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Resources Connection, Inc. (NASDAQ:RECN)

March 12, 2013 10:30 am ET

Executives

Nathan W. Franke - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Anthony Cherbak - President, Chief Operating Officer and Director

Analysts

Kelly A. Flynn - Crédit Suisse AG, Research Division

Kelly A. Flynn - Crédit Suisse AG, Research Division

So we're pleased to have the guys from Resources Connection here. Can you tell me, Resources Connection is the legal name, but the what name? What is this then?

Nathan W. Franke

[indiscernible] Go-to-market.

Kelly A. Flynn - Crédit Suisse AG, Research Division

So this is the go-to-market name. So I guess you can call it both. But presenting for the company, we have Nate Franke, the CFO, joined by Tony Cherbak, the COO. Thanks.

Anthony Cherbak

Thanks, Kelly. Just a legal disclaimer before we start. Relative to this presentation, we may make forward-looking statements. We refer you to our annual report on Form 10-K for the year ended May 26, 2012, for a discussion of the risks, uncertainties and other factors that may cause our business results of operations and financial condition to differ materially from the results of operations and financial conditions expressed or implied by forward-looking statements made during this presentation.

Resources was formed as a division of Deloitte in 1996, spun off on a management-led buyout in 1999 and we went public in 2000. We're a client service focused professional services firm. We work collaboratively with our clients to provide either project consulting, project support or operational support. We help companies solve problems that keep them awake at night by executing internal initiatives that they would struggle to do so on their own, given the lack of capacity or subject matter expertise.

And if I would state our business as simply as I can, we basically help clients get things done. We partner with our clients to execute internal initiatives by dedicating a core group of consultants to do their project's duration. That way, the client retains control over the project and there's a clear ongoing knowledge transfer throughout the engagement. A lot of time with big consulting, one of the complaints is that they, from a client's perspective, as they go through this big project, they spend a lot of money. But at the end of the project, they don't really know what to do with the system that was created or whatever the project tried to intend to do.

Our 6 primary process areas give us the ability to penetrate multiple functional areas within a client: Finance and accounting, information management, human resources, supply chain management, legal and regulatory and risk management, internal audit give us many points of contact within a client's organization. Having many points of contact gives us the ability to get introductions from one department to another as well as one country to another. And once we do work for a client, they use us over and over again. Although accounting and finance is by far our biggest service offering, accounting for just over 55% of our revenues, information management, supply chain management and legal are where we see the most growth potential going forward.

Key differentiators between Resources and our competitors. We're team oriented and exceptionally collaborative in our approach. Our efforts are focused on what's right for the client. We work with our clients every step of the way to be sure that they achieve their desired outcome. We're client service focused but relationship-driven. We work with our clients on knowledge transfer, so that when the project is over, the clients get the intended benefit.

Although we have global reach, we believe that it is important to have local execution. In all of our international offices, we tend to use foreign nationals of their respective geographies that we operate in to lead the delivery of our services, people that know the low local language, the local customs and the local business etiquette.

Our business imperative is to always do the right thing for the client. Whenever conflicted with proprietary products or services, but we listen, determine a desired client outcome and then custom tailor a solution for our clients. Our brand is to build one client at a time.

Our business model provides value to our people, our clients and our investors. To our clients, we provide intellectual capital on demand for them to use as long as needed to get the job done. Our consultants have on average 18 to 20 years of experience and come at bill rates that are a fraction of the Big Four and they create tremendous value for the clients from day 1 on.

To our employees, they get the ability to influence their own career, to control their own destiny. They get to work on interesting assignments within a diverse client base and stay technically relevant while adding new skills to their resume.

To our investors, you get a variable cost operating platform. Approximately 67% of our cash costs are variable. We have an exceptionally strong balance sheet, with over $100 million in cash and no debt. Because our business generates significant cash flow, we're able to return approximately $54 million last year through our stock repurchase plan and our dividend program. In fiscal 2013, we raised our cash dividend by 20% to $0.05 per share per quarter to $0.06 per share per quarter and we've continued to buy shares on the open market.

From our inception, we knew that we needed a global footprint to service our multinational clients anywhere we did business in the world. Today, for the most part, our geographical footprint gives us that. Worldwide, we have 77 offices, with 13 in Europe and 12 in Asia Pacific. Our expansion plans call for a greater presence in China and Germany and someday, an office in Brazil or Poland when the economic climate improves enough for us to make further investments. We have always let our clients to be our guide as to where we need to be and we will continue that plan into the future.

We do business with 85% of the Fortune 100, over 75% of the Fortune 500 and 60% of the Fortune 1000. We focus on sustainable, repeatable clients.

One of our most significant assets, after our people, is our client base. Although we always looked at new clients and relationships, a significant portion of our future growth will come from selling additional services to our loyal existing client base. Over the years, our client continuity has been outstanding. We just don't lose clients. During fiscal 2012, we served all of our top 50 clients from 2011, and we're very proud of the fact that over 84% of our top 50 clients use 3 or more service lines. As we know that once we get an opportunity with a client, they use us over and over again. Our client base is very well diversified, with no client over 5% of revenues.

