Good afternoon, ladies and gentlemen, and welcome to the Resources Connection Inc. Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

At this time, I would now like to remind everyone that management will be commenting on results for the Second Quarter Ended November 28, 2020. They will also refer to certain non-GAAP financial measures. An explanation and reconciliation of these measures to the most comparable GAAP financial measures is included in the press release issued today.

Today's press release can be viewed in the investor relations section of RGP's website and was also filed today with the SEC. Also during this call management may make forward-looking statements regarding plans, initiatives and strategies and the anticipated financial performance of the Company.

Such statements or predictions and actual events or results may differ materially.

Please see RGP's report on Form 10-K for the year ended May 30, 2020 for a discussion of risks, uncertainties and other factors that may cause the Company's business results of operations and financial condition to differ materially from what is expressed or implied by forward-looking statements made during this call.

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

finance and accounting, risk and compliance, tax, human resources and project management.

To effectively address this evolution, we have the foresight to acquire Veracity in 2019 to help us build end-to-end digital solutions for our clients who strive to automate workflows and increased collaboration, which has become even more important given the increasingly virtual nature of today's workforce.

The past year has not only reinforced and accelerated the digital mandate for all corporations it has placed an emphasis on the employee experience given remote work which is a specialty of Veracity's. Given an integrated go-to-market plan in fiscal '21, RGP and Veracity are uniquely positioned to capitalize on the emerging trends.

Combining Veracity's robust capabilities around workflow automation, leveraging premier platforms like ServiceNow and Akumina with RGP's deep functional expertise and process orientation. Veracity achieved record revenue during the quarter, and this trend has continued in Q3.

We've also experienced growth in our cross-selling success across the enterprise. With Veracity bringing RGP into project work and vice versa. We expect this positive momentum to continue through the second half of the fiscal year, although remember, Q3 for all parts of our business is impacted by holidays.

With respect to our digital engagement platform development, HUGO progress continues as planned. We have finished the talent management release and that part of the software is an active use with a select set of candidates and internal management. We're on track to bring this digital engagement offering to market by the end of this fiscal year.

We will, however, ensure that the macro environment is stronger and more fully recovered from lock down scenarios when we bring the product to market, and we'll share more detail as that time line approaches.

We're excited that this new digital engagement model will bring transparency, choice, efficiency and speed in striking the right professional match for much sought after talent in the finance and accounting realm. Our second growth priority initiative this fiscal year is to continue to involve our delivery to be more fluid, virtual and borderless.

This initiative is intended to enhance both revenue and earnings as it is directly linked to client acquisition, new and existing and cost efficiency. For example, we've recently closed several projects with consultant teams pulled together from multiple geographies to deliver an exceptional experience for clients.

This type of approach would not have happened pre-COVID when we operated with a more traditional GEO focused mindset. We're also demonstrating that we do not need physical offices to serve clients effectively.

For example, we just closed a new multi consultant engagement on a project out of Des Moines, where we do not have a physical office or go-to-market team. This exemplifies the opportunities we're starting to uncover with new client sets.

As Jen will also outline, we've made strong progress on our real estate consolidation plan, which will continue to drive forward. All of these actions help us continue to streamline our cost structure while bringing our client delivery teams closer together and closer to client buyers. Next, RGP's client continuity was outstanding this quarter.

These retention statistics demonstrate the value-add we bring to clients each and every day. During Q2, we served all of our top 50 clients from fiscal 2020 and 46 of the top 50 from 2019. This stickiness has remained consistent year-over-year despite the global pandemic.

In addition, for Q2, our top 50 clients represented 44% of total revenues, while 50% of our revenues came from 70 clients. Our largest client for the quarter was approximately 3.5% of revenues.

Also during the second quarter, 90% of our top 50 clients procured multiple services or functional expertise from RGP, which demonstrates our ability to build revenue beyond the origins of our finance and accounting routes and is an improving trend as we start the second half of the year.

In closing, I'm also pleased that we've posted to our website today, a new investor deck to kick off 2021. Our new presentation synthesizes our heritage, our exciting future and our relentless focus on shareholder value creation. We've also expanded our disclosure around environmental, social and governance topics.

