Resources Connection Inc (RGP) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to 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 McPhee] 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 condition 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 '18 earnings call. Here is 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're seeing in Q4; third, I will report on the progress we have made in integrating the 2 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 U.S.

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. U.S. 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 $0.14 per diluted share compared to $2.9 million or $0.09 per diluted share a year ago. These results were positively impacted by $0.07 per diluted share related to the tax reduction from the tax reform act and were offset by costs of $0.11 per diluted share related to severance, acquisition and transformation-related expenses during the quarter.

SG&A was $55.3 million in the third quarter, 32.1% of revenue compared to $45.4 million in the third quarter a year ago, 31.5% of revenue. The increase is mostly attributable to SG&A expense from the acquired businesses. The company's SG&A was also higher than originally planned this quarter largely due to costs associated with the integration of the company's 2 acquisitions as well as increased business development efforts to drive growth. In addition, we experienced several onetime expenses that were out of the ordinary and hit at the same time. Herb will outline these costs in greater detail in a moment.

Controlling SG&A spend remains one of our strategic priorities, and we are fully committed to improving cost-containment efforts within our day-to-day operating model. We acknowledge that our timing on delivering SG&A savings is delayed, but we are confident that they will normalize. We are committed to the longer-term goal of SG&A below 30% by the end of fiscal '19.

In Q2, we marked the start of a compelling growth story at RGP. This past quarter, that story has continued to grow and evolve, rooted in the success of our strategic initiatives and acquisitions. In Q4, we are looking to build on our momentum and begin capturing more of the opportunities created by our recent efforts.

Let me now share some of the positive revenue trends we're seeing in our business. Our Strategic Client Program, which is leading the way for elements of our sales transformation, is reporting revenue up 9% year-over-year. We expect to see that growth continue through Q4 and into fiscal '19. The account planning work and deeper focus on client initiatives is paying off as we are earning more work within that client base. In our top 10 clients in Q3, all but 2 were up strong double digits. Our business development team, which is primarily responsible for net new logos is performing well inside of our major markets. In addition, organic year-over-year revenue trends have continued to increase nicely so far in Q4. Again, Herb will outline the trends with more color later in the call.

With respect to our investments, we're very pleased to report that significant progress has been made in integrating our 2 acquisitions, taskforce and Accretive Solutions. In fact, the integration of our taskforce acquisition is substantially complete. We are also in the final stages of integrating Accretive and remain on track to complete the integration during Q1 of fiscal '19. The acquisitions have already begun to have a positive impact on our business results, with taskforce contributing revenue of approximately $3.8 million and EBITDA of $700,000, and Accretive contributing revenue of approximately $17.3 million and EBITDA of $1.1 million. Herb will cover the cost synergies we have captured from the acquisitions, but I am pleased that we have already achieved over half of the cost reductions we expected to realize from these deals.

Now I want to provide an update on our continued progress against the 3 strategic initiatives we first outlined at our Q3 2017 earnings call that was a year ago. We are 12 months into this work, and I'm pleased to share that we've made substantial progress. I'll begin with sales transformation. In the U.S., our sales transformation is largely complete. We have accomplished all but one of the objectives we outlined for this initiative in April 2017. Having rolled out Salesforce throughout the enterprise, developed go-to-market sales management and account development playbooks and launched a new learning and development program. All that remains is the deployment of a new incentive compensation program for our sales team members, which we plan to complete by the end of Q4 and implement for fiscal year '19.

Internationally, our sales transformation is well underway as we are making certain personnel changes, investing in business development roles and launching account planning by client in all markets. While the bulk of the work may be behind us here in the U.S., we are being very careful to avoid complacency. We are now in a refinement period, reinforcing accountability and working to review and adjust the sales initiatives that we have implemented over the past 12 months to ensure we are optimizing results.

