羅致恆富 (RHI) 2010 Q1 法說會逐字稿

Hello, and 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.

Thank you, and good afternoon. We appreciate your 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, they are subject to risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. We have described 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% from 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 aboard. First quarter revenues for our staffing operations were up 2% on a constant currency basis from the results we reported for the fourth quarter. Our permanent placement operations performed particularly well during the quarter, growing 9% on a 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 pickup in demand, as well as immediately replace workers lost due to turnover. At this point, I'll turn the call over to Keith for a more detailed review of our first quarter financial results.

Thanks, Max. Let's 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 as 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 locations worldwide.

Office Team had revenues of $141 million in the first quarter. This is down 3% from the first quarter of 2009 and also flat sequentially. Office Team 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 a 3% increase sequentially. This division places senior level accounting and finance professionals on a project basis. It has a 149 locations worldwide and makes up 13% of Company revenues.

Robert Half Technology had first quarter revenues of $75 million, down 10% from the first quarter of 2009 and down 1% sequentially. Robert Half Technology places information technology professionals on a consulting and full-time basis and operates 112 locations worldwide and accounts for 10% of Company revenues.

Our permanent placement division, Robert Half Finance and Accounting had 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; it 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 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 temporary 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 costs and the absence of prior quarter workers' compensation credits. This was partially offset by higher temp-to-hire conversion fees. Overall staffing gross margin $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 lower revenues and lower payroll credits for less time charged to vacation and holiday accruals. Protiviti's direct cost 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 costs, staffing SG&A costs 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 costs 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 costs 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 2009. Protiviti SG&A costs 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. The 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,(Sic-see press release) 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 are the trends we observed 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 difficult to gauge trends [perm] over 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 million 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. I'll turn it back to Max.

Thank you, Keith. We were pleased with our first quarter results. While he quarter started slowly, we picked up momentum as the quarter progressed. Unemployment levels remain fairly high in the 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 the performance of our Robert Half Finance and Accounting permanent placement division. Many companies that made deep personnel cuts during the recession are having to quickly hire as business demand grows or when they lose workers due to turnover.

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

Protiviti has diversified its revenue base by strengthening its client relationships and expanding its service offerings in areas such as IT security, IT applications controls, business continuity, and infrastructure management. We are also encouraged by the joint opportunities we are seeing as a result of collaboration between Protiviti and our staffing divisions. 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 costs becomes very clear for the small and mid-sized businesses that make up the largest percentage of our client base. This type of staffing flexibility can be invaluable. At this time, Keith and I will be happy to respond to questions. We ask that you please limit yourself, as usual, to one question and a single follow-up as needed. If you have additional questions, we'll certainly try to return to you later in the call.

(Operator Instructions) Our first question comes from Tim McHugh with William Blair & Company. Go ahead, please.

Yes. I was wondering, 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'd expect gross margin to play out over the next couple of quarters?

I'd say on balance we did better passing through the unemployment costs than we had projected. You note that our sequential change in temp gross margins was down 75 basis points. That effectively is a combination of 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, the conservative 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 more 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.

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

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

Okay. Thank you.

and our next question comes from Ashwin Shirvaikar with Citigroup. Go ahead, please.

Hi, this is Phil Stiller on for Ashwin. I was wondering if you could discuss the expected impact of the health care reform on your business?

Well, 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's some time in the future. We believe much could change before then. There's a staffing industry lobbying group that is very active and planning to get more active as we speak because the bill as drafted doesn't fit very well into the type of employees we have, ie 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 have to be met before we have to pay the excise tax. First our 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.

The biggest uncertainty is what portion of our temporaries will opt into the state exchanges versus what portion will opt to pay the 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 preexisting conditions, you effectively can wait until you get sick 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's absolutely no way to guesstimate how many will opt for the exchanges versus opt to pay the penalty. And furthermore, because there's another three years until it becomes effective, trust me, there's going to be plenty of attempts to change and make this bill more appropriate for firms such as ourselves.

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

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

Okay. That's helpful. Thank you. And can your just comment on what the impact of pricing was in the quarter, and then perhaps if there were areas of strength or weakness by a vertical basis?

