Kate Duchene - CLO and EVP Tony Cherbak - CEO and President Nate Franke - CFO and EVP

Kevin McVeigh - Macquarie Research Andrew Steinerman - JP Morgan Securities Equities

Good day, ladies and gentlemen, and welcome to Resources Global Professionals' 2016 Second Quarter Fiscal Earnings 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 during that time. [Operator Instructions] As a reminder to our audience, this conference is being recorded. Now, I will turn the call over to Kate Duchene, Chief Legal Officer. You have the floor.

Thank you, operator. Good afternoon, everyone, and thank you for participating today. Joining me on the call are Tony Cherbak, Chief Executive Officer; Tracy Stevens, Chief Operating Officer; and Nate Franke, our Chief Financial Officer. During this call, we will be providing you with comments on our results for the second quarter of fiscal year 2016. By now, you should have a copy of today's press release. If you need a copy and are unable to access via our website, please call Patricia Marquez, at 714-430-6314, and she will be happy to fax a copy to you. Before introducing Tony, I would like to read an important announcement about certain statements that we may make during this call; specifically, we may make forward-looking statements, in other words statements regarding future events or future financial performance of the company. We wish to caution you that such statements are just predictions and actual events or results may differ materially. We refer you to our Form 10-K report for the year ended May 30, 2015 for a discussion of some of the risks, uncertainties, and other factors, such as seasonal and economic conditions, that may cause our business, results of operations, and financial condition to differ materially from 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 Tony Cherbak.

Thanks, Kate. Well, good afternoon and welcome to Resources' second quarter call. I'm going to start by giving you a brief overview of our second quarter operating results. Total revenue for the second quarter of 2016 was $150.9 million, representing a $600,000, or 0.4% decrease quarter-over-quarter and a 1.8% increase sequentially. On a constant currency basis, revenue increased by 1.7% quarter-over-quarter and 1.9% sequentially. Second quarter gross margin was 39%, a 30 basis point improvement sequentially and a decrease of 20 basis points from the prior year quarter. During the second quarter, our SG&A costs were $43.2 million versus $43.6 million in the comparable quarter a year ago and down approximately $800,000 from last year. In Q2, we generated adjusted EBITDA and cash flow from operations of $17.1 million and $15.3 million, respectively. For the quarter, our pretax income was $14.8 million. Our GAAP net income was $8.7 million, or $0.23 per share. Our GAAP net income includes a $0.01 per share negative impact of accruing for a European legal case. Offsetting this was a $0.01 per share positive impact related to the reversal of approximately $290,000 of tax valuation allowances. During the second quarter, we returned $9 million to shareholders, as we repurchased approximately 294,000 shares of our common stock at an aggregate cost of $5.3 million and paid our quarterly dividend totaling $3.7 million, or $0.10 per share. Now let's talk about revenue trends. As we reported in October, weekly revenues during the first five weeks of the second quarter totaled $57.2 million. During this period, weekly revenues averaged $11.4 million per week. During the following four weeks of the quarter, average weekly revenues increased to $12.4 million per week, then tailed off in the first three weeks of November, averaging $12 million per week. The last week of the quarter, which was Thanksgiving week, revenue was about $8 million. The decline in November was felt across all of our geographies. From a geographical standpoint, revenue in the U.S. was flat quarter-over-quarter. Europe's quarter-over-quarter revenue decreased 8.9% in dollars, but increased 3% in constant currency, while Asia-Pacific increased 10.4% in dollars and 17.7% in constant currency. Based upon the first three non-holiday weeks of December, it appears the weekly revenue decline experienced in November has reversed, as weekly revenue has averaged $12.4 million versus the $12 million weekly average experienced in the non-holiday November weeks. With that, I'll now turn the call over to Nate for a detailed review of our financial results.

