Good day, ladies and gentlemen, and welcome to the Resources Global Professionals Q3 FY’18 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the call over to Alice Washington, General Counsel. Please go ahead.

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 third 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 the 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.

Thank you, Alice. Hi everyone and welcome to our third quarter fiscal year 2018 earnings call. Here's a quick overview of what I will cover on our call today. First, I'll start with a brief overview of our third quarter operating results. Second, I will preview trends we are seeing in Q4. Third, I will report on the progress we have made in integrating the two acquisitions, taskforce and Accretive Solutions. Fourth, I will provide an update on our strategic initiatives. Finally, I will highlight our priorities for the remainder of our fiscal year and the year ahead. Our total revenues, including taskforce and Accretive for the third quarter of fiscal ’18 were $172.4 million, which represents an increase of 20% compared to the third quarter a year ago. Excluding revenue from the acquisitions, the increase was 5%. On a sequential basis, third quarter revenue, including both acquisitions, increased by 10%, up from $156.7 million in the second quarter of fiscal ’18. Without the acquisitions, revenue decreased $1.8 million sequentially or 1.2%. This slight decline was not a surprise and can be attributed primarily to the impact of Christmas, New Year's and Chinese New Year's holidays in Q3, with the only significant holiday in the second quarter being Thanksgiving here in the US. On a regional basis, we saw strong revenue growth across the board. Europe again led the pack, reporting organic revenue growth of approximately 34% year over year and up 61%, including taskforce. This marks the ninth consecutive quarter that Europe has grown its revenue. US revenue was up 15% year over year, including the Accretive acquisition, and the Asia-Pac region grew 9.4% year over year. Herb will provide additional details on our revenue performance a bit later in this call. Net income improved to $4.6 million or…

Thank you, Kate and good afternoon everyone. I’ll start by giving detail on our fiscal third quarter financial results, and will then discuss the early trends we’re seeing in the fourth quarter. I’ll also give further detail on the financial impact of the strategic growth initiatives and recent acquisitions that Kate discussed. Starting with an overview of our third quarter results. Total revenue for the third quarter of fiscal 2018 was $172.4 million, a 20% increase from the comparable quarter a year ago, including our acquisitions, and up 5% excluding them. Sequentially, revenue was up 10%. On a constant currency basis, revenue increased 17.6% year over year and 9.6% sequentially. Our third quarter gross margin was 36.3%, flat compared to the prior year third quarter. SG&A expenses were $55.3 million or 32.1% of revenue, compared to $45.4 million, 31.5% of revenue in the fiscal third quarter a year ago. I’ll provide more color on SG&A shortly. Our net income was $4.6 million or $0.14 per diluted share. In quarter three, adjusted EBITDA was $8.7 million or 5% of revenue, compared to $8.4 million or 5.8% of revenue in the year ago quarter. Now let me discuss some of the highlights of our revenues geographically. As Kate mentioned, we had strong revenue growth across the board. For the third quarter, total revenues internationally were approximately $38.1 million versus $26.9 million in the third quarter a year ago, an increase of 41.4% year over year, 29.6% constant currency, and an increase of 2.1% sequentially, 0.6% constant currency. These results were bolstered by our strong performance in both Europe and Asia Pacific. Europe showed improvement for the ninth successive quarter, reporting revenue growth of about 34% year over year, excluding revenue from taskforce and flat sequentially, even though there were two additional holidays…

Thank you, Herb. We achieved a lot during the quarter, and we have been busy. We’re optimistic about closing out fiscal ’18 and laying a strong foundation for fiscal ’19. Our client continuity has remained strong throughout our transformation. During the third quarter, we served all of our top 50 clients from fiscal 2017, and 49 of 50 from 2016. Our top 50 clients represented 34% of total revenues, while 50% of our revenues came from 124 clients. Our largest client for the quarter was approximately 2.2% of revenue. That concludes our prepared remarks, and we're now happy to answer any question.

