Good afternoon, 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. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I’d like to remind everyone that management will be commenting on results for the Second Quarter ended November 27, 2021. They will also refer to certain non-GAAP financial measures. An explanation and reconciliation of the measures to the most comparable GAAP financial measures is included in the press release issued today. Today’s press release can be viewed in Investor Relations section of RGP’s website and 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 the Risk Factors section in RGP’s report on Form 10-K for the year ended May 28, 2021 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’s CEO, Kate Duchene.

Thank you operator and welcome everyone to our second quarter earnings call. Thank you for joining today. I’ll cover four topics, starting with a quick review of our outstanding second quarter results, I’ll then discuss market trends supporting our sustained performance, what we’ve done to capitalize on the trends and our favorable outlook for the balance of the fiscal year. I’ll also provide an update on our HUGO initiative and close with the introduction of our newly established Advisory Board. During our Q1 call, we guided towards 24% growth year-over-year, and I’m very pleased to say that our results were even stronger. Revenue was again the highest achieved in over 10 years with 31% growth year-over-year. The growth was delivered in both professional staffing and project consulting and was delivered across nearly all geographies. Our healthcare business grew by 21% year-over-year, and the strategic client account programs grew 27% over prior year quarter, and both have strong deal flow in the pipeline. Our adjusted EBITDA doubled versus the prior year quarter to nearly $25 million, and our adjusted EBITDA margin improved to 12.5%. This accomplishment is a result of driving sustained revenue growth, creating an improved fixed cost structure and expanding our gross margin. We’ve worked hard to increase the profitability of the business by driving greater sales productivity and operating efficiency. Our focus on shareholder return includes delivering low- to mid-teen adjusted EBITDA margins, while also making the appropriate investments in the business to drive top line growth over the long term. We remain optimistic about the balance of the fiscal year. At present, two tailwinds are providing more business opportunity than we have experienced in over a decade. First, the Great Resignation or talent reassessment has caused many of our clients to experience skill gaps or temporary openings…

Thank you, Kate, and good afternoon, everyone. During the second quarter, we saw continued strong revenue and margin growth as well as fortitude in operating metrics. We saw larger deal sizes, continued penetration into existing accounts, as well as heightened success with new logos. The momentum noted at the end of Q1 relative to revenue and pipeline continued. Enterprise revenue increased by 31% over prior year quarter and 9% sequentially, while top-of-the-funnel activity demonstrated continued strength, despite the Thanksgiving holiday, leading to significant increases in qualified opportunities, and ultimately to the highest level of closed deals in several years. Strong performance was consistent across our core business in Asia-Pacific, Europe, North America, Veracity and Countsy. While the rising economy and macro trends germane to our business have provided some economic tailwinds, our operational focus and tenacity have led to increased opportunity, bigger wins, and growing foundational strength. The growth we are seeing reflects the speed with which companies are picking on change, but also a broader and more permanent shift in the way workforce plans are built. Both delivery and the use of an agile workforce are here to stay as much for the fact that companies recognize the benefits of access to talent that can be rapidly deployed for discrete purpose as the realization that labor trends have changed and a broader swath of people are choosing to work differently. This desire for flexibility is symbiotic and is a powerful economic force that continues to accelerate. We see more candidates seeking flexible employment with more control and have seen declines in attrition rates and increases in hiring in our variable employee base over the last four quarters. The stigma of non-traditional employment, which was prevalent when RGP was founded, has not dissipated. Stability of opportunity, variety of choice, remote…