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

Okay. And then lastly on the balance sheet, you guys have about $350 million in cash on the balance sheet. You didn't do a buyback this quarter. Could you comment on what level of cash you think is appropriate and what you want to do with that cash?

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 through dividends or repurchases. We bumped our dividend this quarter. As Max said, we spent $20 million of our cash flow for that purpose. We will continue to buy back stock over time. We just chose this quarter not to do so.

Okay, thank you.

And our next question comes from Kelly Flynn with Credit Suisse. Go ahead, please.

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

Well, clearly the good side of that thesis is perm is doing much better early in the cycle relative to temp than it has in times past. As we said in our comments, we believe because many companies cut so deeply, they are aggressively at least reinstating to those levels when they either get more demand or they have turnover. As to how it 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.

All I would add to that, Kelly, is that we said in one of our prior conference calls that we have had an internal program in terms of our marketing efforts, in which we're stressing to small and mid-sized clients that the quality of candidates available has never been higher. And to the extent they want to upgrade their staffs, this is now standing time to hire people that frankly, they may not have been able to attract otherwise. So it's hard to say how much of our success is due to that program and how much is due to other factors. But my guess is they're all involved in the success so far.

Okay. Just going back to that, the thesis I'm talking about is the opposite of what you're seeing. A lot of people are saying that perm is going to lag temp because companies are going to want --or 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. And I just want to know, is it fair to say that's not how you see it?

I think the numbers speak for themselves. And at least so far it says, companies cut so deeply, they're willing to reinstate part of that permanently. I think the numbers speak for themselves so far.

Okay. Sounds good. Thanks, guys.

(Operator Instructions). Our next question comes from Andrew Steinerman with JPMorgan. Go ahead, please.

Hi there. 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?

In the first quarter, Andrew, we did have some severance costs related to our non-US operations. And those severance costs were over $1 million that we would consider nonrecurring. 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. Overall, our thinking is Protiviti will be 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 not only impacts revenues, but because you charge less of your payroll to vacation and holiday accruals, your payroll costs that you report on your P&L actually increase as well.

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

We see it up. We see it up. And even if you look at the seasonal softness, and the first quarter just ended. And if you look back over time, it was not unusual to see double digit sequential declines. This quarter was only 6%, I believe. And that's in large part because they've done a really nice job of diversifying away from a focus on Sarbanes-Oxley.

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

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

Okay. Excellent. Thank you.

And our next question comes from Sara Gubins with Bank of America. Your line is open.

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

It's our small business clients. It's broad based. It's not necessarily any one vertical. Maybe financial services is a little stronger than some of the other industries. But because we're so diversified at the client level, because of our small business focus, so is the demand. What was uniform is how all companies cut very severely their full-time staff. And as we just said, they're certainly willing to reinstate at least some tranche of that.

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

We, for over 20 years, are always looking at smaller deals, in new verticals, new geographies, that pipeline continues. Every single quarter we look at something. That hasn't changed. The pipeline is there. I think we have a very high bar as far as what we actually do, which time shows. But we're still active and looking.

I guess I'm wondering how multiples are trending at this point?

I don't think our view into that market is comprehensive enough to make a statement about multiple trends.

Okay. Thank you.

Thank you. And our next question comes from Vance Edelson with Morgan Stanley. Go ahead, please.

Hi. Thanks a lot. 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 if we assume it will continue to be the faster growing business. What impact do you think that will have on the overall margins?

It will have a very good impact. If you look this quarter, virtually 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 measured in one-year increments. This past quarter, the incremental margins were even better from perm coming off a very low base, obviously. So we're very optimistic that we can get outsized incremental margins for perm as perm recovers.

That's great. As a follow-up, how do you expect SG&A to trend from here? You kept it fairly flat sequentially, and it's well below the year ago levels and the peak levels. And yet, you've also managed to keep the sales teams largely intact. Is that a reason for optimism that you may be able to continue to contain the spending going forward?

