Alice Washington - General Counsel Kate Duchene - Chief Executive Officer Herb Mueller - EVP and Chief Financial Officer.

Andrew Steinerman - JPMorgan Securities LLC Mark Marcon - Robert W. Baird & Co..

Good day, and welcome to the Resources Global Professionals' First Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instruction will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the conference over to, Ms. Alice Washington, General Counsel. Ma'am, you may begin..

Thank you, operator. Good afternoon, everyone, and thank you for participating on this call. Joining me here today are Kate Duchene, our Chief Executive Officer; and Herb Mueller, our Chief Financial Officer. During this call, we will be commenting on our results for the first quarter of fiscal year 2019.

By now you should have a copy of today's press release. If you need a copy or are unable to access it on our website, please call Shannon McPhee at (714) 430-6363. I would like to remind you that we may make forward-looking statements during this call.

Such statements regarding future events or future financial performance of the Company are just predictions and actual events or results may differ materially.

Please see our report on Form 10-K for the year ended May 26, 2018, for a discussion of risks, uncertainties and other factors such as seasonal and economic conditions, such factors may cause our business, results of operations and financial conditions to differ materially from the results of operations and financial conditions expressed or implied by forward-looking statements made during this call.

I'll now turn the call over to our CEO, Kate Duchene..

Thank you, Alice. Good afternoon and welcome to RGP's 2019 first quarter conference call. Here is a quick road map from my remarks.

I will start with an overview of our operating results for the first quarter; second, I will update you on the business of the two acquisitions we accomplished during the past 12 months; third, I will discuss the primary growth drivers in the business this quarter and how we see them continuing throughout the fiscal year; and fourth, I will review our critical enterprise objectives for fiscal 2019.

Our total revenues for the first quarter of fiscal 2019 were $178.6 million, which represents an increase of 26.5% over the first quarter a year-ago. Excluding the revenue from taskforce, revenue increased 23.5%. All three regions were up strong double-digits year-over-year, North America grew 26.1%, Europe grew 36.5%, and Asia Pac grew 15.9%.

We are also pleased by SG&A improvement this quarter. In Q1, our SG&A as a percentage of revenue was 31.6% compared to 33.6% a year-ago, an improvement of 200 basis points. Sequentially, the improvement was 40 basis points. I will talk more about our planned efforts to ensure further progress in a moment.

We achieved $13.2 million in adjusted EBITDA or 7.4% of revenue compared to $7.9 million or 5.6% of revenue in the year-ago quarter. We are pleased by this improvement to our bottom line.

We intended to deliver more profit to the bottom line throughout the year with continued focus on revenue growth, including improved pricing and continued expansion in the business lines with higher margins, coupled with ongoing expense management. Herb will share further detail regarding our financial results during his discussion shortly.

The takeaway from my overview is this, we have invested in organic and strategic growth and it is paying off as revenue momentum takes hold. Over the past two years, we have been focused on building service capabilities beyond staff augmentation into project or strategy execution and solutions deployment.

In North America, these strategies are driving growth across the region, especially in Northern California, Atlanta, Dallas, Denver, and Mexico City. In Europe, the highest performing practice is the UK. In Asia Pac, our China business is leading the growth curve. Next, I want to share a quick update on the two acquisitions we completed in fiscal 2018.

First, taskforce Management on Demand, the acquisition we completed at the end of August 2017 continues to outperform expectations. This business, which is the premier C-level interim and project management firm in Germany serving the middle market is exceeding its revenue trend for this year and is trending up in the second quarter.

We are selling business referred across the taskforce and RGP client base in Germany and around the globe. We are evaluating how we can expand this C-level business to additional markets across the RGP platform.

Accretive Solutions, the U.S.-based finance technology and business transformation firm serving the middle market, which we acquired in December 2017, has performed in line with expectations. We have completed the integration of the majority of this acquired business into RGP’s operations, so it is no longer possible to break out revenue separately.

We know that together we are developing meaningful revenue that we would not have won as independent companies either because of expertise or global reach. The continued standalone business from the Accretive acquisition, Countsy, is performing well, ahead of plan and growing.

This business, which operates with its distinct brand and business model, serves as an outsourced finance and accounting and HR services partner for venture-backed start-ups and spin-offs. Countsy delivered revenue growth in Q1 with improved gross margin year-over-year by more than 200 basis points.

Herb will discuss the legacy Accretive businesses contribution to our results during his more detailed remarks. Now, I will spend a minute talking about the growth drivers this quarter.