This is particularly important to us in our efforts to become the employer of choice for high-quality professional talent who want to work differently with a community and company that cares about profit and purpose the importance of diversity, equity and inclusion and operating as a force for good in community and individual life.

The advent of the fifth industrial revolution is here and it will be squarely focused on bringing humanity back to the workplace. When you have a look at our new investor presentation, we think you'll agree that RGP is very well positioned to deliver what talent and clients want today. I'll now turn the call over to Tim for his operational update..

Thank you, Kate, and good afternoon, everyone. During the quarter, we continued to embrace our de facto operating model of virtual delivery and utilization of borderless talent. We saw positive movement in revenue and operating metrics as well as an appreciable increase in project teams working on large client initiatives.

As the overall macro environment began to improve, our weekly revenue and pipeline also gained strength. As Kate touched on, sequential revenue trended up 6.4% on a same-day constant currency basis, buoyed by increased client spend on project initiatives and some seasonal tailwind tied to year-end activities.

Project management and communication became even more important with rising demand as we continue to operate mostly virtually traversing time zones to deliver projects.

We've seen this demonstrated on numerous occasions, whether it be assisting and operational transformation for a West Coast entertainment client, leveraging talent from Honolulu, Miami and Houston, or assisting a Pacific Northwest Healthcare client transformed their delivery in operations with talent from Atlanta, Orange County and the San Francisco Bay Area.

This more seamless matching of supply and demand has allowed us to operate with greater efficiency which was increasingly important as demand continued to rebound during the quarter. Our ability to successfully deliver in a remote fashion provides a critical qualification, which will impact the buying decisions of clients in a post-COVID environment.

We believe the successful evolution of project delivery, coupled with our clients' increased leverage of the distributed workforce has permanently changed our commercial environment.

It opens up our ability to fashion solutions using a mixture of traditional and virtual delivery models, bound together by our strength in Agile Co delivery, project management and commitment to holistic communication.

This new market dynamic will provide a strong foundational underpinning as we enter into the second half of the fiscal year and initiate planning for FY '22, which will include expansion of client programs, leveraging broader market talent for virtual delivery and increased focus on account penetration.

Now let me turn to our second quarter operations. As noted in our first quarter remarks, we began to see a strengthening pipeline and increased daily revenue rates. This strengthening increased throughout the quarter as daily revenue rates reached levels that were the highest since April.

While Q2 demand was still impacted by the pandemic, North America and Asia Pacific saw sequential increases in daily revenue rates.

As did Europe, which I will focus on in a moment, client programs and health care led the charge in North America, which also saw strengthening in key core markets, including Tri-State and the California and Texas markets. Asia Pacific also delivered positive rates and was consistently trending at nearly pre-COVID rates by the end of the quarter.

We neared completion of a significant restructuring in Europe during the second quarter, impacting approximately 40% of the workforce and resulting in a cessation of operations in France and Italy. I am extremely proud of the European team and their unwavering focus on clients and consultants during very difficult economic times.

Despite working through this reorganization, our European practice banded together, renewed its focus on our most important clients and actually increased daily revenue over Q1. Notable growth in demand, especially related to larger projects, also positively drove volume and quality of pipeline.

In fact, activity and pipeline were both strong in the quarter. And while there remains uncertainty related to the macro environment, given current operating trends, we could see sustained progress emerge as we move forward.

While we remain keenly focused on growth and expansion opportunities within existing clients and markets, we are also concentrating heavily on operating leverage and efficiency.

We are utilizing a more virtual and agile footprint, and this new operating style, coupled with continued focus on expense management has yielded SG&A improvements of 4.7% sequentially and 11.1% from prior year quarter after excluding restructuring costs.

We will continue to be judicious about our expense discipline, and we'll continue to invest in areas where we can achieve higher returns. In particular, digital and technology, health care and client programs continue their strong performance and offer opportunity to deepen and widen our relationships with important clients.

Before handing over to Jen, I want to provide some additional insight on early third quarter trends. The early weeks of Q3 have shown a continuation of positive trends in both revenue and growing pipeline with daily revenue up approximately 8% over Q2.