Next, our business model structure. In the third quarter, we finished building out our talent group, marking the completion of all of our major organizational updates. In our major markets, we have also implemented the sales structure in our revenue team to focus on middle-market client acquisition and penetration. This objective will also allow us to sell our solutions capabilities into that client base with less brand pressure than we faced in the Fortune 500. The Accretive acquisition also directly supports this initiative because their client base is primarily middle market. We are now functioning fully under our new organizational design in the U.S. and remain confident that we have the right people in the right roles, focused on the right clients. We are driving accountability and productivity across all positions. We recently hosted a leadership summit in Dallas designed to hone our management's -- our management teams' focus on our strategy to grow, our business objective and clear definition of roles and responsibilities. We will continue these alignment and accountability efforts going forward and expect them to improve efficiencies and results across the company over the longer term.

I've already touched a bit on our third initiative, cost containment. We have made good progress on managing our core SG&A expense. We have, however, experienced higher expenses related to severance, our acquisitions, sales transformation and business development costs. These costs will normalize, and we have not lost sight of our cost-savings goals as we move toward completion of our transformation efforts.

Creating alignment throughout the organization on growth strategies and results did take some investment. We believe it is money well spent as we continue to see an uptick in revenue performance as we move through Q4.

As I stated on the 2 previous earnings calls, cost reduction does not follow a straight line, and we continue to expect that there will be some short-term lumpiness as we complete the integration of our 2 acquisitions, make needed adjustments to our talent mix, invest in business development and middle-market client penetration.

This has been an extremely busy year for us, and I and the entire management team are pleased that we are seeing tangible results in our business from our efforts. But we are even more pleased with the momentum and the potential to see continued improvement as we close out the year and look ahead to fiscal '19. We are now 1 full year from the announcement of our key strategic initiatives and remain on track to hit all our milestones and goals within the time frame that we originally laid out. As we complete those efforts in the coming quarter, we plan to shift our focus to evaluating how our initiatives are performing and making adjustments where necessary to continue growing revenue while making balanced investments. We will also focus on finalizing the integration of Accretive, including aligning their sales function with our own. We will continue our efforts to deepen our client development plans and cross-sell within a client base that has embraced RGP as a premier provider of high-quality talent. Our business model aligns perfectly with the growing gig economy mindset, finding specialized talent on demand to help drive business forward.

I'll now turn the call over to Herb for a more detailed review of our third quarter results.

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 3, 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've 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 2 additional holidays in the third quarter compared to the second quarter. Asia Pacific reported strong revenue, up 9.4% year-over-year and flat sequentially. Our U.S. performance strengthened in the quarter, with revenue increasing 14.9% year-over-year, including Accretive. These results reflect increased activity overall, higher bill rates in several of the company's largest markets and also reflect our continued progress on our strategic initiatives in the integration of Accretive. Sequentially, revenue in the U.S. increased approximately 12.5%, including our acquisitions. Excluding acquisitions, revenue sequentially decreased slightly at 2%. A normal trend since this quarter includes the Christmas, New Year's holidays.

Turning to the revenue trends for the fourth quarter of fiscal 2018. Weekly revenues in Q4 are trending approximately 22.5% ahead of last year, including taskforce and Accretive. If the current trend continues, revenue would be in the range of $178 million to $182 million overall compared to $148.6 million a year ago. Without Accretive and taskforce, the revenue trend is $156 million to $160 million. The high end of the range is based on the current trend of 7.5% organic growth. As we continue the integration of Accretive in the fourth quarter, we will lose the ability to break it out from overall RGP results.

Turning to gross margins. Including our acquisitions, gross margin for the third quarter was 36.3%, flat compared to the prior year third quarter and decreasing 160 basis points sequentially. The sequential decrease is related primarily to the normal resetting of employer payroll tax obligations at the beginning of a new calendar year and a slight increase in pay rate per hour. Excluding reimbursable expenses, our third quarter gross margin was 36.9%, which compares to 37% in the third quarter a year ago.