The largest portion of our SG&A is the payroll cost for our internal staff. They have very variable compensation plans. So those costs will float with revenues. As revenues improve, so will the payouts to those people. So rather than looking at it on an absolute basis, I would look at it relative to the revenues. We will begin to leverage our fixed cost. But the larger cost is largely a variable cost.

Got it, thanks.

Thank you. And our next question comes from Tobey Sommer with SunTrust.

Hi. This is Frank in for Toby. Can you give a little color on bill pay spreads in some of the temp segments in terms of Accountemps, Office Teams and technology.

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

Great. And can you highlight any areas of geographic strength or weakness in Europe or Asia?

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 than 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 slightly in Germany; we were up nicely in Australia; we were down in Japan.

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?

The buyback program we have a little over 5 million shares. Equity based comp was $14 million, which is about what it's been running -- maybe a little bit light of what it's been running, per quarter.

Great. Thanks very much.

Thank you. And our next question comes from Paul Ginocchio with Deutsche Bank. Go ahead, please.

Thanks for taking my question. 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? Thanks.

Well, 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, restart projects and getting the restarts to happen is always somewhat challenging. It was a little more challenging than we expected. You they happen get to February, which is already a short month. 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 had two big a hurdle to overcome with what had happened in January and February.

Great. And any idea what the weather impact was? Can you size that at all?

We're not big on weather impacts. We kind of noted, smiling, that one of the banking firms did a temperature-adjusted snow analysis, and that what's more important than precipitation is temperature. So I think that kind of puts into context. We don't go there.

Okay.

It hurt, but we're not going to try to quantify it.

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

Tax rate was low. We had a nonrecurring credit of about $1.4 million during the quarter. We would expect the go- forward rate to be 40%, 42%. But we did get a little credit.

Thank you.

and our next question comes from Jim Janesky with Stifel Nicolaus.

Thank you. 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? Are you -- 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 we're hearing, that that might come back down?

I think it's as simple as companies collectively said we cut too much. We cut too much. And we need to reinstate at least part of that. And I think it's no more complex than that.

As I said earlier, Jim, all I would add to Keith's comment is that the typical small to mid-sized business owner is very entrepreneurial, and they recognize opportunities when they present themselves. Right now they do have the opportunity to hire people they couldn't hire before. We've been banging away at that for quite a few months. And I do think some of that is they're upgrading; they're hiring people that weren't available in the past to them.

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 per -- 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?

That is correct. There have been no structural changes in how we compensate or our business model generally in perm placement.

And then just a quick follow-up on the compensation, noncash charge. Is there a separate one, than that $14 million, Keith, for restricted stock?

That is restricted stock. The options is now de minimus. We stopped doing that in 2004.

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

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

Hi, guys. Good afternoon. 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 were more technology based or IT-type skill set. What is the mix of your consultants? I assume people 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.

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. I guess 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's resource base to match its revenue opportunity. So, as we see it here today, we don't have some major out of balance between our resource base and demand.

Is there anything else you're seeing on the horizon here other than just companies starting to come back? Some projects they've delayed that could give a jump start to demand for this business?

I think companies have been particularly tight on any discretionary spending. I think they loosened those purse strings as things get better. Even internal audit budgets have been under pressure because in companies' quest to save costs, they've reduced their internal audit budgets. I think those began to come back.

We're getting more and more traction with joint staffing and Protiviti engagements. Many times, staffing introduces Protiviti. The 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 in need discovery; we've done well in our restructuring operation. We're bullish about the Protiviti future.

We've tried very hard to keep the resource base intact as best we can. Clearly we could take it lower now and get better short-term results from that. It just seems unwise, giving that we're right at the end of the great recession or right at the beginning of the great recovery, to make a major further reduction in their resource base. Again, might we lose a few million dollars next quarter because we're hanging tight to our resource base? That's possible. But in the long term, we think that's the right thing to do.

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?

What has been really interesting is that at the top line for the last couple of years, it's interesting to us how closely the top line for Protiviti has moved with the top line of staffing. They're within a few percentage points of each other. The top lines have not been very different. Protiviti's cost structure is less flexible, and strategically, that's something we'll work on for the future. But Protiviti's top line hasn't acted much differently than staffing's top line. That's been on the downside, so I'm not so sure on the up side it should act that differently either.