Thanks, Tim, and good afternoon, everyone. During our second fiscal quarter, sustained change in demand coupled with successful go-to-market execution enabled us to attain the strongest top line revenue in the last 10 years. We improved enterprise average bill rates and achieves better pay/bill ratio. Additionally, higher leverage and indirect cost of service further contributed to above-guidance gross margin. With persistent focus on reducing fixed costs and improving operating efficiency, SG&A leverage continued to be favorable. We delivered $24.9 million of adjusted EBITDA or a 12.5% adjusted EBITDA margin, which is a highest margin in any quarter in the last decade. Now, let me provide more color on our operating results, starting with revenue. With quarterly revenue of $200.2 million, we well exceeded the high end of our revenue guidance of $190 million. After adjusting for business day and currency impact, Q2 revenue represents growth of 31% year-over-year, and 11% and 6% over the pre-pandemic second quarter periods of fiscal ‘20 and ‘19, respectively. In addition, our revenue was up 11% sequentially on a same day constant currency basis. Revenue growth in the second quarter was broad-based across most of our core market, key client accounts, solution areas as well as industries. Macro trends including the shift toward a more agile workforce model, increase in the use of contingent labor to fill workforce gaps, and companies embracing and executing more transformational initiatives all continue to be meaningful secular tailwinds in driving our top line growth. Professional staffing revenue increased 41% year-over-year while project consulting revenue increased 26%. Strategic client accounts grew 27% year-over-year and 7% sequentially. Our solution offering and business transformation grew 37% year-over-year and digital transformation service revenue continued to expand with Veracity leading the way at a growth rate of 36% year-over-year. In North America, revenue improved…

Thank you. [Operator Instructions] Our first question comes from Josh Vogel with Sidoti & Company. You may proceed with your question.

Thank you. Good afternoon, everyone, and happy New Year.

Happy New Year, Josh.

Thank you. I guess the first question I have for Kate, you talked about all the early successes and positive feedback with HUGO in the tri-state area. And I guess there’s a couple questions around this. When do you anticipate -- you did have some commentary around the back half of the fiscal year, but when do you anticipate this goes from pilot to full rollout? And to build off that, where are the next markets you plan to introduce HUGO, and would it be a deliberate move maybe into some regions, or at that point would it be national? And also would you do it under a pilot method or would it be a full rollout? I know there’s a lot rolled into one, just curious how we should anticipate HUGO really going to market in coming quarters?

Right. So, right now in our pilot stage and this early stage, we’re focused on feedback and engagement more than revenue, and we’re really focused, as I said in my prepared remarks on filling [ph] the vending machine, so to speak. So, it’s a lot about inventory right now. We’re working toward a six-month timeframe for moving beyond pilot. And I think it’s too early to tell Josh, whether that would be to the next select markets that we’re going to focus on, which is Texas and Northern California, but given the way the world is working now, that may well bleed quickly into more of a national pursuit. We just have to learn as we go a little bit, but I’d say within the next six months, we’re going to move beyond pilot.

That’s helpful. Thank you. Switching gears a little bit, I’m kind of surprised in this environment and with the war for talent and general shortages out there that they are showing such success and traction in the pay to bill ratio, I was curious -- and it sounds like this is sustainable. So, I just wonder, maybe more for Jenn, if you could just talk about the wage environment and wage inflation today? And why it appears so easy that you’re passing this along to clients? I know you talked about the value-based pricing and the intention to stay ahead of the impending rise in pay rates, but do you anticipate any potential pushback from clients or prospects when this comes up or do you think this will still remain a relatively easy conversation given the secular tailwinds here?

