Good day, ladies and gentlemen, and welcome to the Resources Global Professionals’ Fourth 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 instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Ms. Alice Washington, General Counsel. 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; Herb Mueller, our Chief Financial Officer; and Tim Brackney, our Chief Operating Officer. During this call, we will be commenting on our results for the fourth quarter and the year ended May 25, 2019. By now, you should have a copy of today’s press release. If you need a copy and 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 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. Hello, everyone, and welcome to RGP’s 2019 fourth quarter conference call. To begin, we delivered a very strong financial year in fiscal 2019. I am pleased by the headway we made this year in driving growth, but also improving gross margin and bottom-line profitability. Tim and Herb will provide specific color and detail around revenue and gross margin during their remarks in a few moments. They’ll also discuss operational priorities for fiscal 2020 and trend we are experiencing in the first quarter of the current fiscal year. I want to focus my opening remarks on two broader topics. These topics are core to RGP’s strategic plan over the next three years. First, I will discuss our plan to become a more digital business. Second, I will discuss recent investments in brand refreshment and brand development, and why we believe they are vital for the future of RGP. The first important element of our strategic plan centers on digital innovation. In June, we consolidated our digital innovation efforts within RGP to be led by Tracey Figurelli, Executive Vice President Digital Innovation. This function will be focused on three core priorities: first, build and commercialize a digital engagement platform for RGP; second, enhance our consulting capabilities to serve clients in the digital transformation and user experience category; and third, building commercialized digital product offerings for our clients and for use within RGP. The critical objectives of this group are four folds: to drive volume; improve profitability by lowering cost of sales metrics and driving product revenue; elevate customer experience; and enable us to support our clients on their own digital transformation journeys. I’ll now address each of those digital priorities with more specificity. The digital engagement platform initiative is underway and the team is on track to deliver a…

Thank you, Kate, and good afternoon, everyone. I will highlight three operating initiatives that impacted our results and operations for the fourth quarter and the fiscal year, as well as provide a view into our fiscal 2020 priorities. As noted by Kate in previous calls, we have been embarking on operational improvements in sales productivity, cost containment and delivery efficiency. We are proud of the results we’ve achieved to date from our initiatives around sales productivity. Global revenue increased 11.4% to $729 million on an annual basis. In North America, there are increases in average outreach, average pipeline and revenue per sales person year-over-year. This was largely accomplished through a combination of efforts, improved sales leadership and discipline, and focused on pricing governance and aligned incentives. Note that Europe and Asia-Pacific only began their sales transformation efforts in earnest during fiscal 2019 and progress is nascent. We recognize that our transformation into a true sales organization is not yet complete and there is more work to be done. But we are certainly pleased with the progress we’ve made to-date. Later, Herb will provide more detailed color around bill rate and gross margin in his remarks. With respect to cost containment, we are committed to unlocking operational leverage by doing more with the same. Global adjusted EBITDA increased by more than 50% on a full year comparative basis. This gain was led by North America and Asia Pacific, offset by a decline in Europe. Largely, this increase was accomplished in productivity gains, but also through a commitment to discipline hiring coupled with improved transparency and governance around discretionary spend. We remain committed to prudent investment and cost containment in all three theaters of operations. Finally, this quarter, we reorganized our advisory and project services function. A team of seller-doers, whose primary…