While we remain wary given the fluid macro environment, these positive indicators and some of the news around vaccine development and distribution are certainly encouraging. I will now turn the call over to Jen for a more detailed review of our second quarter results..

RGP's, Taskforce's and Citrix. RGP is over 90% of our business and drives the trends of our consolidated enterprise. Please refer to our press release and Form 10-Q for additional disclosure regarding segments. Now we'll get ahead to Q3.

Average weekly revenues for the first three non-holiday weeks for the quarter was $13.3 million, we expect typical seasonality in the third quarter around our revenue as well as gross margin.

From an SG&A perspective, while we anticipate cost savings from restructuring to continue, we typically experience higher SG&A in Q3 due to the reset of payroll taxes at the start of the calendar year.

Lastly, consistent with our approach last quarter, we will not issue any specific revenue or earnings guidance for the third quarter of fiscal '21, given the ongoing uncertainty as it relates to the pandemic. Now we're happy to take questions..

[Operator Instructions] Our first question comes from Josh Vogel with Sidoti. You may proceed with your question..

My first question, we saw some modest bill pay spread on in the quarter. And I think with regard to bill rates, when you're at the table and you try to win and deliver projects remotely, it doesn't seem affected pricing at all.

I'm curious where you think that is?.

Josh, it's Tim Brackney, Happy New Year. Well, we're -- a lot of the projects that we take on when you think about it, it's most -- there's outcome orientation to it. So if you think about the -- since we don't have to deliver locally, it's really about kind of what expertise do you need to deliver and how is it delivered.

So theoretically, we should be able to get some actual arbitrage from that if we're able to locate from other parts of the country, and we're starting to see some of that. But the reality of it is that, we're basing our bill rates on the project itself versus the locality of the delivery resource..

Understood.

And on the other side, though, with your consultants no longer having the constraint of geofencing, couldn't we assume maybe give you some leverage over time on the pay side?.

Yes. That is -- and we anticipate that. And just -- it kind of comes down to you like this is still a world that everybody is a little bit getting used to.

But as we sort of open up the catalog that allows us to really match talent efficiently, irrespective of locality, as you pointed out, no geofencing of talent, then we will have the ability to think about labor costs in a different way.

One of the advantages that we had, I think, through this is that we didn't really -- we really erred on the side of being fair to our consultants. So as our -- we didn't negotiate downwards, and that was intentional because we want to keep our best talent with us, and we want our platform to be sticky.

And so as a result of that, as demand picks up, that will be an advantage for us as we move forward..

All right. Great. And with the vaccine rollout and getting back to a normal life, hopefully, in the next few months or quarters, do you think that you can and will still have success in selling and delivering remotely.

Is that going to remain the new de facto [indiscernible] model? Or do you expect it to revert back at all?.

Well, I think I definitely think there'll be modulation. But I think the most important thing about this is, when you think about the environment we went to was largely on-prem. And then we went to an environment that was all off-site.

And what we've learned in that move is that there are parts of engagements and access to talent that we could that we can utilize from a virtual perspective. That doesn't mean we need to go all one way or the other.

In fact, we'll start to see, I believe, teams where we'll have some on-site delivery and that will be supplemented by folks who are on-site for part of the time, and some folks who aren't on-site at all just depend on the composition of the team and the project itself..

Sure. Sure. And last quarter, you talked about some challenges on-boarding at new clients due to like some hardware and software constraints. I'm curious if that's eased at all..

It has -- those constraints are still there, but it has eased a bit. I mean, people -- we have a couple of clients to the hardware element of it was a real challenge, and they've been able to kind of get a handle on their own supply chain.

But as more people are working remotely, I think everybody's found this, even in the consumer world, the access to some technology is not as efficient as it once was. It's better than it was in the second quarter, but we still have challenges..

Okay, great. If I could just sneak in two, I know I have a lot of questions. Thank you. You referenced how you're seeing good traction from your most significant client accounts and the health care client base.

So I was just curious how much those clients represent the pay and maybe what that looked like a year ago and even from Q1?.

