Q1 2025 Resources Connection Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Resources Connection Inc. Conference call. Currently all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time as a reminder, this conference call is being recorded at this time I would like to remind.
Speaker Change: We won that management will be commenting on results for the first quarter ended August 24, 2024. They will also refer to certain non-GAAP financial measures an explanation and reconciliation of these measures to the most comparable GAAP financial measures are included in the press release issued today today's press release can be viewed any investors relates.
Speaker Change: Injection of RG piece website and 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.
Speaker Change: The <unk> report on Form 10-K for the year ended may 25th 2024 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.
Speaker Change: I'll now turn the call over to RGB CEO Kate Mcshane.
Speaker Change: Thank you operator, good afternoon, everyone and thank you for joining the dress Patel, our chief operating officer in General our Chief Financial Officer are with me today to discuss Q1 results operating updates and trends and exciting strategic initiatives all focused on what.
We have accomplished in Q1 to evolve our operating model and brand architecture to provide greater transparency and clarity regarding our capabilities to unlock growth and cross sell across our enterprise.
Speaker Change: While the past 12 months have been a challenging operating environment and professional services, we've embraced the opportunity to create a stronger platform for the future broaden our addressable market deepen our client relationships and improve efficiency.
Speaker Change: We made two significant moves in Q1.
Speaker Change: First we evolved our operating model to align strategy and execution with accountable business segments driving performance.
Speaker Change: Second we rebuilt our brand architecture and positioning to clearly articulate our new operating model and the competitive advantage, we bring to the marketplace.
Speaker Change: We launched our new brand positioning today, we will post a new investor presentation. Later this week available at Www Dot RG P Dot com.
Speaker Change: This digital asset lays out our refreshed brand architecture and capabilities, what differentiates our brands and the opportunities ahead.
Speaker Change: We are a global professional services firm, bringing solutions to clients in three ways on demand talent consulting and outsourced services via our on demand veracity and County service brands and all under the <unk> umbrella.
Speaker Change: John will cover our new segment reporting in her remarks, reviewing these service brands in more detail.
Speaker Change: And demand by our GP comprises our high value talent solutions that enable our clients to solve problems quickly and confidently.
Skill set gaps and bandwidth needs we.
Speaker Change: We do not deploy with the pyramid model using an experienced talent.
Speaker Change: Delivering the seasoned and senior talent create faster impact for clients or on demand consultants are expert to execute with 51%, having big for big consulting or big loss experience and many holding multiple certifications with top designations.
Speaker Change: As part of our total technology transformation, we invested in new AI powered talent acquisition and management software that drives faster speed to market and close we are beginning to see the fruits of this investment as we can scale faster with access to industry expertise across finance and accounting.
Speaker Change: <unk> risk assurance project in change management.
Speaker Change: In this business, we generate strong margins with excellent client retention, we hired a new leader for this segment in June who is driving enhanced execution and sales focus.
Speaker Change: Ferocity by our GP is our next generation consulting business, driving digital and functional transformation across people processes and technology.
Speaker Change: <unk> operates with a bench model for salary delivery leaders and can scale by drawing on talent within our on demand business.
Speaker Change: This approach also provides us the opportunity to manage it delivery cost structure for the benefit of our clients and our G. P. <unk>.
Speaker Change: The lifecycle of a transformation project skill set needs change and the combination of bench and agile talent capability differentiates this delivery model from the competition.
Speaker Change: The combination of consulting and on demand also allows us to engage with the client at the beginning of the project lifecycle.
Speaker Change: <unk> has strategic partnerships with service now.
Speaker Change: Oracle Workday Black line, among others and brings frameworks and methodologies to transformation work for functional leaders in finance and accounting tax risk and compliance supply chain customer experience employee experience and information technology.
Chelsea by our GP is our outsourced services business for accounting HR and equity administration, helping startup scale ups and spin out who want to stay laser focused on growth.
Speaker Change: We manage clients back office operations, so they can focus on product and sales.