Thank you, Tim, and good afternoon, everyone. I’ll start by giving detail on our fiscal fourth quarter financial results and we’ll then discuss the trends we’re seeing in the first quarter of fiscal 2020. Starting with an overview of our fourth quarter results, total revenue for the quarter of fiscal – in 2019 was $182.1 million, a 0.9% decrease from the comparable quarter a year ago, but increased 1.5% sequentially. On a constant currency basis, revenue increased 0.4% year-over-year and increased 1.5% sequentially. Our fourth quarter gross margin was 40.1%, up 180 basis points for the prior year fourth quarter, primarily due to the improvement in our pay rate to bill rate ratio as a result of the impact of internal pricing initiatives, slightly lower payroll taxes and business expenses. SG&A expenses for the quarter were $56.9 million or 31.2% of revenue compared to $58.9 million, 32% of revenue last year and improvement as a percentage of revenue of 80 basis points. Our net income improved to $9.4 million or $0.29 per diluted share compared to $4 million or $0.12 per diluted share in the prior year quarter. In Q4, adjusted EBITDA was $17.5 million or 9.6% of revenue compared to $13.1 million or 7.1% of revenue in the year ago quarter. Now let me discuss some of the fourth quarter highlights of our revenues geographically. Our U.S. revenue decreased 0.6% year-over-year and increased 0.5% sequentially. We had significant improvements in the Southeast, Chicago and the Northwest, offset by drops in Tri-State and Southern California during the quarter. Tri-State’s results continue to be impacted by the trend of financial services companies moving work out of the area. For the fourth quarter, total revenues internationally were $39 million versus $39.8 million in the fourth quarter a year ago, a decrease of…

Thank you, Herb. In closing, while we made tangible progress in improving our financial fundamentals, we recognize that there is more work to do. Our strategy is to evolve the mix of business from staff augmentation, moving into project execution and advisory services are making a positive difference. In addition, the evolution of our sales organization and delivery model and our approach to incentive compensation are paying off. While these are ongoing initiatives, I am pleased to see they’re already making impact. We have operational changes we are implementing in Europe, which we just discussed and in certain markets in North America, including Tri-State, Southern California and Houston. We will have new leadership in Europe over the next 60 days and we’re optimistic about the impact that Jens Christophers’ leadership can have in the German marketplace. He is a proven builder and a disciplined leader. In certain other markets, we are making management changes in fiscal 2020 and refocusing our sales and delivery capabilities to better align with client needs. We believe these changes will lead to improved performance and we’ll be updating you during our next call regarding progress. Before turning to questions, as always, I’ll share our client retention and continuity statistics for the fourth quarter of 2019 as they do reinforce the trusted relationships we have with our great clients. Our client continuity does remain strong. During our fourth quarter, we served 49 of our top 50 clients from fiscal 2018. In the quarter, we have 278 or we had 278 clients, for whom we provided services at a run rate exceeding $500,000 in fees. This was down from 316 in fiscal fourth quarter of 2018. However, on a year-to-date basis, the comparison is 281 in fiscal 2019 versus 266 in fiscal 2018. In addition, our top 50 clients for the quarter represented 37.3% of total revenues, while 50% of our revenues came from 99 clients. Our largest client for the quarter was approximately 2.9% of revenue. At the end of the fourth quarter, 92% of our top 50 clients have used more than one type of service or functional expertise. This penetration reflects the diversity of relationships we continue to build within our clients’ organizations and reinforces our opportunity for growth. We look forward to growing a more profitable business in fiscal 2020, as we evolve our offerings in the digital space and in how we engage with our clients and talent. We’re excited about the initiatives we’ve shared on this call and the impact we believe they will have on our financial performance throughout the year. Okay, so that concludes our prepared remarks and we’re now happy to answer any questions.

[Operator Instructions] Our first question comes from the line of Michael Cho with JPMorgan. Your line is now open.

Hi. Thanks for taking my question. Kate, I just want – my first question, I want to start with some of the digital initiatives that you laid out earlier in your prepared commentary. I guess, you threw out some, I guess, market statistics or size of the market around why you’re going – approaching the digital innovation initiatives. But I guess is there a revenue opportunity that Resources is specifically going after in terms of the commercial products that you’re thinking of? I’m specifically interested in your commentary about the external human cloud platform?