Thanks, Tony. As mentioned, revenues for the quarter were $150.9 million, a quarter-over-quarter decrease of 0.4% and a sequential increase of 1.8%. On a constant currency basis, consolidated revenue increased quarter-over-quarter by 1.7% and 1.9%, sequentially. Now, I'll discuss some highlights of our revenues geographically. For the second quarter, revenues in the U.S. were $122.5 million, essentially flat quarter-over-quarter and up 1.2% sequentially. For the second quarter, total revenues internationally were $28.3 million, down 3.4% quarter-over-quarter and up 4% sequentially. International revenues were $29.3 million in the second quarter a year ago. International revenue accounted for approximately 19% of total revenues for the quarter versus 18% in the first quarter. Europe's second quarter revenue decreased 8.9% quarter-over-quarter and increased 15% sequentially, while the Asia-Pacific region saw second quarter revenues increase 10.4% quarter-over-quarter and decrease 3.6% sequentially. On a constant currency basis, total international revenue increased 7.5% quarter-over-quarter and 5.1% sequentially. On a quarter-over-quarter and sequential basis, the U.S. dollar was stronger against most currencies in Europe and Asia-Pacific. As a result, on a constant currency basis, Europe's quarter-over-quarter revenue would have increased 3%, while Asia-Pacific's revenue would have increased 17.7%. On a sequential basis, Europe's revenue increase would have been 15.8% and Asia-Pacific's revenue decrease would have been 2.7%. Let me now discuss early revenue trends for the third quarter of fiscal 2016. Weekly revenues for the first five weeks of the third quarter totaled $50 million and were $12.6 million, $12.5 million, $12.1 million, $6.9 million during Christmas week, and $5.9 million last week during New Years. Using the most recent average non-holiday weekly run rate of $12.4 million over the remaining weeks of the third quarter and adjusting for the Martin Luther King and Presidents Day holiday, we would achieve third quarter revenues of approximately $148 million. This computation is purely mathematical and does not consider potential increases or decreases in weekly run rates over the balance of the quarter. Now, let me discuss gross margins. Gross margin for the second quarter was 39%, versus 39.2% in the second quarter of fiscal 2015. Gross margin was approximately 50 basis points higher than anticipated and results primarily from lower than anticipated healthcare costs. Excluding reimbursable expenses, our second quarter gross margin was 39.7%, compared to 40% in the second quarter a year ago. The average billing rate for the quarter was approximately $120, compared to $119 in the first quarter and $122 in the year-ago quarter. The average pay rate for the second quarter was approximately $60, compared to $59 in the first quarter and $61 one year ago. Please remember, these hourly rates are derived based upon prevailing exchange rates during each given period. We expect gross margin in the third quarter of fiscal 2016 to decline by approximately 230 basis points from the second quarter's gross margin, primarily due to the reset of payroll taxes on January 1st and the impact of holidays during the quarter. For the second quarter, gross margin in the U.S. was 40.1% and our international gross margin was 34.4%. Now to headcount, for the second quarter, the average consultant FTE count was 2,554. This compares to 2,504 in the previous quarter and 2,514 in the year-ago quarter. Quarter end consultant headcount was 2,645 versus 2,631 a year ago. Total headcount of the company was 3,407 at quarter end. Selling, general and administrative expenses for the second quarter were $43.2 million, or 28.6% of revenue, an $800,000 decrease from $44 million and 29.6% of revenue in the first quarter of fiscal 2016. SG&A was $43.6 million, or 28.8% of revenue, in the second quarter of fiscal 2015. The sequential decrease is primarily due to the stock compensation charge of $890,000 included in SG&A in the first quarter. Additionally, SG&A for the second quarter was slightly better than anticipated, due to lower compensation and benefit related costs. We anticipate SG&A expenses in the third quarter of fiscal 2016 to increase approximately $400,000 from the second quarter level of $43.2 million. The increase is primarily due to the reset of payroll taxes, offset in part by lower marketing expenses. Stock compensation expense was $1.4 million, roughly similar to the amount reported in the first quarter, excluding the impact of the accelerated vesting of stock options. We would anticipate quarterly stock option stock compensation expense in the upcoming quarter to approximate the amount recorded in the second quarter. At the end of the second quarter, our office count was 68, 45 domestic and 23 international. Related to the other components of our financial statements, depreciation and amortization was $911,000 for the quarter, similar to the amount recorded last quarter. We would expect depreciation and amortization expense for the upcoming two quarters to approximate $900,000. Our adjusted EBITDA, or cash flow margin, which we define as EBITDA before stock compensation, was 11.3% in the second quarter, compared to 10.6% in the first quarter and 11.5% in the second quarter of fiscal 2015. Our pretax income was $14.8 million for the quarter. During the second quarter, we recorded a provision for income taxes of $6.2 million, representing an effective tax rate of 41.5%. Our effective tax rate was approximately 70 basis points better than anticipated, primarily due to the reversal of the $290,000 of tax valuation allowances. Our effective tax rate is impacted by our current inability to offset income in tax jurisdictions in which we are profitable with losses in several tax jurisdictions in which we are not profitable. Our GAAP tax rate for upcoming quarters is difficult to predict and could be volatile, as the rate will be dependent upon several factors, including the operating results of our U.S. and foreign locations, each of which are taxed or benefited at different statutory rates and the offset of the tax benefit of foreign losses in certain locations by valuation allowances. On a cash basis, our tax rate was about 42% and we expect that rate to continue over the next couple of quarters. For the third quarter of fiscal 2016, we anticipate a tax rate of approximately 44.5%. In summary, our GAAP per share income was $0.23 during the second quarter and includes the offsetting $0.01 per share impacts of the tax valuation allowance reversal and the accrual for a legal matter related to our European operations. Now to the balance sheet, cash and investments at the end of the second quarter were $110.1 million, an $8.9 million increase from the end of the first quarter. The increase stems primarily from cash generated from operations of $15.3 million, offset by share repurchases and dividends totaling approximately $9 million during the quarter. Capital expenditures were $953,000 during the quarter. During the second quarter, we repurchased approximately 294,000 shares of our common stock at an aggregate cost of $5.3 million, or $18.04 per share. On a year-to-date basis, we have repurchased approximately 1.8% of our outstanding shares as of the beginning of the year. Our current Board authorization for our stock buyback programs have approximately $155.2 million remaining. We will continue to return cash to shareholders through our dividend and share repurchases, while maintaining a balance between the capital requirements of growing our business in fiscal periods. Our shares outstanding at the end of the second quarter were approximately 37.1 million. Receivables at quarter end were approximately $98 million, compared to $94.5 million at the end of the first quarter. Days of revenue outstanding were approximately 60 days versus 57 days in the first quarter of fiscal 2016. Now, I'll turn the call back over to Tony for some closing thoughts.

