Kate Duchene - Chief Legal Officer Tony Cherbak - CEO Nate Franke - CFO

Andrew Steinerman - JPMorgan Mark Marcon - Robert W. Baird

Good day, ladies and gentlemen, and welcome to the Resources Global Professionals' Third Quarter Fiscal 2016 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 be given at that time. As a reminder to our audience, this conference is being recorded. I would now like to hand things over to Kate Duchene, Chief Legal Officer. Please go ahead, Ma’am.

Thank you, operator. Good afternoon, everyone, and thank you for participating with us today. Joining me on the call are Tony Cherbak, our Chief Executive Officer and Nate Franke, our Chief Financial Officer. During this call, we will be providing you with comments on our results for the third 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 one 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 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 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. Good afternoon and welcome to the RGP third quarter conference call. I'm going to start by giving you a brief overview of the third quarter operating results. Total revenue for the third quarter of fiscal 2016 was $146.8 million, the same as the comparable quarter a year ago. Our revenues for the third quarter were slightly below our own internal expectations. Although the sequential quarterly revenue declines that we had experienced with our energy clients, stabilized from our first quarter to our second quarter. During our third quarter, sequential revenue from our energy clients decreased by approximately $1.1 million. Quarter-over-quarter, the revenue decrease from our energy clients was approximately $2.6 million. Third quarter gross margin was 37.4%, an increase of 10 basis points from the comparable quarter a year ago. During the third quarter, our SG&A costs were $43.3 million, up $100,000 sequentially, but lower by $200,000 quarter-over-quarter. During the third quarter, our adjusted EBITDA was $13.1 million and we used cash in operations of $3.7 million. Additionally, we returned $12.2 million to shareholders during the third quarter in the form of share repurchases and dividends. Our pretax income on a US GAAP basis was $10.8 million versus $10.5 million a year ago. Based upon an effective tax rate of 44.7% during the third quarter, earnings per share was $0.16, the same as in the third quarter of fiscal 2015. As we reported in early January, non-holiday weekly revenues during the first five weeks of the quarter were $50 million averaging $12.4 million in the non-holiday weeks. During the remaining seven non-holiday weeks of the quarter, weekly revenues averaged $12.2 million ranging between $11.9 million and $12.5 million, and the last week of the quarter was $12.3 million. During the early weeks of the fourth quarter, we began to experience a slight pullback in weekly revenue run rates as evidenced by average weekly revenues of $11.7 million during the first four non-holiday weeks of the quarter. While a portion of this decline relates to the impact of spring break holidays spread over multiple weeks, we believe another factor relates to a cautious spending environment within the financial sector, which is assessing the impact on your business of current federal monetary policy as well as the spill-over effect from continued turmoil in the oil and gas industry. Based upon the amount of change that we see facing our clients, we believe this recent revenue compression is more transitory than an indication of a longer term trend. Comparing current weekly run rates to comparable weeks a year ago, fourth quarter revenue is trending about even. With that I will now turn the call over to Nate for a more detailed look at our financial results.