For the third quarter, our gross margin in the U.S. was 36.9%, the same as last year's third quarter mark, and our international gross margin improved to 34% compared to 33.8% a year ago. For the fourth quarter, we expect our gross margin to be in the 38% to 39% range compared to 39.1% a year ago. The year-over-year decrease is primarily a result of pressure on pay rates, the growth of our international business as well as the 2 acquisitions having slightly lower gross margins.

The average hourly bill rate for the quarter, including acquisitions, was approximately $123, which compares to $123, including acquisitions, in the second quarter and $118 in the year-ago quarter. The average pay rate for the third quarter was approximately $63 compared to $59 last year and $61 last quarter. As a reminder, these hourly rates are derived based on prevailing exchange rates during each given period.

Now to head count. Quarter-end consultant head count was 3,143, including 402 from Accretive and 48 from taskforce, versus 2,611 a year ago. The total head count of the company, including Accretive and taskforce, was 4,033 at quarter-end. While overall head count increased, we remain diligent in our efforts to ensure we have the right level of personnel in the right markets. For instance, we've added [a] talent in Europe to support their growth.

Now looking at other components of our third quarter financial results. SG&A expenses were $55.3 million or 32.1% of revenue. This compares to SG&A of $45.4 million or 31.5% of revenue in the third quarter of fiscal 2017 and $47.5 million or 30.3% of revenue in the second quarter of fiscal 2018. Our SG&A also includes noncash charges for stock compensation expense of $1.4 million or 0.8% of total revenue.

The year-over-year increase of $9.9 million from last year's third quarter relates largely to costs associated with the SG&A of the taskforce and Accretive operations, integration costs associated with the acquisitions and increased business development efforts. Specifically, SG&A includes $6.2 million directly from the acquired businesses, $0.7 million from severance, $2.9 million from integration of the acquisitions and the ongoing efforts to transform our sales and business development efforts. The combined impact of these charges were $0.11 per diluted share on today's results. In addition, the increase over our estimated range for the quarter included medical claims that were approximately $350,000 higher than normal. We also booked an additional $300,000 of bad debt reserve due to higher AR levels and a currency hit of $1 million compared to last year primarily relating to the strengthening of the euro, yen and pound in the quarter. We view the temporary bump in SG&A costs as necessary short-term investments in the growth of our business and our client base and expect that some of these costs will continue into the fourth quarter. We anticipate the bulk of these integration and transformation costs will taper off beginning in fiscal year 2019 and be further offset by additional cost synergies realized in the successful integrations of the Accretive [Solutions].

As Kate discussed earlier, reducing SG&A as a percent of revenue remains one of our strategic priorities, and we're fully committed to improving cost-containment efforts within our day-to-day operating model, and we'll continue to closely monitor SG&A while focusing on growth. In the fourth quarter, we expect SG&A to be in the range of $54.5 million to $55.5 million, approximately 31% of sales, which will include $2.5 million to $3 million of spending for the transformation and integration of the acquisitions. This includes costs for consultants and training-related activities. We recognize that these costs are a little higher than we previously outlined, but our goal is to ensure that the integration and transformation is extremely successful. The results in growth we are currently achieving supports our decisions.

At the end of the third quarter, our office count was 74, 48 domestic and 26 international. During the third quarter, we added 5 offices in the U.S. as a result of our acquisition of Accretive.

Turning to the other components of our financial statements. Depreciation was just over $1 million compared to approximately $950,000 in the second quarter. Amortization expense was $1 million compared to $300,000 in the second quarter as a result of the additional amortization of intangibles related to Accretive. Our adjusted EBITDA or cash flow margin, which we define as EBITDA before stock compensation, was 5% in the third quarter, down slightly from 5.8% a year ago and 8.5% in the second quarter of fiscal 2018. Our pretax income was $4.6 million in the third quarter.

During the quarter, we reported a provision for income taxes of $46,000, representing an effective tax rate of 1%. The drop in tax expense this quarter relates to the revaluing of our deferred tax assets and liabilities as required by the Tax Cuts and Jobs Act of approximately $1.1 million and additional $1.1 million related to bringing our overall tax expense into line with the new U.S. mandated lower rate. The favorable impact on EPS in the quarter of these changes were $0.07 per share.