Hi, Josh. Yes, sure. Let me talk about pay rates first and just talk about a few factors that impact our overall average pay rate. It really hasn’t moved that much. This quarter’s pay rate compared to last year same quarter as well as Q1, it really only moved by about roughly $0.10. It did move up a little bit, but not a whole lot. One of the things that’s impacting our overall average pay rate is mix, right, not only mix by geography, but also mix by our solution. So, we are seeing more impact in certain solution areas, such as tech and digital. We are seeing pay rates go up a bit more. But in the finance and accounting areas, we have not really seen that much of a significant increase. And given that F&A is still more than 40% of our business, and that’s why you’re seeing a mixed impact there from an average pay rate standpoint. And the other factor is that, I commented in my remarks, which is, given our agile talent model, and because of the fluidity of our talent supply, I would argue that our pay rate is already reflective or very close to what markets is -- how the market is moving, because of the fluidity of our talent supply, and we’re constantly and continuously evaluating market pay rates and making those adjustments. So, I think, while -- we are impacted by overall wage inflation, but what you’re going to see is more of a gradual movement as opposed to any sharp rises in our future, in terms of setting expectations for our future pay rates. And in terms of bill rate, we’ve been focused on working, on raising bill rates for a number of quarters now, right. There is anticipated a movement in the pay rate. So, this is the perfect time to have these conversations with our clients, because wage inflation, and this is really happening to everybody broad based. So, I think at a time like this and because of the labor shortage, I think our clients are really starting to appreciate more of the value that we bring to them because we can supply the talent to them at a time when they -- and when they really need it to be able to fill that gap [pb]. So, it’s making those conversations regarding bill rates much easier. And, Tim, if you have anything to add, please feel free to jump in here on the bill rate side.

I would just say that -- I think the constriction of the labor market is probably what makes it an easier conversation because the pace of change hasn’t slowed down at all. And so, as clients are losing employees to non-traditional employment and to other opportunities, they understand sort of the macro situation we are in . So, it is an easier environment to have those rate discussions. And I would just tell you, as I said on the last call that, I think we are priced under market anyway. So, there is still an opportunity for us to get lift. And on the wage side, just one comment on that, which is what you see here from a macro standpoint is that more people want to migrate to this form of employment and not all of that is related solely to pay rate, a lot of it has to do with their ability to have control and to be able to have a broader portfolio of experience. And I highlighted a couple of those examples in my prepared remarks, and I can say that I’ve used one of those situations, they turned out an opportunity to make significantly more money to be able to have control and work our projects that they wanted.

Those are really helpful insights. Thank you. Just a couple of quick housekeeping type questions. Obviously, really strong and impressive performance all around. You’ve consistently been a strong generator of cash, and we saw that announcement in early December. I was just curious, are there other instances or opportunities where, you could buy back a slug of stock from a shareholder connected to any prior acquisition? And, I was just curious about that first and then just building off of that after.

Yes. Sure, Josh. We did buyback about $20 million worth of shares in early December in a privately negotiated transactional with -- the seller is related to a prior acquisition. And from a share buyback perspective, I think it’s safe to say, probably for the rest of the fiscal year, I don’t foresee us being back in the market and buying a significant amount more and share buyback. But going forward in fiscal ‘23, we’ll continue to, as I said, engage in share buybacks possibly to offset some of our dilutions, right, but more opportunistically when we feel that the valuation is right.

Okay. And then, just given the event, which is pretty early in the quarter, what’s a good share count we should be thinking about for Q3?

I think $33 million. We bought back about $1.1 million. So, I would say, probably somewhere in the mid-32 million range.

Okay, great. And just lastly, and you had the comments on this, given the opportunity to utilize benefits from the historical net operating losses in foreign regions, is 28%, is that a good tax rate to use going forward?

That’s right. That’s about right. And if we are to reverse some of the valuation allowances in the second half of the fiscal, obviously that’s going to give us a huge benefit in Q3 or Q4 of fiscal ‘22. But going forward, I think 28% is a good way to look at our think about our effective tax rate.

All right. Great. Well, thank you for taking all my questions and very impressive results. And again, happy New Year, everyone.

Thank you. Our next question comes from Mark Marcon with Baird. You may proceed with your question.

Hey. Good afternoon and happy New Year, and congratulations. Really nice quarter. Wondering, can you talk a little bit more about HUGO just in terms of what the experience was in tri-states, just in terms of the roles that were being filled? How quickly were you able to get people into the system? How you envision it impacting the economics within the tri-state region as it matures, because I’m assuming that as that unfolds then that would roll out across the country.