Thanks, Tony. As mentioned, revenues for the quarter were $146.8 million, even with revenues in the third quarter of 2015. On a sequential basis, revenues decreased 2.7%. On a constant currency basis, consolidated revenue increased 1.1% quarter-over-quarter and declined 2.5%, sequentially. I'll now discuss our revenues geographically. For the third quarter, revenues in the US were $121 million, flat quarter-over-quarter and down about 1.2% sequentially. For the third quarter, total revenues internationally were $25.8 million, up 1.2% quarter-over-quarter and down 8.8% sequentially. International revenue accounted for approximately 18% of total revenues for the quarter, down from 19% in the second quarter. Europe's third quarter revenue increased 1.5% quarter-over-quarter and increased 10.5% sequentially, while Asia-Pacific region saw third quarter revenues increase 6.5% quarter-over-quarter and decrease 7.5% sequentially. On both the sequential and quarter-over-quarter basis, the US dollar was stronger against the euro. On a quarter-over-quarter basis, the US dollar was stronger against most of the currencies of Asia-Pacific countries in which we operate that was a push in the sequential quarter. As a result, on a quarter-over-quarter basis, Europe’s revenue increase would have been 8.9% and Asia-Pacific’s revenue would have increased 9.8%. On a sequential constant currency basis, Europe’s revenue decrease would have been 8.5% and Asia-Pacific’s revenue would have been the same. Let me now discuss early revenue trends for the fourth quarter of fiscal 2016. Weekly revenues for the first five weeks of the fourth quarter totaled $58.1 million and were $11.9 million, $11.8 million, $11.7 million, $11.1 million, which includes Good Friday and last week $11.6 million. This run rate is similar to the comparable weeks a year ago. Using the most recent non-holiday average weekly run rate of $11.7 million over the remaining weeks of the fourth quarter, we would achieve fourth quarter revenues of approximately $151.5 million. This computation is purely mathematical and does not consider potential increases or decreases in weekly run rates over the balance of the quarter or exchange rate changes. It should be noted that Memorial Day will fall in the first week of fiscal 2017, so we will not be directly impacted by this holiday in the current quarter. Now let me discuss gross margins. Gross margin for the third quarter was 37.4%, a 10 basis point increase from 37.3% a year ago and down 160 basis points from 39% in the second quarter. Our gross margin for the quarter is about 70 basis points higher than anticipated resulting primarily from improved bill pay spreads. The average billing rate for the quarter was approximately $121 per hour compared to a $120 in the second quarter and $120 a year ago. The average pay rate for the third quarter was approximately $60, the same as in the second quarter and up from $59 one year ago. Please remember these hourly rates are derived based upon prevailing exchange rates during each given period. Excluding reimbursable expenses, our third quarter gross margin was 38.1% which compares to 38% in the third quarter a year ago. In thinking about gross margin in the fourth quarter of fiscal 2016, we would expect gross margin to improve sequentially by approximately 180 basis points primarily due to the reduction of compensated holidays and reduced payroll taxes. For the third quarter, gross margin in the US was 38.2% and our international gross margin was 33.8% representing a quarter-over-quarter increase of 20 basis points in the US and down 60 basis points internationally. Now to headcount, for the third quarter, the average consultant FTE count was 2,480. This compares to 2,554 in the previous quarter and 2,523 in the year-ago quarter. Quarter-end consultant headcount was 2,584 versus 2,577 a year ago. Total headcount at the Company was 3,353 at quarter end. Selling, general and administrative expenses for the third quarter was $43.3 million or 29.5% of revenue versus $43.5 million or 29.6% of revenue in the year-ago quarter. SG&A was $43.2 million or 28.6% of revenue in the second quarter of fiscal 2015. We believe SG&A expenses in the fourth quarter of fiscal 2016 will increase approximately $1 million from the third quarter level. The increase in the fourth quarter SG&A expense primarily from increased marketing expenses some of which relates to our revenue recognition initiatives. Stock compensation expense which is included in the SG&A amounts I just disclosed was up slightly compared to the second quarter at $1.5 million or 1% of total revenue. We would anticipate quarterly stock compensation expense in the upcoming quarter to be about $1.3 million. At the end of the third quarter, our office count was 68; 45 domestic and 23 international. Related to other components of our financial statements, depreciation and amortization was $900,000 for the quarter, about even with last quarter. We would expect depreciation expense for the upcoming quarter to approximate $900,000 again. Our adjusted EBITDA or cash flow margin which we define as EBITDA before stock compensation was 8.9% in the third quarter versus 8.8% in the third quarter of fiscal 2015 and 11.3% last quarter. During the third quarter on a GAAP basis, we recorded a provision for income taxes of $4.8 million on GAAP pre-tax income of $10.8 million representing an effective tax rate of approximately 44.7%. We anticipate a fourth quarter effective tax rate of approximately 44.5%. Our effective tax rate is impacted by our current inability to offset income and tax jurisdiction in which we are profitable with losses in tax jurisdiction in which we are not. Our cash tax rate continues to approximate 42%. Our GAAP tax rate for each of the upcoming quarters is difficult to predict and could be volatile as the rate will be dependent on several factors including the operating results of our US and foreign locations each of which are taxed or benefited at different statutory rates, and the offset of tax benefit of foreign losses in certain locations by valuation allowances. In summary, our per share income was $0.16 for the third quarter, the same as a year ago. Now I'll turn to our balance sheet. Cash and investments at the end of third quarter were $96.5 million, a $13.2 million decrease from the end of the second quarter. The decrease stems primarily from cash used in operations of $3.7 million, and share repurchases and dividends totaling approximately $12.2 million during the quarter. Cash flow from operations was negative primarily due to a decline in accrued compensation of $6.8 million stemming from our buy weekly payroll occurring on the last day of the third quarter. Capital expenditures were $150,000 during the quarter. During the third quarter, we repurchased approximately 589,000 shares of our common stock at an average aggregate cost of $8.5 million or $14.40 per share. On a fiscal year-to-date basis, we have repurchased approximately 1.3 million shares at an aggregate cost of $20 million or $15.66 per share. The shares repurchased represent 3.5% of our outstanding shares as of beginning of the year. Our current board authorization for our stock buyback program has approximately $146.7 million remaining. We will continue to return cash to shareholders through our regular quarterly dividend and share repurchases while maintaining a balance between the capital requirement of growing our business and fiscal prudence. Our shares outstanding at the end of the third quarter were approximately 36.8 million. Receivables at quarter end were approximately $100.5 million compared to $98 million at the end of the second quarter. Days of revenue outstanding were approximately 61 days versus 57 days in the comparable quarter a year ago and 60 days in the second quarter. Now I will turn the call over to Tony for some concluding thoughts.

Thanks, Nate. I continue to be encouraged by the progress we are making internationally especially in Europe. As Nate mentioned, on a constant currency basis Europe grew 8.9%. Results in Europe are gratifying in light of the changes that we’ve made there over the past 18 months. Additionally, Asia Pac grew 9.8% on a constant currency basis despite the slowing economic environment in the region. We are very focused on revenue growth in the US. We continue to see solid activity related to M&A integration initiatives and should start to see a ramp in financial reporting compliance initiatives as we progress into Q4 and then Q1 of fiscal ‘17. Let me now share some additional statistics which we believe reflects the continuing health and strength of our core business. Client continuity continues to be outstanding. Through the third quarter we served all of the top 50 clients from 2015 and all of our top 50 from fiscal ’14. We continue to see an increase in the number of clients with fees exceeding 500,000. Through the third quarter of fiscal 2016, on a run rate basis, we have served 239 clients with fees exceeding 500,000 compared to 237 clients in 2015. Out top 50 clients approximated 40% of total revenue while 50% of our revenue came from 87 clients. Our loyal client following is reflected with our client service approach and the quality of work performed by our consultants. Our largest client for the quarter was approximately 2.2% of revenue. Through the third quarter, 94% of our top 50 clients have used more than one service line and 84% of those top 50 clients have used three or more service lines. The service line penetration reflects the diversity of our relationships that we have within our client organization. Now, as you read in today’s press release, Nate has announced his intent to retire as our CFO following the end of fiscal 2016. Nate will stay on through the filing of our 10-K which is expected to occur near the end of July and will participate in the recruitment of his replacement. The company has retained Spencer Stuart to assist us in the search for new CFO. Nate and I have been working together for over 30 years. During that time not only has he been a great friend, but he has also been a true business partner. Nate has always impressed me with his intellect and work ethic, but most of all his uncompromising integrity. On behalf of all employees of RGP and our board of directors, I want to thank Nate for his many contributions and wish him well in his retirement. That concludes our prepared remarks and we’d be happy to answer any of your questions at this time.

Thank you. [Operator Instructions] Our first question comes from the line of Andrew Steinerman from JPMorgan.

Hi, Nate, obviously I want to congratulate you; wish you well on your retirement.

Thank you, Andrew.

Sure, my pleasure. So I have a question for the team. I just want to make sure I get what you are saying in terms of the hesitancy in most recent weeks has been coming from banks, I think that's why you call them banks as they assess the landscape, oil exposure, market volatility, but in the same breath, you think that's sort of a passing thing. It's not a kind of permanent entrenchment on spending. And if I have characterized it right, could you remind me, one, what percentage of your revenues is related to banks, and two, why you feel like it's going to be kind of passing? Do you have a backlog or anything to point to make you feel that there's kind of a more likelihood that that’s how it's going to be?

So, Andrew, just to remind you, the financial sector which we consider both banks and insurance companies approximates 20% of our revenues and they are obviously being impacted by various different things, right now fed monetary policy, really low interest rate environment which is making it harder for them to make money. They are also being impacted by the spillover from the oil and gas sector and then certainly lower trading revenues as we read in the paper everyday and we are starting to see few layoffs in some of these banks. But, however, when you look at the regulatory work that they are doing which they cannot cut back on, we are still doing a lot of regulatory work out of the banks and other financial institutions working on capital requirements, living wills, their annual commitments to look at their capital available to the comprehensive capital analysis and review process. So we still think that we are still doing a lot of work for these financial institutions. It’s just a little bit choppy right now.

Right. But do you feel like it's going to pick up six months from now?

I think it’s kind of a hit or miss situation with some of these clients. With some we are actually increasing our work. We just don’t think that they can put some of this regulatory work off. It’s actually mandated under Dodd Frank that they continue to look at their capital structure. So I think we were going to continue to do a lot of work. I think it’s a little uncertain if it’s going to deteriorate or not at this point.

Great. I know; I work at one of those institutions. My question is about Europe. Obviously, you've been on kind of a multi-quarter turnaround trajectory here. Would you attribute that to the change of leadership in the region or do you feel like it's a good combination of kind of some nice demand just being well executed on?

I think it’s a combination of the overall leadership change as well as the individual changes that we’ve made in the offices. Again, we are not ready to run a victory lap or anything like that, but just we tend to be going in the right direction in Europe. I think the jury is still out as to where that’s going to end up, but we keep making progress quarter after quarter. So we are encouraged by it at this point time, but like I said, there’s still lot more work to do.

Could you just make a quick comment in Europe, which countries stand out to you kind of leading this acceleration?

We’re doing much better in the Netherlands and in Sweden and a little bit better in France and Ireland.

Okay, thanks so much. I appreciate it.

Thank you. [Operator Instructions] Our next question comes from the line of Mark Marcon from Robert W. Baird.

First, I want to pass along my congratulations to Nate, as well. It's been a pleasure working with you over the years and I wish you all the best.

Thanks, Mark.

So with regards to the commentary, in terms of other verticals, can you remind us, aside from financial services, the size of the most important verticals, and what you're seeing in those?

Mark, financial services is our biggest vertical, like just over 20%. We really don’t, aside from the fact that you guys asked me those questions year-over-year, we don’t really look at the percentages per se in the other areas, but med devices is significant for us, technology, pharma, oil and gas, utilities, petrochemicals is a fair amount of business, but they’re all kind of in that, I would say, if I had to put a percentage range, I would say that they’re all in that 5% to 7% range.

So with the exception of financial services, it's all pretty dispersed? And do you feel like on the energy side that things are stabilizing, or do you think there is a little bit more still to go?

It’s hard to say, because you read the same articles as I do, and the oil is up one day, down the next day. Right now, it’s running about $35 to $38 per barrel. So it’s really just hard to say, I mean, it’s volatile, that’s for sure. We thought a couple of quarters ago that we had stabilized but then this quarter, we saw that it had gone down a little bit more. Obviously, there is a lot of pressure on fees in the oil and gas industry and so that’s what we’re fighting. We’re not losing clients, in some cases, we have to drop our rates a little bit to stay out of the client, but that’s what we intend to do.

Okay. But I mean, in terms of that, the rate compression with those clients, do you feel like that’s over? Or do you think we still have -- we're in the relatively early stages, and we probably won't anniversary it until a year from now?

I don’t think we’re in the early stages of it, because I think it has developed a little bit, but it’s very hard to say if it’s over or not. We feel confident that we will stay at all of these big clients, even while there is little bit of volatility in their industry, we’re still going on visiting these clients, we’re still doing work, but it’s just too hard to call.

Okay. And then, the profitability continues to be good. As we think about the next year, just assuming that things kind of stay steady-ish state, how would you think about the expense structure changing over the coming year?

We’ve had pretty good discipline with our expenses. If you look back 5 years, we barely increased it, well, we’ve been under 1% in our expense structure in terms of growth of the expense structure. So I suspect that we will continue to keep that discipline. Unless we see our revenues start to increase and which will probably ramp up hiring a little bit.

Okay. And then you mentioned that for this coming quarter, you’re going to spend a little bit more around rev-rec in terms of marketing.

Marketing related rev-rec.

Right. And what are you seeing in terms of the client response there?

We’re winning a little bit of work, but we don’t see the clients moving as fast as I think they should be, given the complexity of what they’re facing. I think the companies are being a little bit complacent about just the overall magnitude of what they’re going to face to get this statute implemented. So I think there is a lot more work to do there and we’re winning a few engagements but not nearly as much as I would have expected at this point.

Why do you think they are being that complacent?

If you look back to the SOX days, it was exactly the same thing. They really didn’t get on it, until they were almost right on top of the compliance date. I think the one year deferral probably gave them a little bit of a false sense of security, but that’s the impression that I get because we’re hitting it really hard out in the marketplace and talking to our clients. A lot of times, they tell us that they don’t think that it relates to them so much, until they really start looking at it and then everybody to get a little bit more nervous about it the more that they look at it, but it’s those companies that are kind of just deferring it thinking, well, we’ll just take care of it before the compliance date that’s going to be a problem with them, that’s going to get compressed and then they’re not going to have the time that they need to get ready and then they’re going to have to scramble.

And for calendar filers, that deadline will be 2018, right?

That’s correct.

Okay. Great. And then can you talk a little bit about the practice areas? If we take a look at finance versus information management, et cetera?

Yeah. If we look at it on a year-to-date basis, we probably increased the most in our GRC. Human capital is doing really, really well. Accounting and finance which is our biggest practice, a little bit over 50% of the whole mix is up 1%. IM is doing fine, it’s up about 5% and our little legal practice is doing well as well. So that’s the landscape.

Great. Super. Thank you.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Tony Cherbak for any closing comments.

Well, I want to thank all of our investors and employees and look forward to talking to you in our fourth quarter. Thank you.

Thank you. Ladies and gentlemen, thank you for participation in today’s conference. This does conclude the program and you may now disconnect. Everyone, have a good day.