Yeah, so in recent research from the same study that I referenced, I mean that marketplace is pegged right now to be about $63 billion in revenue. And while there is competition already in the freelancer marketplace and for what I would call non-professional services, there’s a real opportunity for a company to step forward that can drive a human cloud platform broadly across professional services. And that’s what we believe we can do. So if you think about the Zappos model, for example, with regard to selling shoes, they developed a very robust digital marketplace, but they wrapped high-touching client service around that. And that was their secret sauce to become successful. And that’s the vision we have for our product in the global marketplace. And I think what really sets our opportunity apart, Michael, is the fact that we have trusted client relationships already. And that’s going to matter in terms of developing a new way of engaging for talent on projects that matter to an organization.

Thanks. And then if I just ask a follow-up to that, Kate, I mean, do you get the sense today from your clients that there’s a notable segment of Resources’ existing clients that want the self-service?

Yes, I can tell you that directly. I had one-on-one conversations with clients in the research phase regarding the development of this tool. And part of that, Michael, is when you think about the shift in client buyer and the demographic of client buyer, we are selling to many more millennials today than we ever did. And they are much more inclined to want to engage with us in superefficient ways. They don’t involve waiting until 9 o’clock in the morning or 8 o’clock in the morning and placing a telephone call. If they’re up at 2 AM, they want to send their need and they want to know that somebody is responding to it as quickly as possible. And we all know that the drivers today in the marketplace are speed and efficiency. And so, we have to keep up with that. And that’s really why these initiatives are I think critical and will be impactful for our business over the next three to five years.

Okay, great. Thanks for the color. Just one more for me and I’ll hop off. I think last quarter you had mentioned some slower client decision making or putting off project. I think it’s both in the U.S. and in Europe. I’m just curious, has that tone of conversation with your clients changed at all through this quarter?

Yeah, Michael, thanks for the question. I would still say there’s cautious purchasing out there. I think at the end of the last quarter, what we were seeing was – definitely some of the macro trends were with the trade war, Brexit, some of the other things that are still out there, but people have sort of pushed through them a little bit and have recognized that they can’t delay some of their critical initiatives. So some of the things that got re-sequenced from big bang into something that’s more modular, they’re going now. And we feel a little bit more optimistic about how their buying patterns will be in the future quarters.

Okay, great. Thank you.

Thank you. [Operator Instructions] And our next question comes from the line of Mark Marcon with Baird. Your line is now open.

Good afternoon, everybody. I was wondering if you could talk just a little bit more about just the digital transformation strategy and just wondering if you could give some commentary with regards to how that’s being received internally, because it does – you’ve always been a solution company, but it seems like culturally it’s a bit of a transformation as well, both in terms of the interface as well as also some of the projects that you’re working on, where it’s more – it appears more IP-centric versus F&A/audit-centric. So, could you talk a little bit about that?

Sure. And, Mark, thank you for the question and I will also start by saying this is a purposeful move. And strategically, as we talk about the future and how we need to be able to compete more effectively and really grow this platform, we have to get more capability in technology in the digital space. You’re absolutely right that the kind of talent we’re bringing in now to provide digital transformation support is more design-thinking talent, which clients really want in the innovation space, more solution architecture and programming support. So it is a different talent base, but we’ve done a lot of change management work with our existing employee group and to get them ready for this, and to understand the why behind the importance of this. And I would say, in the early days, I think there was some hesitancy about, well, aren’t we really at the core finance and accounting operations support shop. And the answer is no, we can be more. And the other answer – comment I would give to you is that, we’re being asked by many clients to help them in the digital space. There’s one particular large healthcare client in – that’s out of Europe, and we’re helping them with one of their most strategic digital transformation projects, because they trust our way of client service. They trust the humanity we bring, which for us means our listening skills going elbow to elbow with our clients to problem solve with them, and our approach to give the client credit for the successful result. We’ve always said, Mark, I think you know this, because you know as well, RGP operates with a lot of humility and we are motivated every day to make our clients look better. So when we have a client base that is asking us to help in this arena, in my opinion, we have an obligation to start broadening our perspective, getting the right talent in our organization so we can deliver.

That’s great. And then can you talk a little bit about the timeline that you’re envisioning just with regards to the various initiatives, because it seems like there’s multiple facets to the transformation?