For the fourth quarter, lower tax rate will continue to reduce the U.S. tax rate by approximately 5%, but we'll also incur a write-off of deferred tax assets of approximately $1.4 million related to the expiration of unexercised stock options. Also note that our GAAP tax rate for each of the upcoming quarters is difficult to predict and could be volatile as the rate will be dependent on several factors, including the operating results of our U.S. and foreign locations, each of which are taxed or benefited at different statutory rates and the offset of the tax benefit of foreign losses in certain locations by valuation allowances.

On a cash basis, our tax rate was about 36%, and we expect that rate to decrease going forward. We do not expect any charges on our accumulated offshore earnings. Finally, our GAAP net income was approximately $4.6 million or $0.14 per share during the third quarter.

Now let me turn to the balance sheet. Cash and investments at the end of the third quarter were $43.2 million, a $13.1 million decrease from the second quarter of fiscal 2018. This was primarily the result of the Accretive acquisition, share buybacks during the quarter, interim bonus payments during the quarter and a settlement of payroll obligations on the last working day of the quarter. Receivables at quarter-end were approximately $126 million compared to approximately $109 million at the end of the second quarter. The increase of $17 million is split between approximately $10 million of new receivables from former Accretive clients and growth in our core business. Days of revenue outstanding were approximately 65 days compared to 63 days in the second quarter of fiscal 2018.

Dividends for the quarter total approximately $3.7 million. Capital expenditures were $836,000 during the quarter, net of landlord reimbursements. In the third quarter, we repurchased approximately 321,000 shares at an average stock price of $15.95 per share for approximately $5.1 million. Our stock buyback program has $120 million remaining.

We will continue to return cash to shareholders through our quarterly dividend while balancing debt repayment, the capital requirements of our growing business organically and inorganically and fiscal prudence. Our shares outstanding at the end of the third quarter were approximately 31.5 million. We issued 1,072,000 shares [last year in the] third quarter related to the Accretive acquisition.

Now turning to the financial impacts of our Accretive and taskforce acquisitions. As Kate mentioned, the integration of our taskforce acquisition is substantially complete. We're also nearing completion of our integration of Accretive. As Kate and I both mentioned earlier, the acquisitions have already begun to have a positive impact on our results, including taskforce revenue of approximately $3.8 million and EBITDA of $700,000, and Accretive revenue of approximately $17.3 million and EBITDA of $1.1 million. We've already achieved over half of the cost reductions we expect to be realized from these acquisitions, including $500,000 in back-office cost reductions attributable to Accretive. We're on track to complete the balance of cost reductions by the first quarter of FY '19 and expect to have both acquisitions fully integrated at that time. We're excited about our acquisition of Accretive and taskforce, and we're continuing to work to identify additional growth opportunities, both inorganic and organic.

And finally, I'd like to discuss the financial impacts of the strategic initiatives that Kate covered earlier. As a reminder, we first outlined these 3 initiatives just 1 year ago with specific goals to reduce costs over time, enhance our revenue and improve our operating model. We said we expect it to take 18 months, and we've been able to accelerate the timing -- time line. Though with that, we increased our costs in the short term. However, this will allow us to see the overall benefits earlier than originally expected. We continue to successfully implement these initiatives and are pleased with the progress we made in the third quarter, in particular, with the sales transformation initiative and the redesign of our business model. On revenue enhancement, we continue to believe the initiatives we've outlined will put us in a stronger financial position going forward, and we're already seeing growth.

As Kate mentioned earlier, in the U.S., our sales transformation is largely complete. We have achieved all but one of the objectives we initially outlined from this initiative. We have completed the rollout of Salesforce throughout the company and now have developed go-to-market, sales management and account development playbooks. We've also launched a new learning and development program. Our new incentive compensation structure for our sales team is still under development, though we expect to have that completed by the end of Q4 for implementation in FY '19.