Yes. So early days, the positions we’ve been focused on it’s been accounting -- accountant, position, staff accountant kind of positions, fund accountant positions and payroll positions, especially as it’s related to some of the recent news around payroll -- the payroll firm that was hit by a cybersecurity incident. But right now, as I said before, Mark, we are very-focused on feedback and engagement with the platform. So, it’s more about that than revenue at this moment. While we do have revenue goals for the platform this year, we want to make sure the experience is right before we roll out the functionality and access to the platform more broadly. But so far, everything is going according to plan. We’re excited about the early feedback and the interest from existing clients who want to get their hands into the platform and start using it. So, it’s really we have been constricting more of the flow, just to ensure that all the functionality is performing the way we want it before we go live. Because you only get, one time at a first impression, and we want to make sure that that is an excellent experience for both client and consultant alike.

Great. What’s the process for basically getting some of the consultants set up in the system? How difficult is that? What are the barriers or hurdles to that?

Yes, it’s really not hard, but we do have an element of quality control. So, we have uploaded a lot of data from our core RGP system. So, all of our talent is really loaded into HUGO and accessible there if we have the right client opportunities. But remember, we started, and our early focus in HUGO is a level or two down. So, I wouldn’t expect a ton of overlap yet in our core RGP consultant base. But then, we do have a level of quality control that is still a human touch element to ensure that those who want to be published on the HUGO platform will represent the brand and the quality of RGP the way we want them to.

And then, can you talk a little bit more about some of the changes that you’re seeing just in terms of the types of people that are coming onto the platform? You mentioned a couple of examples, but I’m wondering, are these people who are at very senior levels? What qualifications are they? Are they former big four with 7 to 12 years of experience, or are they MD levels? What are you seeing just from a demographic perspective?

Yes. And you’re talking, Mark -- I want to make sure I’m answering your question. You’re talking about HUGO in particular?

No, no. Now, I’m shifting over to what Tim was talking about with regard…

Okay. Then I’m going to give Tim this question, if you don’t mind, Mark. I think he’s perfect for this one.

It’s not -- what I would say to you is, for those of us who have been here a long time, like what I would say is the demographic that we usually filed was around 15 years of experience. And we still see that demographic, but we’re seeing sort of a broader spectrum. So, you’re seeing definitely folks who are earlier in their career who are deciding that they want to take a different career path and journey. And we’re also seeing more senior people who are trying to figure out if they want to just do one or two projects a year and to be really, really accretive to a particular client experience or problem. So, what I would say, the biggest thing is, it’s not -- what we’re seeing is sort of a broad array around that 15-year of experience, and particularly in the earlier career. So, the 5- to 10-year, we’re seeing more of those than we have seen historically. But secondarily, I would say, we’re just seeing more and part of that comes down to just this broad trend toward wanting to work in a different way. So, the volume itself, or at least the volume itself around willing to spend for those that are curious, is significantly higher and that is -- that’s been a trend that’s been coming, that’s been accelerated by what we’ve gone through in the last couple of years.

Tim, can you quantify that a little bit, just in terms of like number of applicants or number of resumes that you’re getting, or people that you’ve loaded onto the database? Any way to quantify how much more interest you’re getting, just in terms of people that are interested in this more flexible career?

When I look at the -- I don’t have the actual applicants -- I don’t have the applicant information, but Mark, I can follow-up with you to give you an order of magnitude on that. But what I can tell you in terms of number of hires, looking back sort of pre-pandemic - and comparing it to the pandemic is probably not the appropriate comp. But looking back into the early parts of 2020, our levels are up 10% to 15%. That just gives you a sense for kind of volumes but then to think about the level of experience within that, I’d have to look at the slides. But I can tell you, from looking at the data that comes -- the kind of the data that’s updated monthly, you can really see that the level of experience has -- not experience, I guess, but there is level of experience, number of years of experience in the workforce has gotten markedly lower. So, if it was 15 before, it’s several -- 6 [ph] lower from that now on average.

And then with regards to the tri-state and California, how much of the increase that you’re seeing there is just due to some of the capital markets activity that’s been occurring, both in terms of venture funding as well as IPOs? Any sense for that?