Yeah, I think this is honestly a three to five year transformation. It’s not going to – we’re not going to be talking about lots of impact next quarter. But as you know, when you’re building this, and I think your initial question suggested this. It takes time to transform. So I laid out three specific priorities of the group. The digital engagement platform is well under way. So I think we’ll see that product coming to market by the end of this fiscal year. Our product development in the RPA space will see impact this year. We already have, I would say two really viable products in the automation space. And that group is targeting to develop three to five more during the calendar year. I think in terms of really building out a consulting team that can have more immediate impact in the next 12 to 24 months. It will take targeted M&A to and we’re engaged in a specific strategy to do that. So – and we’ll be reporting further on that as we make progress.

That’s great. With regards to the digital engagement platform, how close are you to launching it internally, because it sounds like that’s the first step?

Yeah. Next quarter, I mean, I’d love to say tomorrow, Mark, and my colleagues would step on my foot right now. But I’ve seen the product. Our development team is hard at work. We’re continuing to perfect it. I mean to get this right, there’s art in the matching algorithm. So we are actively testing it as we speak right now. And I’m excited that in the next quarter, we’ll be using it internally.

Great. And then with regards to the RPA product, what are the two viable products specifically do?

So the first is a reconciliation tool, we’re calling it [ReconBotz] [ph], and we sold it to some marquee brand name clients. And so now we’re in the process of marketing it to several other large clients, and it’s about the efficiency of the reconciliation project for – a process for large organizations. The second one...

Is it specific to one area of reconciliation? Is there some specific areas that it’s optimized for?

It’s mostly in the finance area. And it’s mostly – I mean, if you think about the number of reconciliations that quite large – especially large finance organizations have to do using humans and also using sort of what we’ll call RPA light there, there are software packages out there that help and aid in that process. What we’ve done is develop a product that will help reduce the need for human intervention in the reconciliation process, but also can work in harmony both with a sort of reduced human contingent as well as an RPA light platform. So it’s a flexible tool depending on what – on kind of how mature the finance organization is and kind of what the desired efficiency outcome is.

Great. And then, sorry, Kate, you were mentioning another one.

Yeah, I think the other product that – and I don’t want to get ahead of our skis on this one – is more in the internal audit and compliance arena. So stay tuned. We’ll be talking more about that as we’re ready to speak publicly.

Okay. Great. And then with regards to just the numbers, can you talk a little bit about some of the trends, like specifically, what are you seeing? You mentioned Europe was a little bit softer as we’re looking out to the first fiscal quarter of 2020. Is it specific to any geography? Is there an impact from Brexit that you’re seeing? We’re starting to hear a little more chatter on that. So I was just wondering if you’re seeing the same.

Yeah, I think, let me make a couple of comments about Europe just broadly, and then maybe Tim or Herb want to add to this too, Mark. I’d say the first thing that we’re seeing in Europe and this is going to hit in the UK, it started in the government sector and now it’s coming to the commercial sector is a change in labor and tax regulation that is negatively impacting our business a little bit with respect to the use of independent contractors. And so we are developing and then we’ll be implementing a strategy that tries to lessen that negative impact. I think the legislation is something 35. I can’t remember the – sorry, IR35. Thank you, Alice. Our General Counsel is in the room, so she’s helping me. And that legislation passed about 24 months ago I think in the Netherlands. And so we talked about that a little bit. So those European countries are starting to try and claw back certain taxes that they’ve lost by allowing the independent contractor marketplace to get so robust. So that’s one thing. And that doesn’t have anything to do with us, but it does impact our business. With respect to Brexit, there continues to be some chatter, but I actually I’m starting to hear perhaps about some opportunities related to Brexit. They haven’t totally materialized, but I don’t think that gives us a path to think we can’t continue to pursue, especially work for our largest clients that – the good news, Mark, in Europe is that our largest client, which is our second largest client for the firm, that comes out of Europe, is very much embracing its future of work philosophy and understanding that they want work to get done in what they’re calling the open talent economy. And, so we’re developing a bigger and bigger relationship with them in order to deliver. And this is a global diversified consumer products business. Now, I don’t know if you all have other color, sorry. Yeah.