As I mentioned earlier, our focus has generally been on larger clients. We have an excess of 1,900 clients, but approximately 80% make up 50% of our revenues. In fiscal 2013, the number of $500,000 clients on a run-rate basis is approximately the same as it was in fiscal 2012.

Approximately 25% of our revenues come from our international operations, although our long-term goal is for that percentage to someday approximate 50%. We believe this will be possible, especially given the growth potential that we have in Asia Pacific and China in particular. Our international platform is essential to us, winning enterprise-wide engagements with our multinational clients. Our global accounts program gives a special attention to our most significant client relationships.

Our consultants average approximately 18 years of experience, which generally includes Big Four, the corporate and more likely than not, a combination of both of those. Our consultants require very little start-up time in contrast of the vast majority of those that come out of the Big Four, which is virtually always training their people at the client's expense, experience equals judgment. And our consultants, for the most part, are paid based upon the hours they work on a client project, which makes it relatively easy to ramp up or throttle down depending on demand.

This slide demonstrates the variable cost nature of our business model and that approximately 67% of our cash operating costs are variable. Approximately 66% of our SG&A is comprised of client-facing personnel from our offices around the world and those are the people that maintain the client relationships. This variable expense structure has allowed us to generate positive operating cash flow every year since inception and allows for the ongoing return of capital to shareholders. And we have the capacity to add significant revenue growth with very limited incremental investment.

We believe the regulatory environment will continue unabated in 2013 and provide growth opportunities for our company as we help our clients navigate the regulatory landscape. The Dodd-Frank Act has provided many consulting opportunities for our financial institution clients, and we're starting to get assessment projects from those clients affected by the conflict mineral provision of Dodd-Frank as well.

We're also very excited about the expansion of our health care service offerings that address patient safety and incident reporting, tracking and remediation. All of these regulatory opportunities, when combined with the growth that we expect from increasing our penetration and information management, supply chain management and legal service lines within our existing client base, makes for a very encouraging future.

And finally, a slide with just some financial highlights. You see, in 2013, in Q2, the gross margin was 39.1%. That was an improvement from 37.9% in 2012. I don't have that number on the slide, but the same. In cash flow margin, we're up to 10.4%. That's in contrast to 9.9%, which is also not on the slide. And then EPS was $0.14 versus $0.11 in the prior quarter.

That concludes our prepared remarks. We're happy to take any questions that you might have. Kelly?

Question-and-Answer Session

Kelly A. Flynn - Crédit Suisse AG, Research Division

Yes. Can you talk about where you see [indiscernible] from a cyclical perspective? I mean, you're not -- obviously, you're not temporary staffing, so you're not probably considered part of that early cycle category. But how do you see that? And then maybe talk a bit about how demand is trending relative to how macroenvironment feels to you.

Anthony Cherbak

Yes, it's like -- we know that we need -- we know that our issue has been growth. And all efforts from the company's standpoint is focused right now on growth. So I think that we're definitely late cycle. I don't think that we're early cycle. We believe -- we're very confident and optimistic about our future. We've been incubating a lot of different growth initiatives within the company, including a lot of work around our IM service line, supply chain management, trying to add critical resources where we don't have them. We know that something like supply chain works because when we acquired the supply chain platform in the central region, they have a critical mass of people. They do very well at it. This last year, we added supply chain resources to the West Coast and we saw an immediate improvement in supply chain revenue. So we know that we need to add -- right now, what our focus is to add those same resources to the East Coast and internationally, and I think that we'll do real well in the supply chain. In addition, I think our legal practice is -- it's been kind of a relatively small business because we've only located it generally on the East Coast in New York and on the West Coast in Southern California. So as we add more offices that have legal capabilities, I think we can do the same thing with legal that we did with accounting and finance.

Kelly A. Flynn - Crédit Suisse AG, Research Division

How about the -- there's been some talk, I guess, over the past several years at this point about the Big Four kind of feeling, the crunch and reducing prices and maybe encroaching on your market share or your model a little bit. Where does that stand or I guess, is it even true?

Anthony Cherbak

Well, we're not -- one of the things that happened with the Big Four is back in the day when independence was a big issue, this is back in the early 2000s, all of the Big Four, with the exception of Deloitte, got rid of their consulting practices for one reason or the other. But it's mainly centered around independents. And so today, we have seen the Big Four rebuilding those practices. And that has obviously created -- they've been doing more things around what our strength is than just their real high-level consulting. In fact, we've seen, one of the Big Four right now has kind of gotten into a business very similar to ours, kind of like to help clients when they have project needs. So I think that the Big Four will always be a competitor. We're not seeing nearly the amount of irrational pricing now that we did maybe 2 years ago. 2 years ago, they were making decisions on pricing that we knew that they were losing money on every hour that they spend, so -- but we're not seeing that anymore, which is good. And in some cases, we're -- we work on a collaborative basis with the Big Four. It's really who has the relationships in any particular market and a lot of times, the Big Four bring us in to do work that they just either can't do or don't want to do in their markets.

Kelly A. Flynn - Crédit Suisse AG, Research Division

Okay. Thank you guys.

Anthony Cherbak

Thanks.

Nathan W. Franke

Thank you.

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Source: Resources Connection's Management Presents at Credit Suisse 15th Annual Global Services Conference (Transcript)
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