Speaker Change: ANZ operates on a modern technology platform anchored by Oracle next week with expert human capital support provided by fractional Cfos and Chr.
Speaker Change: We can get an organization up and running on the technology platform quickly and we're expanding our addressable market from a startup focus in the spin out and carve out clients as they look for support post transaction counts.
Speaker Change: <unk> was recently named the 2024 bps partner of the year by next week, a commendation received over the past six years.
Now that I've described our operating model and brand evolution, let me explain the strategy driving these news first the new structure allows us to serve a broader range of needs within our existing and future clients set we are increasingly selling to diversify buyer personas.
Speaker Change: We're actively working to penetrate new buying centers and our clients to enhance the cross sell and unlock growth.
Speaker Change: We've deepened and expanded our capabilities in the consulting space, both organically and inorganically to enhance our ability to win strategy projects at higher levels within our clients' organizations, which in turn creates opportunities to expand the scope of our work and implementation and execution.
The ability to engage in different ways. During a multiyear project will allow us to win additional work.
Speaker Change: Third we are connecting the dots globally to deliver in country near shore and offshore talent solutions, we've built global delivery centers in the Philippines, and India to provide the right talent at the right price and scale.
Speaker Change: Lions need flexibility global connectivity and exceptional service we.
Speaker Change: Our purpose built to deliver all three.
Speaker Change: We're pleased that we're starting to see this diversification strategy succeed and the address will share. Some specific examples where our segments are delivering solutions to our clients together.
Speaker Change: Having undergone our own technology transformation operating model evolution and brand refresh we are positioned to unlock growth over the long term.
address: Now I'll turn it over to address to share more about our execution focus.
Speaker Change: Thank you Kate and good afternoon, everyone I'm thrilled about the promise of our new structure brand positioning and today's launch all of which support the strategic direction. We shared during our last call as a challenger brand. We are now better positioned to meet our clients' needs based on the preferred way of engaging with us throughout their transformational and operational journey without.
Speaker Change: Facing internal organizational barriers.
Speaker Change: Stability allows us to deliver our on demand talent consulting and outsource services offerings, while the individually or in combination seamlessly.
Speaker Change: Last quarter, our focus has been our leadership integration and reinforcing our full range of service offerings with our sales teams with an emphasis on cross selling.
Speaker Change: While the macroeconomic environment remains uncertain, we are starting to hit stride and executing our cross sell strategy.
Speaker Change: We are empowering our sales organization to fully understand the breadth of our services across all segments of the business and leverage our existing client relationships to expand into new buying centers.
Speaker Change: Training efforts also include an even sharper focus on sales pipeline management and a robust account planning process generally carried out our by our sales and consulting practice leaders.
Speaker Change: I am pleased to share their clients are proving to be quite receptive to our new approach.
Speaker Change: Cited about our ability to deliver tailored solutions as Keith mentioned, all in ways that meet their specific needs and our ability to deliver them in multiple engagement models.
Following the strategic shifts we've made over the last few months, we're seeing a significant quarter over quarter increase in our gross pipeline and project size increase in our cross sell opportunities.
Speaker Change: Growth is no coincidence, but rather largely driven by a stronger focus on go to market execution tight alignment between our segments and an increased emphasis on cross border sales within our multinational client base.
Speaker Change: A solid global infrastructure in place. We're also unifying our offshore delivery center, which we now call global delivery centers in India, and the Philippines to better serve our clients across the organization.
Speaker Change: Our business segments are rapidly evolving.
Speaker Change: We are on demand talent segment is increasingly relevant in the professional staffing space.
Speaker Change: Faced with intense competition and rate pressures in the current environment. Despite this our clients continue to utilize our expert subscale extending beyond traditional finance and accounting rules as the macroeconomic conditions improve we expect client demand for outside expert talent to further expand and we're fully prepared to respond.
Speaker Change: Our newly formed consulting segment positions us higher up the professional services value chain, enabling us to play a key role in transformation strategy and execution initiatives.
