Resources Connection, Inc.

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. If anyone should require assistance during the conference call, pre-press the star key followed by the zero button on your touch-tone telephone, and you will be connected to an operator who will assist you. As a reminder, this conference call is being recorded. At this time, I would 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 are 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 CEO, Kate Duchesne.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us. With me today are Tim Brackney, our Chief Operating Officer, and Jen Rue, our Chief Financial Officer. I will start with an overview of the second quarter, including the ongoing progress we are making to overcome COVID-19 impact. Then I'll share updates on our two most significant priorities this fiscal year, our digital transformation, and evolving our delivery model to be more flexible, virtual, and borderless to drive growth within our client base, existing and new GOs, client programs, and healthcare. This evolution also supports our focus on EBITDA improvement. I'll then share client continuity statistics to reinforce our stickiness in a blue chip core client base and improving continuity quarter over quarter. Finally, I will close by touching on a few highlights from our new investor deck added to our website today. From a revenue perspective, we saw steady improvement in top-line results as we move through the quarter, the impact of the global pandemic notwithstanding. In Q2, our revenue at $153.2 million was a 4% sequential improvement over Q1 and grew 6.4% when comparing revenue based on the same number of billing days and constant currency. Excluding our restructuring charges, SG&A also improved as expenses were reduced 4.7% sequentially. Adjusted EBITDA margin increased 120 basis points sequentially to 8.1% as a result of our cost reduction initiatives and expense discipline. We are continuing to pursue bottom line growth through operational efficiencies, lowered real estate investment, and headcount management. In his remarks next, Tim will discuss some of the positive revenue trends that are emerging as well as steps we're taking to maximize opportunity in our core geographies, client programs, and healthcare industry practice as we continue to position the company for sustained success in the coming years. Now let's turn to our two primary growth priorities this fiscal year. The first is to grow revenue by providing more digital transformation services and building out new digital pathways to engage for staffing services. Over the last several years, explosive technological innovation has fueled the rise of digital transformation as a corporate imperative. Our clients have been forced to rethink the way they do business to stay ahead and compete with digitally native new entrants. In order to support our clients, including these digitally native businesses, our GP has evolved significantly to help clients automate, streamline, and drive efficiency through functional process redesign, technology migration, project management, and communication services. These initiatives are happening in every functional area of our clients, finance and accounting, risk and compliance, tax, human resources, and project management. To effectively address this evolution, we had 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 increase 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 Acumina, 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 in 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 lockdown scenarios when we bring the product to market, and we'll share more detail as that timeline 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 roots and is an improving trend as we start the second half of the year. In closing, I'm also pleased that we 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 our GP 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 an operational transformation for a West Coast entertainment client, leveraging talent from Honolulu, Miami, and Houston, or assisting a Pacific Northwest healthcare client transform their delivery and 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 FY22, 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 healthcare 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 expense discipline and will continue to invest in areas where we can achieve high returns. In particular, digital and technology, healthcare 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.