Thanks, Nate. Well, I continue to be pleased with the progress that we're making in our international operations. On a constant currency basis, Europe posted positive revenue growth for the second consecutive quarter. Our Asia-Pacific region's constant currency growth rate of 17.7% is impressive, given the slowing economies in many parts of that region. I recently spent two weeks in Asia visiting various RGP offices and clients and I'm confident that our revenues will see continued growth, despite the economic news coming out of that region. In the U.S., our flat quarter-over-quarter revenue is in part due to continued softness in the energy sector. Our revenue in the energy vertical decreased approximately $3.2 million quarter-over-quarter, but was stable sequentially. I was pleased to see the sequential monthly increase in December's non-holiday weekly average revenue of $12.4 million from November's $12 million level. As we enter calendar 2016, we're focused on increasing revenue growth. We continue to believe that assisting our clients with the new revenue recognition standard, which most companies have not begun to implement, regulatory compliance, and acquisition integration initiatives will be significant components to our growth. From a financial metrics standpoint, along with the revenue growth, we remained focused on achieving our annual gross margin goal of 39%; and that's excluding the impact of zero margin reimbursable expenses and expanding our adjusted EBITDA margin. While we will continue to invest in people to support our growth initiatives, we will also continue our historic practice of returning capital to our shareholders for the foreseeable future. Now, let me share some additional statistics which we believe reflect the continuing health and strength of our core business. Client and continuity remains outstanding. During our second quarter, we served all of our top 50 clients from fiscal 2015 and 47 from 2014. In fiscal 2016, we currently have 243 clients for whom we provide services exceeding $500,000 in fees on a run rate basis very similar to the amount from this time last year. In addition, through the second quarter, our top 50 clients represent 41.2% of total revenues, while 50% of our revenues came from 80 clients. Our loyal client following is reflective of our client service approach in the quality of the work performed by our consultants. Our largest client for the quarter was approximately 2% of revenues. And through the second quarter, 96% of our top 50 clients have used more than one practice area and 80% of those top 50 clients used three or more practice areas. This practice area penetration reflects the diversity of our relationships with our clients' organizations. Well, that concludes our prepared remarks and we would be happy to answer your questions at this time.