Revenue for our Strategic Client Program is up 9% year-over-year and trending positively. We expect to complete substantially all of our sales transformation by the end of the fiscal year, and we are now working to refine all the sales initiatives that we have implemented over the last 12 months to ensure we're optimizing our efforts.

With regards to the redesign of the business model. This quarter, we finished building out our talent group, marking the completion of all of our major structural updates. We are now fully -- operating fully under the new organizational design in the U.S., and we're focusing on driving accountability and productivity across all positions. We expect these efforts to continue to improve efficiencies across the company.

While we discussed our cost-containment initiative earlier in the call, I want to reiterate that we remain committed to lowering SG&A as a percentage of revenue over the last several years. Despite some onetime expenses related primarily to severance, our acquisition and our sales transformation and business development cost, we have not lost sight of our cost-saving goals. As mentioned earlier, we've accelerated the time line of our initiatives. These efforts have already delivered improved revenue growth, and we expect this upward performance trend to continue throughout fiscal year 2018 and into 2019. Our efforts to execute against our strategic initiatives have already delivered improved revenue growth and have been further supported and enhanced by the client offerings of taskforce and Accretive. As such, we anticipate that this upward performance trend will continue.

As Kate discussed earlier, we're very pleased to see our acquisitions and strategic initiatives beginning to bear fruit. We expect the momentum to continue and anticipate seeing improvement as we finish out the fiscal year. We will now begin to focus -- shift our focus to evaluating how our initiatives are performing and finalizing the integrations of our 2 acquisitions.

In summary, we're very excited about -- that our transformation and acquisition initiatives are ahead of schedule and believe that we're set for an exciting FY '19.

Now I'd like to turn the call back over to Kate for some closing comments.

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 questions.

(Operator Instructions) And our first question comes from the line of Andrew Steinerman with JPMorgan.

This is Michael Cho in for Andrew. My first question is -- I'm sorry if I missed it, what was a total organic constant currency revenue growth year-over-year for third quarter?

I would say 3.3%.

Herb is getting it, Michael.

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%, Herbert. Is that right or?

That's correct. If you look at the first 5 weeks year-over-year, and that's not adjusted for currency yet, it's just the way we're running right now.

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

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

Yes. We didn't calculate that mid-quarter. We will get currency impact at the end of the quarter, Michael.

Understood. And can I just ask one on Accretive? Can you give us a sense for what Accretive's like-for-like year-over-year growth was for third quarter?

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

Got it. And 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 of the U.S., and overall their gross margin is below, the U.S. 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 top line -- 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.

And our next question comes from the line of Kevin McVeigh with Deutsche Bank.

Hey, I wonder, could 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 diluted, but the EBITDA margin seem a lot higher. So maybe just help us understand that dynamic a little bit.

Yes. 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, and 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 4 offices that you picked up? Are you going to keep those offices? Or will they be combined into existing Resources offices?

Yes. There was 5, and they will be combined, and 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, and they're working with our group. In L.A., Chicago, we'll be removing those offices before 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 2 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 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 U.S. just under 4% as a whole, so we feel good about going there. And then Kate, 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 and -- regional bright spot. In Tri-state, we're stabilizing. And we have a lot of change, change in leadership, change in 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 at about 16% of the U.S. revenue.

(Operator Instructions) And our next question comes from the line of Greg Mendez of Robert W. Baird.

First, I was just wondering, Europe continues to do really well. I know you've gotten a little bit aggressive to get some gains there. But I mean 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's 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 of 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 opportunities in our largest clients 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 sound -- I mean would we expect then -- I know you mentioned it's going to be lumpy, but it sounds like the integration of the acquisitions, you're thinking, would be completed at the end of Q1 of fiscal '19. So after that point then, would we expect some of the largest charges to kind of be done with or -- okay.

Yes. According to -- 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 now 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 is going to focuses on the mid-market versus what you're going to have the organization -- the core organization focusing on mid-market? How do those 2 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 run 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 do -- Herb, did you say 500 bps sequential decline in the tax rate for Q4?

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

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.