That’s definitely a contributing factor, but I wouldn’t say it’s the driving force. I mean, really, what you’re seeing is, I mean, you’ve got sort of these macro forces, where companies are recognizing that they need to tap into firms like ours to help them just with the regular changes and transformations that they have in to day to day business. And then, there are also the transactions that are spin-off and some of the IPOs. So, that that is a component of it. I’d say, what’s probably, I think a bigger force driving is just the pace of change that companies have to go through today to make sure, just to ensure that they’re staying with the herd, let alone try to get stuff ahead. And then when you couple that with both the workforce’s desire to not be tethered to traditional employment, but also company’s management’s desire to have more flexible resource, sort of the intersection of those three points is really what’s driving us ahead.

Great. And then, digital transformation, obviously, that’s picking up. Can you give us a sense again for the size of that practice, and how much stronger it is now than it was say, six months ago or a year ago?

Hi, Mark. Tech and digital, it’s roughly about just below 15% of our overall business. And, it’s fluctuated. It’s really increased over the last few quarters. But as you know, the remainder of the business is growing as well. So, I think it’s still definitely about 15% right now, but definitely certainly growing at the same pace, if not faster than some of our other solution family.

And then, on the bill rates and the opportunity for lift and being under market, can you talk about how quickly you might be able to do that and kind of what the magnitude is say in F&A relative to tech and digital?

Well, the answer to your first question is not fast enough. I mean, there is a certain amount of element of -- there’s a book of business that’s under sort of existing rate cards and things like that that as we extend, that we renegotiate a big card that we’ll have that discussion. So, it will be faster on the opportunities where we we’re going into a new client or we are going into a new client just s an existing client and we can be a little bit more confident in thinking about our pricing. I think -- I mean, F&A, I think there is opportunity across the board to raise prices generally. I think the opportunity within F&A is probably an order of magnitude less than it is in tech and digital, because there’s constriction of supply in tech and digital, that’s probably a higher level than we have in other functional areas. But also because there is just so much that’s going on from a digital transformation standpoint, as folks -- companies are trying to improve the experience of their stakeholders, that they are willing to spend more upfront and more immediately.

Great. And then, what about length of assignments and also being able to keep consultants on assignment through the lens of the contractor? You’ve seen -- obviously, there is this Great Resignation, great reshuffle. Is that creating any challenges for you, or are you seeing kind of the staying levels of completion percentage?

I mean, we’re -- it’s a great question, because I would say to you that our average length of assignment really hasn’t varied that much. I think where the challenge comes in is that there is more opportunities for consultants and some of them do get poached at what I would say at an inopportune times, like almost prior to the -- now you almost never saw somebody commit to a project and then sort of at the 11th hour leave to go to another project and we’ve seen that happen I would say several times much to the consternation of our client service team, but it is a function of kind of what’s happening in the world today. What I will say as well, so while that is frustrating, it hasn’t reduced our opportunity to close the work. And what I think one of our greatest strengths is resilience when those types of things happen and we’re able to turn those situations around. But I think if you compare that to sort of the migration away from traditional that some of our clients are seeing, while we’re impacted, I feel like we’re not as impacted as heavily as they are.

Great. And then, I mean, obviously you have really nice turnaround. How are you thinking about longer-term what the margin profile should look like, as we kind of go through this evolution in the business?

Yes. I mean, we are -- this year, year-to-date, our margins right now I’d say roughly around 12%, 12.3%. I think longer term, we think that we can -- I think Kate referred to this in her remarks, low to mid-teens, in terms of margin. I think in the near to mid-term, I think 12%-ish is sustainable. But I think over the long-term, as you know, we’re working on this technology transformation project. One of the benefits that we’re expecting out of this project is that we’re going to achieve much better automation and more automation and better efficiency, which is really going to help us scale and improve our SG&A leverage. So, with that, once that project is complete, and once we go live, we do expect to -- there’s more room in terms of margin, I believe that we can get to mid-teen margin.