[Operator Instructions]. And our first question comes from the line of A Andrew Steinerman with JPMorgan. Your line is now open.

Hi. Good afternoon. This is Michael Chow in for Andrew. My first question is - I’m sorry if I missed it. What was the total organic constant currency revenue growth year over year for the third quarter?

That was 3.3%.

Herb is getting it, Michael.

Sure. Okay.

Yes. 3.3%. Yes, that was 3.3%.

3.3%. Got it. And then - and I think you - correct me if I'm wrong, I heard in the fourth quarter trending comment that the comparable number is 7.5% year over. Is that right or?

That’s correct. If you look at the first five weeks year over year and that's not adjusted for currency. It’s just the way we're running right now, 7.5%0.

Okay. Understood. So what would the comparable organic constant currency number be for fourth quarter?

I don't really have that calculated out, Michael.

No problem.

Yes. We didn’t calculate that mid quarter. We look at currency impact at the end of the quarter, Michael.

Understood. And can just ask one on Accretive? Can you give us a sense for what the credence like for like, year over year growth was for the third quarter?

Yes. It was up slightly. And then - but their profitability and primarily due to the cost reductions that we put in place when the EBITDA last year was essentially breakeven to $1 million this year.

Got it. And then if I could just squeeze in one more on gross margin trends. I know you gave by regions. Can you give a little bit more color on those gross margin trends? I recall there was some lingering pressure in Europe, but it sounded like it was flat year over year. So is that - do you see that improvement continuing?

Yes. Overall, we've got a little bit of pressure due to - there’s a combination of things. One is the mix. As Europe is - and international is growing at a faster rate than the US, and overall their gross margin is below the US. The weighted average ends up bringing our overall gross margin down slightly. We’re also having a little bit of wage pressure that we mentioned. You saw that our pay rates have gone up. We’re working hard now to start recovering that as we’re moving up. And of course, obviously our topline - our bill rate has increased at the same time, but we need to do - continue to really focus on that to get that up even higher.

Understood. Perfect. Thanks so much.

Thank you. And our next question comes from the line of Kevin McVeigh with Deutsche Bank. Your line is now open.

Great. Thanks. Hey, I wonder, can you give us a sense - if I heard the numbers right, it sounds like the taskforce EBITDA margins are about 18% and then Accretive 6.3, if I heard the numbers right, Herb. Is that right? and if that isn't the case - if that is the case, why is taskforce so much higher and is there - because it sounds like from a gross margin perspective, it's a little dilutive, but the EBITDA margin seemed a lot higher. So maybe help us understand that dynamic a little bit.

Yes. The taskforce has a very lean structure. So their gross margin is typically a little bit lower, but manage that business very, very efficiently. the Accretive is - I don't want to say turnaround, but we - clearly in what we outlined when we bought them, that they've been running annually in the - only in the $2 million, $3 million EBITDA range. And so we've got the synergies that we took out. So we had - upon acquisition, we took out part of their back office at that time and then also some of their people in the field. And then we'll balance that out at the end of the integration. We have about another $0.5 million to take out. So they’re going to be close to a 10% EBITDA ratio when everything's completed. So again, we're going to lose visibility of that going into next year because even going into this next - this quarter that we're in, as we're tightly tucking them into our offices, so it won't be clear cut. But we’ll definitely be removing that cost.

Got it. And then it sounds like, was it four offices that you picked up? Are you going to keep those offices or will they be combined into existing resources?

Yes. There was five and they'll be combined. We’re in the process of doing that now. For example in Atlanta, that's already been done. We’ve exited out of their location there. They’re working with our group. In LA, Chicago we’ll be removing those offices for long and working on a consolidation in the Bay Area as well. But they still will keep their Sacramento office as well. And you get into individual location versus truly a different geographic presence, I mean for example in Detroit, technically you’ve got two separate locations. You have ours and theirs, but ours will eventually go away.

Got it. and then could you give any commentary just on a regional perspective, was there any outpaced activity like it in Tri-State as opposed to other regions of the country or just any thoughts you could on a region by region perspective?