Great. And then with regards to the U.S., you mentioned that lease accounting was running around $3 million. Where does it peak at?

No, it was running $3 million less than what it was in Q2. It was just under $10 million in Q2. So we had a pretty high run rate and then it slowed down. We’re still seeing pretty good activity. As I mentioned, the private companies that have to be compliant beginning in next year for fiscal years after December 15, 2019 are working on it. The other thing that’s interesting is, with some of the larger companies, some have decided not to automate their processes. They are really struggling right now to get it done, as they have just gone through their Q2 and now Q3 after adoption. So we still think there’s going to be a fair amount of work in both the public and private. But certainly, Q2 was a huge peak for us. As point of reference, we’re still up year-over-year in Q4 despite the decline that we had over the last couple of quarters.

Okay, great. And then, you mentioned both Tri-State as well as SoCal, and then you also mentioned Houston. What are the prospects there?

I think the prospects are, I mean, look, our large markets are, our most important markets in the – if I think about this year, we had sort of mixed results there. And so, what we’re – I think what we’ve decided to do is have renewed focus from a sales leadership perspective in those markets. So some of our sales leadership teams who are managing the larger regions are going to spend a fair amount of time in market in some of those, what we call out big [muscle] [ph] to try to make sure that we can get those things firing. So we still feel very positive about the prospects there, but we know that we need to have renewed focus there, especially from the leadership perspective.

Okay. And then it sounds like you did a great job with regards to managing the pay/bill spread. In terms of the gross margins, how much of it was just was also just a factor of medical costs and what are the prospects in terms of looking forward for that?

Yeah. Looking forward on it is difficult to do because you can see some fluctuations there, though we’ve done a lot of initiatives to try to control that as best we can. But you never know what you can run into. But roughly about 25% of the improvement was related to that.

Okay. I mean, was it just unusually lower number of incidents and severity? Or is it because of plan design changes?

It was both. And, it’s – the amount, I’d say a little bit less on the plan design, but certainly that had an impact. And it’s hard to equate some of the things with the plan design, how that affects actually your participation rates and other things. So it’s hard to actually quantify that exactly.

I’d just say one other thing about medical. And I agree with Herb completely that it’s just hard to know in any given period when you’re going to get a big claim or get a group of claims that you don’t anticipate. But I will say, since I joined the firm 20 years ago where we had a demographic that was almost all older personnel and experienced hire. We now, Mark, are blending in more millennial talent and more junior talent. And the demographic of our workforce across the board is growing younger. And that will have an impact on our health experience.

All right, I appreciate that. And then with regards to the investments in terms of all the initiatives, you gave us the SG&A for this coming quarter, how should we think about it as the year unfolds? I’m not looking for like specific number guidance, but just directionally how we should think about it, because you did really a nice job in terms of increasing the margins? And just wondering if we’re...

Right. And we’ll be continuing to focus on that. But one of the key things is that on the development costs for the automation tools, much of that is capitalized. So even with that, I expect my overall CapEx to still be under $10 million. But roughly, that’s a good number to think about in total for what we’re doing in digital on an annual basis.

Great.

But, talking about SG&A overall, Mark, we still have a goal to drive it below 30%. So while Q1 is going to be a little tough, because we have some retention and severance obligations we know are coming up that we’ll talk more about next quarter. That’s our goal, is to still stay very disciplined on the expense line.

Great. Terrific. I’ll follow up offline. Thank you.

You’re welcome. Thank you.

And thank you, ladies and gentlemen. This concludes today’s Q&A session. I would now like to turn the call back over to Kate Duchene, CEO, for any closing remarks.

Well, thank you, operator. And, again, thank you everyone for attending the call and for your continued interest in RGP. We look forward to talking with you next after the close of our first quarter of fiscal 2020. Have a good day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone, have a wonderful day.