Josh, I can take that. Our client program revenue represents about roughly around 30% of our revenue -- or our consolidated revenue. And it's grown sequentially to Q1, our client program revenue on a same-day basis grew almost 7%. And health care, health care is roughly around 20% of our North America revenue.

And we've also seen similar growth in health care clients as well, comparing sequentially..

Okay. Great. And just last one, maybe for you, Jen. I just want to make sure I'm calculating the workdays for Q3 and Q4.

Do you have that hand?.

For which quarter, Josh?.

Q3 and 4..

The upcoming Q3, and for Q3, Q3, our North America workdays is going to be officially 63 days. But remember, due to the timing of the Christmas and year's holiday, we do have some adjacent impact of those holidays as well as MLK Presidents Day, even though we're not officially counting them as holidays.

So Q3's holiday impact will definitely be more significant than Q2..

I mean, let me just jump in there, Josh, because we don't have the day off as our roots come from accounting firms. We don't have MLK and President's day off. Many of our clients do. So we always debate should we count that as a working day or not.

I think you err on the side of count - not counting it as a working day, even though we're open because so many of our clients take the day off. Yes. .

And Josh, Q4 in North America, you're looking at 65 days..

Your next question comes from Mark Marcon with Baird. You may proceed with your question..

Good afternoon and Happy New Year. Wondering, can you talk a little bit about the improvement that you're seeing with regards to TRI States, California, Dallas, that all sounds like a marked improvement.

Just what are you seeing exactly? Is it better execution, better leadership or is just the orders are they starting to really increase as you've repositioned?.

Hey, Mark, and Happy New Year. It's -- first of all, let me just say, I mean, we have new leadership in both those markets, and we have focused teams. And so I would start there. I would say we have -- I think we've got the right people in place, and we're definitely executing better.

I would also say, particularly in the Tri-State market, we are seeing some market rebound in financial services, which is nice. In the California markets, we thought we were going to see more impact in the entertainment space there.

And what we've seen is that actually with some of the reorganizations and pivots that, that industry is doing, we're actually getting some tailwind from that and Northern California, where you've got a lot of technology that market, while it kind of paused a little bit, we're definitely starting to see that the tailwind related to technology is strong again.

The Texas markets sort of three distinct markets. You have Houston, Dallas and you have Central Texas. Dallas and Central Texas have really been strong.

And Houston, we have got new leadership there, and we are very hopeful that we'll start to see some pretty good momentum there, but out of all those markets, really with Tri-State and Northern California, starting to see some substantial steps forward in terms of revenue velocity..

That's great. And can you talk a little bit more about this kind of the cadence in terms of orders and how they built up through the quarter and then early into this quarter.

Has there been any sort of pause with regards to the surge in COVID or any hesitancy? Or does it seem like, hey, we've all gotten used to the -- this environment and this uncertainty and people are continuing to build..

Go ahead, Kate..

I'll share a few thoughts, and then Tim can add some specific color. But it feels to us, and our pipe and our revenue trend is telling us that the initial panic and kind of standstill of COVID has given way to decision-making now. So the decisions may look different than they did a year ago, but we are starting to see opportunity open up.

Clients moving forward on large projects, and we don't see a regional distinction. It seems like that's happening across the board with our core client base. And remember, our core client base or the larger organizations that tend to have more budget and firepower, if you will, to move their business forward..

Great.

Can you talk a little bit about the size of Veracity that continues to do really well? How big is it now?.

Veracity hit record revenue, and there -- I don't have that calculation right in front of me, but are, they've had -- on a year-to-date basis, there -- compared to last year, they grew, I think, roughly 8.5%. So it's pretty substantial that improvement..

Great.

I mean, roughly speaking, what percentage of revenue is veracity now?.

I mean, it sounds like HUGO..

I got it. It's roughly 4%. I got to do the math really quick..

Okay, all right, great. And then, HUGO, it sounds like you've got the talent management capabilities up and running. You're going to obviously test it, make sure it works exactly as you anticipate.

What's the next step that you need to, to get to -- just from a technical perspective in terms of being ready for launch? I know you're waiting also for the economy to be in a good position as well so that the launch really has a meaningful impact.

But just wondering where are we from a technical perspective?.