Okay. Thank you.

Our next question comes from Kevin McVeigh with Macquarie. Go ahead please.

Great, thanks. If I read your comments right, it seems like perm is trending a little bit better, as is Protiviti, on the top line. 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 this just more conservatism in the guidance?

We try to be conservative. What we reported was in the range of guidance we gave last quarter. It seems that the better you do historically, the more people jump to the high end or above your guidance. We always try to be conservative. Sometimes it ends up being conservative. Sometimes it doesn't. But we're just trying to call it as we see it.

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?

We broke even in the fourth quarter of last year. Again, using the resource base, 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 the Protiviti to make money. And just like their higher fixed cost structures worked against us on the downside, it should work for us on the upside.

Got it. Okay. Thank you.

And our next questions comes from Paul Condra with BMO Capital Markets. Your line is open.

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

That was the number I gave. It was $14 million and change.

$14 million for the quarter.

For the quarter. That's correct. And that's down; I think it was $15 million last quarter. It's been in that range, $14 million, $15 million, for a few quarters in a row now.

That's the expense from the cash flow?

Excuse me?

The actual expense from the cash flow statement.

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

Okay. Got it. And then, I just want to return to health care really quickly. Not so much about how it might impact your health care 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 health care. Something that might create a tail wind for your business in the future?

To the extent this makes a full-time person relatively more expensive, they need to be more confident than ever that they have a full-time position. And therefore, one could argue that from a demand standpoint, that's a plus.

All right. 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.

No accounting overall. It's essentially either provide minimum levels of coverage as defined, or pay an excise tax in lieu of that. And again, the 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. As I said earlier, we're going to work hard with our industry group to make it more appropriate for the industry that we're in.

Great. And then just lastly, can you give any detail around capital expenditures, what you're looking for this quarter?

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 in double rent from one place to the other. But after that, we'll actually have less rent going forward that we paid going -- in

Okay, great. That's all I have. Thank you.

And our next question comes from John Healy with Northcoast Research. Go ahead, please.

Good evening, and thank you for taking my call. 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 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?

Traditionally, in accounting and finance, the second quarter from a seasonal standpoint is an okay, not a great quarter. Busy season is over. 10-Ks have been filed. Proxies have done. So it's never seasonally a great quarter in accounting and finance generally. It's an okay quarter.

Typically, our consulting divisions, management resources and technology, because the first quarter received a slow startup in January, you have three full months in the second quarter. So sequentially, you typically do a little better in our consulting operations than you do the other. But it's not by leaps and bounds. So, there aren't any big stories, seasonal patternwise in the second quarter versus the first.

Okay, great. And then when you look at the performance of Office Team in the first quarter and how you expect that in the second quarter. The results were pretty decent I thought. And I was wondering if it was a little bit ahead of what you thought it might be trending and what you're expecting going forward.

Traditionally, the office administrative market picks up a little sooner than accounting does. It's not totally unexpected that they did a little better. We were pleased with Office Team. They had a little bit of sequential growth, as did our others. Clearly, we're seeing some improvement across the board. We are seeing more in perm than in temp, but we are seeing US, non-US improvement. The pace of that improvement is a little uneven. It's more measured than we would like. The traditional pattern would be, what happens in light industrial today happens in accounting-finance a couple, three quarters later.

And 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 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?

When you're starting at zero or below, the margins and incremental margins are one and the same. As we've said, if your look back at the history of Protiviti, there was a time when it had 20% operating margins. It had the highest margins in the company, and life was good. Then Sarbanes-Oxley fatigue set in, and life wasn't so good. They've 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 well very well in the United States getting back on the path. We've made strides outside the United States. We still have work to do. We are focused on that. We are cautiously optimistic that consolidated, we can get back to double-digit operating margins, all of which would be incremental.

Great, thank you.

Thank you. Our last question comes from Kelly Flynn with Credit Suisse. Go ahead, please.

Thanks for taking another one. 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 a decline -- much less of an operating 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? Or is this indeed --

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

Okay, makes sense. That's very helpful. Thanks.

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

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