First, our solutions practices, especially transaction services and technical accounting have produced strong results in terms of revenue growth, improved bill rates and improved utilization of our salaried-partner level consultants.

Our solutions practices are up 30% year-over-year due to growth in our M&A transactions and technical accounting services. Bill rates for this Talent pool are improving in fiscal 2019. Utilization of our partner-level consultants was up double-digits in the quarter, which reduces SG&A expense and drives more return to our bottom line.

In Q1, the leading driver of revenue is our technical accounting practice. We are working with clients, large and small on data extraction, software implementation and reporting compliance with respect to the new lease accounting standards.

Many of these projects have been winning competition with the Big Four, given that we have invested in partner level subject matter experts who provide the right insights and quality control. Clients tell us we deliver without the friction and cost structure of the Big Four model. The trends in the solution area remain strong as we enter Q2.

Remember, the deadlines for public company compliance for companies with December year-end is January 2019. We foresee continued robust need through calendar 2019 from public companies who have non-December year-end and private companies.

Driving more solution-oriented revenue improves the bottom line because these offerings command higher bill rates and better gross margins. Another notable area of strength is project and change management services for our large global company clients.

I mentioned this on the last call, but it's worth repeating because so many of our clients are executing transformation projects, including technology implementation, process improvement and automation, and significant transactions that are global in scope and are most effectively delivered using a co-execution model.

This means that clients no longer want to outsource execution that deliver with their own staff and a project execution partner. We hear this again and again in our client meetings.

At RGP, we are now even better prepared to deliver this work because over the past 18 months, we have built our own customizable project management and change management framework. We also continue to differentiate ourselves by the level of expertise we bring around the globe delivered by an integrated, dedicated client account team.

Finally, I’ll lay out our priority enterprise objectives for this fiscal year. First, we will remain focused on driving revenue growth. We see revenue momentum taking hold and we do not intend to let go.

Specifically in fiscal 2019, we will accomplish three key initiatives to support revenue growth; improved account planning using new digital tools and process focused to win work in our existing large client accounts; two, developing a stronger middle market client base with marketing automation support and campaign blitzes regarding our solutions; and three, rolling out the improved incentive compensation program for the remainder of the Company.

This will align everyone to grow through reward. The second enterprise objective is gross margin improvement. As I mentioned earlier, we are focused on expanding our mix of services to deliver higher value works, translating to higher bill rates through project and solutions offering.

Since the start of the fiscal year, we have seen bill-rate improvement for new work as we become a recognized partner for our clients beyond the staff augmentation arena.

We are also working hard on developing an institutional pricing approach, ensuring our bill rates for project and solutions work are appropriate and our bill rates for interim and staff augmentation work reflect the caliber of talent we deliver.

Our new incentive compensation program employs both revenue and gross margin targets to drive growth and bill-rate improvement, which connect to reward. We will continue to report on these improvements and the results since benefits to gross margin.

The third enterprise objective is cost containment and reducing SG&A expense as a percentage of revenue as we continue to evolve. We need better leverage between our revenue and talent functions and are exploring lower cost options in the global marketplace for additional talent support.

We are also building a digital platform to enhance the efficiency of Talent acquisition and Talent Management to support a growing business with better leverage. The goal is to reduce SG&A percentage as revenue improves so we continue to enhance bottom line results. Again, we will report on progress against this critical objective.

I’ll now turn the call over to Herb for a more detailed review of our first quarter..

one, bonus payments made during July of $11.8 million; two, share repurchases on the open market of $7.5 million; three, the quarter end coincided with payroll settlement resulting in use cash of $7.4 million; four, repayment of $5 million on our credit facility; five, receivables increased $2.6 million in the final period with the ramp up of revenue activity in August; and six, dividend payment of $3.8 million.

Receivables at quarter end were approximately $138 million, compared to approximately $130 million at the end of the fourth quarter of fiscal 2018. Days of revenue outstanding were approximately 62 days compared to 61 days in the first quarter of fiscal 2018 and 63 days last quarter.

This increase compared to year-ago is primarily the result of increase in sales volume in August. Capital expenditures were $1.1 million during the quarter, net of landlord reimbursements.

We expect CapEx to be in the $4 million to $4.5 million range as a result of multiple office relocations as we work on downsizing our office footprint moving to an open office environment. In the first quarter, we repurchased 468,000 shares. Our stock buyback program has $112.5 million remaining.

We will continue to return cash to shareholders through our quarterly dividend, our rebalancing debt repayment, the capital requirements are growing our business organically and strategically as well as fiscal prudence. Our shares outstanding at the end of the first quarter were approximately $31.5 million.

Now turning to the financial impacts of our Accretive and Taskforce acquisitions. The integration of both our Taskforce and Accretive acquisitions are now complete. The acquisitions are continuing to having a positive impact on our results, contributing over $20 million revenue in the quarter.

This was an estimate for Accretive as we do not have a clear view since we've completed the integration. We reduced Accretive Solutions cost $6 million on an annual basis. These savings include the back office functions and real estate.

We are excited about our acquisitions of Accretive and Taskforce and both businesses are now driving significant new opportunities for revenue growth in their respective markets as well as RGP’s core business and with the Company's existing clients. We are also continuing to identify additional growth opportunities both strategic and organic.

Now I'd like to turn the call back over to Kate for some closing comments..

Thank you, Herb. Looking ahead, we are committed to building on our growth, improving our pricing to increase gross margin results and bringing our cost structure down as a percentage of revenue. We are excited about the work ahead in fiscal 2019 and look forward to updating you as we progress.

Before turning to questions, as we always do, I’ll review our client continuity statistics for Q1. Client continuity remained strong. During our first quarter, we served all of our top 50 clients from fiscal 2018, and 48 of 50 from 2017.

In the quarter, we have 304 clients for whom we provide services at a run rate exceeding $500,000 in fees, and this number is up from 264 in fiscal 2018. In addition, our top 50 clients for the quarter represented 37% of total revenues, while 50% of our revenues came from 106 clients.

Our largest client for the quarter was approximately 2.9% of revenue. At the end of the first quarter, 88% of our top 50 clients have used more than one type of service or functional expertise. This penetration reflects the diversity of relationships we have within our client’s organizations and reinforces the opportunity for growth.

With that, I conclude our prepared remarks and we are now happy to answer any questions..

[Operator Instructions] And our first question comes from the line of Andrew Steinerman from JPMorgan. Sir, your line is now open..

Hi. I was intrigued by the way you're talking about your businesses, your business mix by service line. You obviously referenced solutions, which includes two subsegments and project and change management. And I know it's not the first time you've mentioned these segments, but I don't know what percentages of revenues those segments are.

So if you could share that, if there's other segmentation for us to understand, kind of how the whole comes together?.

Yes. Andrew, I would explain it this way. We're really looking at our business as solution or advisory-oriented, project-oriented and staff aug or interim business. It used to be that we looked at it more functionally by service line or expertise.

Our change management, project management services are squarely in our project business, which is the majority of the Company now at about 65% to 68% of our business, and that's where we see the most growth in our large and very large client base.

Our solutions business is still small, representing less than 10% of our business, but it’s the business that’s growing nicely and also, I think, will be providing higher return for us and better return to the bottom line as we continue to grow that.

And that business is made up – I called out M&A transaction and technical accounting, but that's also where we're developing our data and analytics practices and our robotics and process automation work that we're seeing more and more related to finance transformation work.

That's what you'll see in our solutions business as we continue to grow that..

Okay, great. And just one second question. You mentioned some North American geographies that were strong, Northern California, Atlanta, Dallas, Denver and maybe one other. I wanted to get a sense - Mexico City. Could you give us a sense of how other geographies within the U.S.

are doing Tri-State, Chicago or whatever you think appropriate to call out?.

Right, the two big areas right now Tri-State and Southern California are both right now behind where we wanted them to be. Tri-State has leveled off for a while and we had going back – 18 months ago, we had the big dip that bottomed last year and staying relatively flat. We brought in new management. They are late last fall.

And we're pleased with the activity levels that we're getting, and we’re seeing signs now that the revenue is going to pick up. One thing that we do have that's positive there is some of the revenue that they're generating in the Tri-State area is actually not occurring in Tri-State. It happens in other areas.

Some of the financial services firms have satellite offices in, say, Phoenix, Arizona, Tampa and worldwide. So it's a little tricky and we’re working on that to really get a – really crystal-clear picture that truly some of that work at Tri-State is growing, but it's not all happen that revenue is not all being generated in that market.

So we're encouraged with that. Continuing to work on our mid-market penetration there as well. Los Angeles has been a little bit of a disappointment for us, and then we’re working there. Again, we brought in a new leader this past spring to help try to bolster that and get that going again.

They've been impacted by a fair number of companies moving out of the area. For example, Toyota’s headquarters used to be L.A.-based. They moved to Dallas, and there's been other companies like that. So they've had that impact.