Yes. So, the next element of the platform will be the client side. So that's what we're working to finish right now, Mark. And when we're done with that, we'll be ready to bring the product to market. That will be our minimum viable product, and we'll continue then from there to make certain enhancements. So you're right.

There are two things at play here in terms of our time line. One is our own internal product development, and that is a lot of software development and perfecting the match algorithm. And the second is an assessment of the macro environment and is the environment ready. Because remember, we're going to launch HUGO in an adjacent market.

Not where we operate right now. It's a level or two down from where we operate primarily in finance and accounting. And that kind of work may require more on-premise delivery. So we want to make sure when we launch that the market is healthy and ready for that, if that makes sense..

It totally does. And then with regards to -- obviously, this is fairly recent.

But when we think about solar winds and the implication as it relates to cyber, and your push on digital transformation, what sort of impact are you seeing there? Are you seeing more audit opportunities? Is that meaningful? Is there any sort of slowdown or pause from clients in terms of any sort of initiatives until they get a better handle? What are you seeing from that perspective?.

I mean I'm not aware we're seeing any pause, Tim, are you?.

No..

I think we have opportunity there in terms of assessment work and audit work..

Great.

And then in terms of the gross margins, how much was the health care, the increased health care utilization, a function of the lower gross margin?.

It's roughly about 25%..

Okay.

And so do you anticipate that continuing, Jen? Or do you think that, that was just kind of a blip?.

Yes. I mean the health care trend is a bit unpredictable to a certain extent. I mean, we saw the our health care costs come down right when we entered into COVID, and it started ticking back up in Q1 and Q2 so just depending on where COVID stands and participant behavior, that's a little bit -- that's somewhat hard to predict.

But I think that we've seen some kind of pent-up demand coming back in Q1 and Q2. So I don't know that it's going to materially go up going forward, but it's possible..

Okay. How should we think about the gross margins for this current quarter obviously, there's holidays, there's also going to be the reset in terms of payroll taxes.

So how should we think about that relative to this past quarter?.

Given the holiday impact, it's going to be more significant.

So I think Q3's gross margin is going to be relatively lower compared to this past quarter compared to and if you take into consideration the payroll tax reset, so all of those are contributing factors to a lower -- to a lower gross margin percentage in Q3?.

Yes. I mean, would it be in line with historical seasonal patterns in terms of..

Correct..

Okay. And then how -- and then you said SG&A is going to go up a little bit sequentially, obviously, again, because of the payroll reset and then any sort of new compensation structures but then obviously, the offset is we should have some benefits from the restructuring.

How -- I mean, roughly speaking, how much of a delta should we see in terms of SG&A from a short term perspective?.

Yes. I think the impact of payroll taxes. I'll just give you kind of a reference point. Normally, in Q3, our payroll taxes run about 10% and of our payroll costs versus 7.5% in Q2. So I think roughly, you're looking at -- excluding restructuring costs, you're probably looking at a couple of million or more maybe higher from payroll taxes increase..

Terrific, and then it sounds like in Europe, can you just talk a little bit about how you're able to maintain the revenue while doing the significant restructuring. It sounds like there was a really good performance there..

Yes, Mark, I would definitely say that was the case, and we have a couple of large clients over there where we have been working on both existing projects and expanding our footprint there.

And again, candidly, we have a very engaged and dedicated team there that kind of soldiered through a tough situation and managed to keep our clients happy and make sure that our consultants felt connected to us. So it was, as you pointed out, it's a story of good performance..

Our next question comes from Andrew Steinerman with JP Morgan. You may proceed with your question..

Happy New Year, everybody. I just wanted to focus on the $13.3 million, which was the kind of the three weeks in December trend year-over-year.

What kind of percentage change would that be on a year-over-year basis? And I'm asking on a same-day constant currency basis, thinking about weekly $13 million versus the year ago?.

Based on the first few weeks' trend compared to a year ago, we're roughly down about 9%..

Okay.

And that's same-day and constant currency, right, total company?.

That's right..

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Kate Duchene for any further remarks..

I just want to thank everyone for attending with us today, and we look forward to reporting after our third quarter of fiscal '21. Happy new year, everyone..

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect..