Good day, ladies and gentlemen, and welcome to the Resources Global Professionals Q2 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to turn the conference over to Ms. Alice Washington, General Counsel of Resources Connection. Ma'am, you may begin.

Thank you, Operator. Good afternoon, everyone, and thank you for participating today. Joining me on this call 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 second quarter of fiscal year 2018. By now, you should have a copy of today's press release. If you need a copy and are unable to access the copy on our website, please call Shannon MacPhee at 714-430-6363, and she will assist you. Before introducing Kate, 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 Form 10-K report for the year ended May 27, 2017, 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 conditions 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 Kate Duchene.

Thanks, Alice. Happy New Year, and welcome to our second quarter fiscal 2018 earnings call. We hope your holidays were happy and safe, and we thank you for joining us during this first workweek of the new year. Here's a quick overview of what I will cover on our call today. First, I'll start with our second quarter operating results; second, I will preview trends we are seeing in Q3; third, I will comment on our experience welcoming our 2 recent acquisitions, taskforce AG and Accretive Solutions, into RGP and outline further plans for integration; fourth, I will report on our progress against our strategic initiatives. To remind you, there is sales transformation, operating model improvement and cost containment. Finally, I will confirm our priorities for the second half of our current fiscal year. Now to our results. Our total revenues for the second quarter of fiscal 2018 were $156.7 million, which represents an increase of 6.2% compared to the second quarter a year ago, including taskforce. Without taskforce revenue, the increase was 3.7%. On a sequential basis, second quarter revenue, including taskforce, increased by 11% compared to $141.2 million in the first quarter of fiscal '18. Without taskforce revenue, the growth rate was 8.4%, a satisfying result given the significant strategic and operational changes we have been implementing throughout fiscal '18. The revenue increase was achieved by growth in all regions of our business, led by strong growth in Europe of approximately 21% quarter-over-quarter and up 44% including taskforce. We are particularly pleased with these results since Europe has achieved revenue growth for eight successive quarters. In addition, the North America and Asia Pacific businesses made solid contributions to growth in the quarter. Herb will discuss the revenue uplift in greater detail a bit later in this call. Second,…

Thank you, Kate, and good afternoon, everyone. I'll start by giving detail on our fiscal second quarter financial results and will then discuss the trends we're seeing in the third quarter. I'll also give further detail on the financial impact of the Accretive Solutions acquisitions and other strategic growth initiatives that Kate discussed a little earlier. Starting with an overview of our second quarter results. Total revenue for the second quarter of fiscal 2018 was $156.7 million, a 6.2% increase from the comparable quarter a year ago. Sequentially, revenue was up 11%. On a constant currency basis, revenue increased 5.3% year-over-year and 10.6% sequentially. Our second quarter gross margin was 37.9%, down 40 basis points from the prior year second quarter primarily as a result of the impact of lower gross margins in taskforce, consistent with other European practices. SG&A expenses were $47.5 million or 30.3% of revenue compared to $46.1 million or 31.2% of revenue in the fiscal second quarter a year ago. Our net income improved to $8.1 million or $0.27 per diluted share. In Q2, adjusted EBITDA was $13.4 million or 8.5% of revenue compared to $12.3 million or 8.3% of revenue in the year-ago quarter. Now let me discuss some of the highlights of our revenues geographically. As Kate mentioned, we've seen improving trends across our international business, with revenues in Europe showing improvement for the 8th successive quarter, excluding revenue from our acquisition of taskforce. Europe is benefiting from strength in our U.K., Ireland and Sweden practices. Europe second quarter revenue increased 20.9% year-over-year and 27.3% sequentially, excluding revenue from taskforce. Our U.S. performance strengthened in the quarter with revenue increasing 1.5% year-over-year, reflecting increased activity in bill rates in several of the company's largest markets. Sequentially, revenue in the U.S. increased 5.6%, in part…

Thanks, Herb. In closing our prepared remarks, I want to convey our optimism about the business in calendar 2018. I am part of a very committed team here at RGP. I'm proud of my colleagues' energy and commitment to our clients and to each other. We have taken on a number of initiatives these past 12 months to improve the financial performance of the company. Our efforts are paying off. We bring renewed passion to the company every day, and we'll continue to work very hard to deliver improved results. We remain focused on attracting and retaining exceptional talent to help our clients with ever-increasing change in a very disruptive world. This commitment to our clients continues to show through our client continuity data. During the second quarter, we served all of our top 50 clients from fiscal 2017 and 2016. Our top 50 clients represented 39% of total revenues while 50% of our revenues came from nine new clients. Our largest client for the quarter was approximately 2.7% of revenue. With that, this concludes our prepared remarks, and we're now happy to answer any questions. Thanks.

[Operator Instructions]. And our first question will come from the line of Andrew Steinerman with JPMorgan.

This is a little bit of a technical question. You said 3.7% of growth from revenues in the second quarter without taskforce. Was that on a constant currency basis? Or do you have to take out currency to come up with the organic number?

Yes. That's on a constant currency basis right now.

Okay. Fair enough. And when you look sequentially for your third quarter guided versus your second quarter actual without acquisitions, are you anticipating a normal seasonal ramp from here?

Yes. So I mean, right now, you've got -- right now, we've got an ongoing improvement year-over-year. Now what always makes it a little more convoluted in our Q3 is the holiday season. So right now, even as we look at the trends in the first 4 or 5 weeks, it gets a little messy because of what happens on where Christmas and New Year's fall. But overall, we're trending about 4% better year-over-year, and we anticipate that, that can continue to grow.

Right. And lastly, remind me, didn't we say last quarter or maybe it was 2 quarters ago that the long-term sustainable financial goals would be to grow 4% to 5% organic? So my question is, are we essentially there? And is that still the goal?

Yes. Well, that is still the goal. We appear to be there ahead of our schedule. As we talked about even going back six, nine months ago, we really thought it would be Q4 and going into FY '19 before we'd really start to see the organic growth paying off. But we're certainly -- Europe is ahead of schedule, the U.S., where I initially anticipated flat is already up a couple of percent. So I think we're a little bit ahead of our -- what we anticipated.

[Operator Instructions]. And our next questions will come from the line of Mark Marcon with Robert W. Baird.

You obviously have a lot of different things going on. With regards to that growth that you're mentioning with regards to the 4% to 5% that we're currently seeing, what are you seeing in the U.S. at this point? And can you talk a little bit about Houston, Chicago and Tri-State in terms of what you've seen there?

Right. Overall, in the U.S., we're up about 1.5%. And that's a mix. We had -- Houston was up year-over-year. Chicago was slightly up. Tri-State was down directly year-over-year in Q2, though it's showing a positive trend. Remember, really, Tri-State bottomed out in May of last year. And since then we've been kind of reversing that direction, but it's still negative year-over-year. So the good news is, the 1.5% year-over-year growth is including the year-over-year drop in Tri-State.

Got it. As you mentioned, the 4% so far this year, and obviously the weeks are changing, are you seeing a continued improvement across-the-board in the U.S.?

We are continuing to ramp up the Bay Area. Certainly, multiple markets are improving throughout U.S., and the trend is positive.

Great. And then with regards to Europe, obviously, really good growth there even ex taskforce. What do you attribute that to? Is it primarily some of the initiatives that you've put in place and some behavioral changes? Or is there also some better growth that's occurring, generally speaking?

