office operations as we speak about six miles away and in fact for the second quarter we’ll have about $2 million and double it from one place to other, but after that we’ll actually have lesser unit [going forward] and we paid going in the past.

Operator

Next question comes from John Healy with Northcoast Research.

John Healy - Northcoast Research

When you look at the second quarter guidance, I was wondering if you could talk a little bit about the temp side of the business maybe from a division unit where you may expect to see more strength or maybe more weakness. If it is any different from what you saw in the first quarter and if anything's driving that?

Keith Waddell

Well, traditionally in accounting finance, the second from seasonal standpoints an okay not a great quarter, busy seasons over. 10-K have been filed, proxies have done. So it’s never seasonally a great quarter in accounting finance generally. It’s an okay quarter. Typically, our consulting divisions manage, resources and technology, because the first quarter included up a slow start up in January, you have three four months in the second quarter, so sequentially you typically view a little better in our consulting operations than you do the other, but it’s not by leaps and bounds. So there is any big stories seasonal pattern wise in the second quarter versus the first.

John Healy - Northcoast Research

When you look at kind of the performance of OfficeTeam in the first quarter and maybe how you expect that in the second quarter. With that business unit, the results were pretty decent I thought. And if that was maybe a little bit ahead of where you guys thought it might be trending and maybe what you're expecting going forward?

Keith Waddell

In traditionally, the office administrative market picks up a little sooner than an accounting does, and so it's not totally unexpected that they did a little better. We were pleased with OfficeTeam and they had a little bit of sequential growth as did our others. In clearly, we are seeing some improvement across the board. We’re seeing more in perm and intent but we are seeing US, Non-US improvement as a pace of that improvement is little uneven, it's more measured than we would like, but the traditional pattern would be, what happens in light industrial today it happens in accounting finance a couple three quarters later.

John Healy - Northcoast Research

Right, perfect and then last question, Protiviti, seems like an opportunity there for some pretty good incremental margins at some point the end of this year or next. Could you just talk about how those incremental margins should trend once you get into a period where there's meaningful revenue growth over the break even point?

Keith Waddell

When you are starting at zero or below that total margins and incremental margins are one and the same. As we have said if you look back at the history of Protiviti there was a time when it had 20% operating margins, it has the highest margins in the company and life was good, then Sarbanes–Oxley fatigue set in and life wasn't so good. They have diversified significantly away from that, we don’t expect to see 20% operating margins in Protiviti but we certainly expect to see double digit or at least 10% operating margins in Protiviti. We’ve done very, very well in the United States getting back on that path. We’ve made strides outside the United States, we still have work to do, and we’re focused on that. We are cautiously optimistic, we are consolidated, and we can get back to double digit operating margins all of which would be incremental.

Operator

Our last question comes from Kelly Flynn with Credit Suisse.

Kelly Flynn - Credit Suisse

Question also relates to the Q2 guidance. You're guiding the same that you did for the first quarter. You said that you expect much less of an operating income decline at Protiviti. So, I'm wondering, what's the offset there? Is there some type of erosion or decline in operating income on the rest of the business?

Keith Waddell

We expect incremental margin performance across our lines of business in the second quarter. We always hedge to that to some degree on the low side numbers that we give out, just to be prudent. Our current expectations would be either that we would see operating income growth in perm to Protiviti or a smaller loss at a minimum in Protiviti in the second quarter, and like we back off at that somewhat and get more conservative for the loan numbers we give out. That's the high end of the range we have year-over-year growth in every sector for the first time in years. So it would be an inflection point at the high-end of our guidance we’d have year-over-year growth in temp, perm and Protiviti. At the low end of our guidance ,we’d have year-over-year growth in perm and Protiviti which still be slightly often temp. So we are getting very close to an inflection point at either end of the range.

Max Messmer

That's all we have time for today. We appreciate your interest. Thank you very much.

Operator

This concludes today’s teleconference. A taped recording of this call will be available for replay later this evening through 8:00 p.m. Eastern on May 4th. The dial in number for the replay is 800-374-0934 for inside the United States, or for outside the United States country code plus 1-402-220-0680. Once again, the dial in number for the replay inside the United States is 800-374-0934 or for outside the United States, country code plus 1-402-220-0680. This conference call will also be archived in audio format in the investor center at www.rhi.com. Thank you for your participation.

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