Yes. Let me just add to that just a little bit, Mark. It’s a combination of the things that we’re working on now, certainly the technology that Jenn talked about, and the fact that we’re moving from really end-of-life core systems, to state-of-the-art systems. And we do believe that will matter in the business and will matter to our financial results. But also, as HUGO gains adoption in that self-service platform, and continuing to build that kind of digital experience and everything we do at RGP will drive efficiencies that can help us think of our margin in ways that we wouldn’t have 10 years ago. And we’re all committed to that to delivering shareholder return and really driving everything we do to improve that.

And our next question comes from Andrew Steinerman with JP Morgan. You may proceed with your question.

Jenn, my question is about your comment towards the end of your prepared remarks, where you were talking about the outlook for third quarter. You mentioned extended shutdowns around the holidays. And sort of in the same breadth, you said expecting kind of typical seasonality. And I definitely concur with you that kind of at the middle of the range for revenues of minus 3% sequentially for third quarter compared to second quarter is typical seasonality. So, my question is a little more nuanced. The question is, were you trying to call out unusual negative seasonality around the holidays in December, and then made up for kind of in a faster start, kind of January, February. So just kind of break down for us, when you say a kind of a typical seasonality and you also said extended shutdown, was December kind of a normal December, or you started counting on kind of January, February, to make up for any kind of shortfalls around kind of people taking holidays?

Yes. Beginning weeks in Q3 -- I think Tim referred to this in his remarks, which is, we are still building momentum from the end of Q2. So, early weekly revenue in Q3 in December, before the holidays, we were seeing roughly about a 1%-ish increase compared to the end of Q2. And even though we’re ahead, we know that we’re going to hit our holiday seasons. And over the last couple of years, we are seeing some of our larger clients having extended shutdown. For example, RGP, we, since COVID to now we also decided to give our people a week’s break over the holidays. So, that is going -- that is contributing to a little bit more seasonal impact compared to previous years. And so, it’s really accounting for that seasonality and the holiday impact and peripheral holiday impact, if you will. And then also taking into account, Omicron is still out there. So, we did build in loosely, some impact from -- potential impact from Omicron as well. So, we do expect in January and February, we could pick up some acceleration.

Right. And just that last little piece on Omicron. It’s obviously nice and conservative that you built in some impact from Omicron, but shouldn’t Omicron sort of be very little impact to your business? Isn’t your business just as easily delivered remotely as it is on site? And so, like, I get it, the last sort of 10 days around Omicron has been nervous for all of us. But when you just look at the way you deliver, would you really expect there to be much of an Omicron impact, even if the -- let’s just call it the national workforce is more remote in January and February?

Yes. Let me just say make a comment, and Kate if you want to, jump in. I mean, yes, we are more resilient in terms of delivering remotely, but it’s also about project starts, right? It could push back. Omicron could have an impact on our clients’ business and it could push back project start. So, that’s kind of what we’re baking into in terms of potential Omicron impact.

Yes. And I think what we’re working with is we published the mandatory policy that we’re required to publish, Andrew, by I think it’s the 10th or 11th of this month, is what kind of requirements will -- our clients have, which then go to pushing out start dates, et cetera. And that’s the only thing we worry about.

Right. But just to be clear, it’s good that you’ve built that into your assumptions. You haven’t seen any delayed project starts, because of Omicron yet, right?

No, not yet, nothing material. But we’re really starting to see places and some of the major markets where you’re starting to see some larger incidences of breakout. So, you just want to be careful about that. Because of that you get in all kinds of logistical things around starting consultants and screenings and things like that.

No, I appreciate the sensitivity. And I think you’re taking a sensible approach. Thank you.

Thanks, Andrew.

Thank you. I’m not showing any further questions at this time. I would now like to turn the call back over to Kate Duchene for any further remarks.

Thank you, everyone. We’re proud of this quarter’s results. And we look forward to delivering good news at the end of our Q3. Happy New Year, everyone.

Thank you. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.