Yes. Overall, Tri-State we've talked about that over the last several quarters, has still lagging year over year. We’re in our turnaround mode. I’m going to let Kate talk about that just in a second. But if you take out Tri-State, we were up in the US just under 4% as a whole. So we feel good about going there. And then Kate, do you want to talk a little bit about?

Yes. I'll turn to the optimistic and I'll touch on Tri-State too, Kevin. I’d say our strongest region right now is northern California. We’re very bullish about what we're seeing from both our core business and the Accretive business in the Bay Area. So that is really our strongest regional bright spot. In Tri-State, we’re stabilizing and we have a lot of change, change in leadership, change and structure in Tri-State and we've been able to stabilize and hold our revenue through all that change. And now we're going to start seeing more progress as we get that business turned and growing again. So I feel like we're not satisfied with the result yet there, but we’ve made a lot of progress in terms of setting the foundation for growth.

Got it. And then just real quick. Can you remind us what percentage of the revenue Tri-State is today?

Yes. Typically, historically they've been in the 20% range. Right now they're running about 16% of US revenue.

Thank you.

[Operator instructions]. And our next question comes from the line of Greg Mendez with Robert W. Baird. Your line is now open.

Hi. Thanks. This is Greg on for Mark Marcon. Thanks for taking my question. First, I was just wondering, Europe continues to do really well. I know we’ve gotten a little bit aggressive to get some gains there, but how are you thinking about the momentum going forward for that business?

Yes. I think we feel very optimistic about the momentum in that business. It's a lot about leadership and talent that we've been able to bring into the European practices. We have a new leader in Stockholm for example that came to us from E&Y and McKinsey. He’s having a good, positive impact in the business. Our leader who runs all of Europe who is based in London has done an excellent job. It takes a while to turn the ship and now we've done that and we're seeing the fruits of all that labor. I would also say that we've invested there in some of our managing consultant partner type talent resources that can drive more strategic project opportunity in our largest client and be able to go deeper with our services, and we’re seeing a positive impact from that.

Okay, great. And on the SG&A, so it sounds - I mean would we expect then - I know you mentioned it's going to be lumpy, but it sounds like the integration, the acquisitions you're thinking would be complete at the end of Q1 of fiscal ’19. So after that point then, would we expect some of the larger charges to kind of be done with, or?

Yes.

Okay.

Yes. The short answer is yes, and you'll start seeing that trending in Q1 as we ramp down some of the additional charges at that time.

Okay, got it. And can you just talk a little bit - I mean how - you talked about an emphasis on not going into mid-market. Accretive obviously is a step into that space as well. So how does the - can you just talk about the interaction between how Accretive focuses on the mid-market versus what you're going to have the organization - the core organization focusing on in mid-market? How do those two interact and how are you thinking about that?

Yes. So we'll be integrating our sales teams really by the end of the fiscal year. So we won't be running legacy Accretive differently than we ran the core business in fiscal ’19. I will say we've done a better job this year of analyzing our client base by segment, understanding what they're buying from us by segment and then mobilizing parts of the revenue team to focus on the particular client segment they’re best suited to serve. And that's a different go to market strategy than we've deployed in the past and we think will be more effective.

Okay, got it. And just a quick numbers question. Did you - Herb, did you say 500 bps sequentially decline in the tax rate for Q4?

The - we’re going to be up in that 36% range overall would be statutory. Now, there's - but then you've got the other hit of the $1.4 million. So I would actually calculate out to an actual percentage, but there’s ins and outs there. And we have a tough time predicting that every quarter because it just depends on exactly how the profitability comes also in Europe and international that drives change there.

Okay. Got it. Thank you.

Thank you. And I'm showing no further questions at this time. So with that, I’d like to turn the call back over to CEO Kate Duchene for closing remarks.

Thank you, operator. We appreciate all of you attending the call and your interest in RGP. We look forward to talking to you again on our next earnings call following the end of our fiscal year 2018. Thanks again.

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