Speaker Change: Dedicated consulting business positions us to engage in earlier stage discussions with clients, particularly around business with digital transformation, which creates opportunity for us to win larger pieces of work across the enterprise.
Speaker Change: Acquisition of reference point and its deep advisory capabilities are further strengthening our position with financial services clients, even those we serve for over 10 years.
Speaker Change: Our also our services segment is expanding its client base, especially among venture backed startups, while also exploring cross selling opportunities within our existing client base, including carve outs.
Speaker Change: Scale ups.
Speaker Change: Europe and APAC segment performance is getting better positioned for future growth.
Speaker Change: We werent impacted by typical summer seasonality combined with the elongated client decision, making cycles and contract negotiations in Europe, while APAC continues to be resilient and deliver strong results.
Speaker Change: We remain cautiously optimistic for the remainder of the fiscal year, given our client environments remain Caribbean as they progress through their internal business restructuring.
Speaker Change: Most importantly, all segments are proving highly relevant and differentiating us from our traditional staffing and consulting firms, allowing us to secure larger engagements than we have in the past few years.
Speaker Change: Large part driven by cross selling activities. Some examples include.
Speaker Change: For a large health care delivery system, we want a sizable ERP implementation initiatives to partner with our clients and their systems integrator and provider backfill in film functional roles. This was a collaborative effort between our on demand and <unk> brands second I shared on our last call that we were in final discussions with the portfolio company of private equity firm to support a significant carve out project.
Speaker Change: Not only was Kelsey awarded a multimillion dollar project to provide comprehensive outsourcing services, but the same client is now leveraging our on demand Brian to engage additional consultants to support the carve out.
Speaker Change: As another example for a global leader in the commercial real estate services and investment space.
Speaker Change: And a large medical devices and patient care services company.
Speaker Change: We're engaging our teams across segments and geographies to support their transformational needs. This was the result of a collaborative efforts across our brands and geographies driven by the product of the work we've done to remove internal barriers and prioritize seamless client service. Another excellent example of successful cross selling in action.
Speaker Change: In terms of our technology and digital transformation efforts, we're on track to deliver our new financial system for North America. Later this calendar year. Additionally, we have initiated the planning phase for migrating our international and other business units onto the new platform.
Speaker Change: I'll now hand, the call over to John.
John: Thank you for Josh and good afternoon, everyone.
John: For the first quarter of fiscal 2005, our total revenue was $136 $9 million down 19% from the prior year quarter on a same day constant currency basis.
John: Gross margin for the quarter was 36, 5% and with run rate SG&A, improving to $47 7 million, we delivered $2 $3 million of adjusted EBITDA on a total enterprise basis, which represents a one 7% adjusted EBITDA margin.
John: During the quarter on top of the funnel sales activities picked up more momentum and we saw a notable rebound in growth pipeline, which is an encouraging early indicators of recovery. However, client caution continues to impact the speed at which opportunities move through the sales pipeline growth.
John: Gross margin this quarter was compressed compared to the prior year quarter predominantly due to lower utilization of salary consultants as well as less favorable leverage on indirect cost of service as a result of a softer topline.
John: The pricing environment across the globe remains competitive <unk>.
John: Enterprise wide average bill rate was $119 constant currency down from $125 a year ago revenue mixed shift to Asia Pacific continues to impact our total company average bill rates driven by lower relative bill rates compared to other geographies and the significant volume of hours built in this region.
Our U S and Europe average bill rates continued to demonstrate strength, even in the competitive pricing landscape and increased 2% and 5% respectively from the first quarter of fiscal 2024.
John: Now on SG&A, our enterprise run rate SG&A expense for the quarter was $47 7, million% to 14% improvement from Q1 of the prior fiscal year, primarily driven by lower management compensation expense as a result of actions taken in the previous year to reduce fixed costs.
John: It continues to remain laser focused on improving our operating efficiency and cost leverage.
Speaker Change: We completed the sale of our building in Irvine, California during the quarter unlocking $12 3 million of cash of $3 $4 million gain was recognized in connection with the sale, which was excluded from the aforementioned total run rate SG&A.