I think it's a combination of those. I think it started by changing our leadership and our management in Europe, and it took some time to take hold. But we have -- Europe has almost been ahead of the U.S. in terms of really focused sales management practices and leading from the center there. So we do have common performance metrics in Europe. We changed our comp plan about two years ago in Europe. I think all of those changes, we're now seeing the benefit. I do not think yet, Mark, that we're seeing the benefit of some of the real structural changes we're making, especially around integrated solutions and how we're focusing our talent pillar to take on more of the talent management to free up our sales team to focus on sales activity. I don't think we've seen the benefit of those structural changes yet. These are good. What we're seeing in Europe is just some really good management happening, some good hires and really committed leaders in those practices. And I think it's helped that the economy and our clients are green-lighting projects again related to transformation and optimization efforts, and we're well positioned to support them.

That's great. And then with regards to some of the initiatives that you outlined, what's the anticipation just in terms of like severance and unusual expenses that we should anticipate over the next couple of quarters? And at what point would those kind of end, where we could really get a sense for the normalized profitability of the organization?

Let me jump in, and then I'm going to turn it to Herb to really answer from a deeper financial perspective. I don't envision right now any big severance. I think we've seen the changes at the top of the house that we needed to make. There will be some changes in personnel that will happen naturally. The expectations we're setting are heightened right now, and so I think we'll see some natural turnover but nothing that would create substantial severance obligations going forward. I'll now turn it to Herb to talk a little bit more on when do these transitional costs start to wind down so that our SG&A normalizes, if you will. Let me just also say that we will have some ongoing technology expenses because we're upgrading some of our systems. And that's a natural part of creating a healthier infrastructure for a stronger, more robust business. And with that, Herb?

Great. A couple of things, one on severance. We actually have about $300,000 charge in this quarter that occurred in December. And at this time, we don't really anticipate any more at this time. I think we're in pretty good shape, but then you never know what will happen, but for the most part that activity's done. With our transformation costs, we'll still see probably approximately $900,000 or so in this next quarter. We're also going to have some integration costs related to what we're working through with Accretive. That will run roughly about $1.5 million in each of the next two quarters, and then that goes away. But part of that is offset on some of the Accretive. On day one of that acquisition on December 4, we made the decision, it was close to $3 million annualized of costs that were eliminated, and then we have close to another $1 million that will end in -- really, in June. We're anticipating the back-office group to help us through to our fiscal year-end basis. And so you'll see the cost still with those. But again, that $1.5 million per quarter is offset roughly by half by the immediate synergy savings.

That's great. I'll follow-up a little bit more offline.

Okay, great. And I want to also clarify one thing, Andrew, on your comment. Actually, the growth that we're seeing in Q3 right now is not on a constant currency, that's just on absolute dollars, but it's very, very close. There's not really that significant of a difference on constant currency.

And our next question will come from the line of Ato Garrett with Deutsche Bank.

Just one quick housekeeping question. Could you run through your guidance really quickly again for the third quarter? I want to make sure I have it all down.

Sure. Pull that back out. Not that easy, sorry. Too much paper right now. So right now, so we're trending -- revenue trends -- is trending about 4% ahead of time. So looking at $148 million to $151 million, excluding taskforce and Accretive, and then an additional $20 million to $21 million for those two entities. That would put total revenue in the $168 million to $172 million range compared to $143.8 million. Gross margin, we're looking at $35.6 million to $35.9 million. Bill rates were up. And then, let's see, my SG&A number was going to be in the range total of $52.5 million to $53.5 million.

Okay, great. And you had some series of comments on tax. You said that they're -- that you're looking about -- it could be coming down 5% on a cash basis. Is that a similar proxy to what we'd expect on effective?

Yes. Well, that will be coming through over the next couple of quarters that we'll recognize for this year. Longer term on statutory and on the cash basis, potentially a 10% to 12% reduction.

There are no further questions in the queue. So now it's my pleasure to hand the conference back over to Ms. Kate Duchene, Chief Executive Officer, for some closing comments and remarks. Ma'am?

Okay. Yes, thank you, operator. Again, we appreciate you attending our call and your interest in RGP. We wish you all a very happy and healthy new year. And we look forward to talking with you about our business again after the end of our third quarter. Thanks.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.