Thank you. [Operator Instructions] Our first question comes from Kevin McVeigh with Macquarie. Your line is now open. Please go ahead.

Great. Thanks. Hey, Tony and Nate. Wondering if you could give us a sense -- in terms of the revenue fall in the oil and gas -- has that been kind of contained to that vertical or -- just given the cross current to the market, are you seeing that spread out anywhere else?

Yes, it's mainly in that sector, Kevin. I mean you saw it probably today in the paper where oil is now down to $35 a barrel, so that sector is getting hammered. I don't believe it's going to -- it can't stay there forever. So, we do anticipate when it moves back up, there will probably be more work at our oil and gas clients. And we're staying in touch with them right now, but also trying to diversify our practice a little bit outside of the energy sector and this is mainly in the Texas and Tulsa areas.

Is that still, Tony, about 5% of revenue at this point, or is it less than that?

If you look at just the energy sector, it's about -- it's a little under 7%. And I think you're right, relative to the oil and gas, it's about 5% of our revenues.

Energy, okay. And then, how is -- is it -- the engagement you have in the Philippines, is that fully staffed at this point and continues to ramp, or is that -- or any updates on that?

Yeah, it kind of goes up and down, depending on the client needs. We are starting, again, a little bit of a ramp-up there currently. But again, with the billing rates in the Philippines, I would not say it's a consequential amount of revenue for us.

Understood. Thank you.

Thank you. Our next question comes from the line of Andrew Steinerman with JP Morgan. Your line is now open. Please go ahead.

Hey, Nate. When you talked about the mathematic computation for third quarter, at least on my phone, it phased out, so I didn't hear the number. I assume you just -- you took the $50 million in the first five weeks, and then took $12.4 million, multiplied it by 8, and got about $149 million. Was that what you said?

Yes, exactly. The only additional adjustment is we pared it by about $1.6 million for the President and Martin Luther King holiday. So, that's where I got to the $148 million. So, it was your math --

$148 million, I've got it.

-- adjusted to those holidays.

Okay. Perfect. And when you look at the demand for your services outside of energy for the U.S., what do you see?

You know, aside from oil and gas, I would say it's pretty stable. Obviously, in the numbers we're giving, the U.S. isn't growing. But what I would tell you is we're seeing continued new opportunities. When you looked at financial services, we've got new opportunities from various insurers that are now being brought under some of those compliance initiatives. At the same time, you have other pieces where that work is completing. But -- so the demand in that area is good and we continue to also see demand in the other verticals. It's just, we're in this flow of -- you have engagements ending and others starting up, and we need to -- we obviously need, especially in the U.S., to get the growth as to not just be in the replacement mode. I think we will see -- we've had discussions with a significant amount of our clients around rev rec. Most of those clients have basically told us they're starting in earnest after 10-K filing season. So, as Tony mentioned in his remarks, I think that will be a boost for us, as well.

And if you isolate just Q2 and look at that independently, Andrew, just between currency and the energy sector, that cost us about $6.3 million in revenue. As Nate said, we've got a pretty good pipeline in other areas, especially in financial services, and we're doing a lot of business with the pharma companies. So, we're pretty bullish on our pipeline and future prospects for growth.

Thanks for all the color. I appreciate it. Thank you.

Thank you. There are no further questions. I would now turn the call back to Tony Cherbak, Chief Executive Officer, for closing comments.

Well, thanks for your continued support and interest in RGP. We look forward to our next update in the third quarter of 2016. Thank you.

Ladies and gentlemen, this does conclude today's program and you may all disconnect. Everybody have a wonderful day.