Outside of there when you look broadly across the – well, Chicago is slightly up year-over-year, Dallas is doing well as we mentioned, Houston is slightly up. So overall, we're seeing growth in majority of the offices. There are still some of the smaller ones that could be somewhat flat, but overall we're very optimistic..

Thank you..

Thank you..

[Operator Instructions] Our next question comes from the line of Mark Marcon from Robert W. Baird. Your line is now open..

Good afternoon, Kate and Herb. It sounds like things are, generally speaking, picking up here in North America.

And I was wondering to what would you attribute the go-to-market positioning, the leadership changes versus say just the external macro environment? I know it's hard to completely separate it, but how are you thinking about it?.

So Mark I think it's a function of both. I mean clearly we're seeing some lifting tide from the general economy and the fact that companies have money to spend on transformation projects. So that's always helpful.

But I don't want you after this call to underestimate the sales transformation that we’ve undergone, not only with new leadership, but with new tools that we've invested in for the Company and really the difference in our go-to-market strategy, the accountabilities that we're driving, the transparency we're driving throughout the Company.

And I attribute a lot of success in North America to our President of North America, Tim Brackney, and the energy he brings to driving our business in every region. He is based in Northern California. He used to run our Portland, Oregon office. And I think Tim is a great leader in our organization, and he’s really made a difference with his team..

That's great. And it sounds like – with the exception of Southern California, it sounds like you are feeling better about the individual offices.

Is that a fair statement? Or are there a few more that you are still working through?.

No, I think really we only have two now that are – that I call on the watch list that we're looking at very carefully and Herb has already given you a little color on those, and that’s Tri-State and Southern California. For us in Southern California, it's Los Angeles and Orange County. Our Orange County business is up good double-digits this year.

So it's really reworking our client base and our go-to-market focus in L.A., and I think we have a very strong leader there now. She was an internal promotion, but [exceptionally we think] [ph] from her as we lead that office back to recovery..

Great. And Tri-States, it sounds like it's still on the watch list, but you are seeing signs, some signs of progress..

Yes. We've seen additional personnel change there over the last quarter. And so we're excited. We’ve also hired some new people. So we’re excited about what some fresh ideas can bring, some different experience can bring and some new capabilities. And I think we need that in our Company.

And when I look at the caliber of people we are able to now recruit to the Company and we always have been, but I'm still very encouraged by the level of talent that we're bringing in now..

Great. And then with regards to the guidance from a revenue perspective. You did have the second half of the quarter or year-ago that ended up showing some acceleration.

Was there anything that was specifically like project related that you don't think is going to repeat? Or is there any reason underlying the conservatism with regards to the guidance as it relates to this coming quarter?.

Yes, it’s a combination of things. I mean, we’ve had – last year, there was just – it wasn't any one project and there were just a lot of things that kicked in that really accelerated.

We do tend to get some normal seasonal acceleration after the Labor Day period and people come back and they get geared up, but it's not normally as high as it was last year.

I mean, it was like on the middle of September, somebody flipped the switch and you just saw it happening and we're seeing still some increase here in the last few weeks, but not as dramatic.

And then we've got right now Europe, which has been on fire for the last three years is having – I don't want to say it's a slowdown, but maybe a slowdown in the growth rate. And some of that is something we have a constant challenge with in the companies.

When you have a really hot market, you end up having so much time spent on managing those projects that in some cases, your new business development efforts can slowdown just a little bit, and then that catches up to you. I'm not sure that that's exactly what's happening, but that's generally something that we’ll see.

So I'm not worried about Europe, but I think there could be a little bit of lull in their growth and they could come in somewhat low single-digit growth versus the double-digit that they've seen in the past. So that's part of it right there. And just again, at this past summer normally, sequentially you see a fall off during the summer months.

We did not have that this year. We maintained the weekly revenue run rate through the summer. And so now the question is, will we still get the normal? There's not so much as a rebound, but will we get the full pickup that you get historically after Labor Day? So that's just some of our cautiousness there in what we're projecting..

And related to Europe, is it any specific geography like is it the UK or France or…?.

Well, I’d say the only geography I’d call out is Ireland, and that’s because a big project for a retailer there finished. And as usual, it didn't end early. We knew it was going to end and therefore that’s just a big chunk of work to replace.

Other than that, I think I just visited Europe a couple of different times, and what I heard in that the summer months there were so wonderful from a weather perspective that people took some additional holiday, too. And that also impacts our business development efforts a little bit.

As Herb said, we're not worried about Europe, but it's just hard for any business to sustain the growth trajectory they were on. We haven't really added headcount there. So it’s something we're looking at. And they're working very hard and are very focused under the leadership of our business leader there to ensure that they deliver on plan..

Great. And then you mentioned that the integration is completed with regards to the acquisitions.

But it sounds like we’re going to have like $900,000 in severance in the upcoming quarter, is that right?.

That's right..

What’s that related to?.

It’s a couple of planned exits in the business, but a big chunk of that is that a member of our executive team is leaving the business effective the end of August. So….

Okay.

Who is that?.

Tanja Cebula, who's been with the Company for a very long time and was leading our Talent pillar, and now Katy Conway, another leader, has taken Senior Leadership of Talent, and we'll be working closely with Tim Brackney in North America to continue to build on our momentum..

Okay, great. And then Kate, you mentioned the margins as a couple of the key imperatives of the Company going forward.

Can you give us like an intermediate and a longer-term aspiration both for gross margin as well as SG&A or how you think about the adjusted EBITDA?.

Yes. I'll let Herb take that because he's the one that's been setting forth our long-term financial metrics..

Right. So on a long-term basis, as we look out on our five-year plan, we would like to see the margin creep up and get back up closer in the 39% to 40% range overall, but it's going to take a little while to get there. A part of it is, of course moving more into the solutions practice, the higher bill rates and we’re getting evidence of that now.

We're now closing projects with our partner group billing out now from $250 to $350 an hour. Now it's overall still a small percentage. So it's not moving the needle in a big way, but we'll start to raise the overall tide as we get in and we're doing that kind of work. So that's really important to us.

We've also started a bigger focus on negotiations, improving that and moving that. So we're seeing – I've got a lot of anecdotal evidence that's beginning to work, but it's a much bigger focus now. We’ve made it a major component in our incentive plan this year. But again, I think we'll see some improvement through the course of the year on that.

But ultimately, we'd like that to be over 39%. On SG&A side, in the long-term, we want to see that in the 27% to 28% range, and again, that's a three-year target. And basically, trying to reduce this thing about 1% a year is our internal goal.

So we would like to get this year down as close to 30% as we can and we've got an internal target a little bit better than that, but I'm certainly not going to commit that, but then continue to work that.

But that's primarily a combination of getting the revenue growth and we're being very, very careful right now that we don't want to break the momentum and not fuel the markets that are growing and making sure that we're making the right investments there.

So I'm not going to say that we're going to absolutely reduce SG&A, but as a percent of revenue we should. And hope there is, Mark, that as revenue goes up that SG&A goes up at a rate roughly 60% of the revenue increase, so that you start building that leverage over time..

Got it.

And so ultimately hoping to get to operating margins or EBITDA margins that are going to be closer to the 12% range?.

Right. Yes, 11%, 12% would be our target and we're balancing that with technology investments that we need to make as we move more and more into the digital economy, being ready to be able to support that will be really key. So I don't expect – we’re not going to try to manage this business to have 18% EBITDA.

I think we're going to continue to invest in it and really keep an eye on growth and then really feel like that 11%, 12% EBITDA numbers is a realistic target and one that makes sense for our business..

I’ll just add, Mark, that one of the other investments we've made over the last 18 months is to reinvent our learning and development function here, which we had not been supporting financially for a couple of years before that.

And when you read about trends in talent and human capital businesses, if you're not investing in improving the competencies and the values and the learning environment, you're going to lose. So one of the things I’d say in the Company is investing in our people is the surest way to deliver for our clients.

And to me, that says that's how we build our business. So you're seeing us manage SG&A by investing in some foundational functions in the Company that I think will serve us well over the long-term..

It sounds great. And then my one last question, this is just a backwards looking question, but for Q1 the gross margin was better than what we were anticipating and what you had guided to.

What was the reason for that?.

Yes, medical cost came in lower than we were expecting..

Okay, great. Terrific. Thank you..

You’re welcome. Thanks Mark. End of Q&A And I'm currently seeing no further questions. I will now turn the call back to Kate Duchene for any further remarks..

Great. Thank you, operator. Again, thank you everyone for attending the call and your interest in RGP. And we’ll look forward to reporting on our progress at the end of Q2. Everybody, have a great week..

Ladies and gentlemen, thank you for your participation in today’s conference call. This concludes today’s program and you may all disconnect. Everyone, have a great day..