Speaker Change: As previewed in our July call and outlined by Cade and the dress we began operating in multiple business segments in the first quarter.
Cade: Segments are on demand talent consulting outsource services and a fourth segment with Europe and Asia Pac regions combined I will now provide some color on segment performance.
Cade: Revenue for our on demand talent segment was $52 5 million compared to $78 million in the prior year quarter, a decline of 33%.
Cade: Adjusted EBITDA was $2 $6 million or a margin of four 9% compared to $8 $6 million or an 11% margin in the prior year quarter.
Cade: <unk> for our consulting segment was $55 million compared to $56 8 million in the prior year quarter, a decline of 3%.
Cade: Revenue in the first quarter of the current fiscal year include $4 $5 million of revenue from acquisitions, we made over the last year.
Cade: Segment, adjusted EBITDA was $7 $8 million or a 14, 1% margin compared to $8 5 million or 15% margin in the prior year quarter.
Cade: Revenue for our outsource services segment was $9 $5 million compared to $9 4 million in the prior year quarter, a 1% improvement.
Cade: Segment, adjusted EBITDA was $1 4 million or 14, 7% margin compared to $1 5 million or 16, 4% margin in the prior year quarter.
Finally revenue for the Europe, and APAC segment was $18 million compared to $23 3 million in the prior year quarter, a decline of 21% on a same day constant currency basis.
Cade: Revenue from APAC remained relatively resilient, while Europe experienced a choppy summer with delays in project starts and deal closes although somewhat green lit in recent weeks.
Cade: Segment, adjusted EBITDA was <unk> 2 million or a one 3% margin compared to $1 7 million or.
Cade: Or seven 3% margin in the prior year quarter.
Speaker Change: Aligning our segment reporting to a new operating structure, we were required under the accounting guidance to allocate goodwill across the new operating segments and assessed for any impairment.
Speaker Change: Which resulted in a $3 $9 million noncash goodwill impairment charge within the Europe and APAC segment.
Speaker Change: Segment adjusted EBIT excludes certain shared corporate costs. Please refer to the reconciliation of non-GAAP measures in today's press release and the Form 10-Q expected to be filed later this week, which includes a reconciliation of segment adjusted EBITDA to consolidated net income.
Speaker Change: Turning to liquidity, our balance sheet remains pristine with $90 million of cash and cash equivalents and zero outstanding debt, we generated $23 million of free cash flow for the last 12 months period net cash outflow associated with the reference point acquisition was $23 million, we distributed $4.
Speaker Change: $7 million worth of dividends in the quarter and repurchased $5 million worth of shares at an average price of $11 62 per share with total available financial liquidity of $263 million. We will continue to focus on completing our technology transformation project.
Speaker Change: Returning cash to shareholders through dividends and share buybacks under our share repurchase program, which had $37 million remaining at the end of the first quarter.
Speaker Change: I will now close with our second quarter outlook. So far in the second quarter weekly revenue run rate has been steady with a slight uptick in the most recent weeks.
Speaker Change: While the stronger growth pipeline is encouraging the operating environment continues to be choppy and we anticipate the sales cycle to remain protracted in the near term as such we do not anticipate a notable uplift in Q2 revenue run rate from the first quarter, we project full quarter revenue to be in the range of $1 $35 million to 140.
Speaker Change: Yeah.
Speaker Change: We estimate gross margin to be in the range of 36% to 37%, reflecting our pay bill ratio revenue mix and salary consultant utilization.
Speaker Change: Similar to the first quarter.
Speaker Change: We expect our second quarter run rate SG&A expense to be in a range of $48 million to $50 million non run rate and noncash expenses for the second quarter will primarily consist of technology transformation costs and stock compensation expense totaling approximately $4 million.
Speaker Change: In closing, we remain optimistic that our efforts to enhance execution under the new operating structure as well as refresh branding coupled with improving economic certainty over time will position us for a return to growth.
Speaker Change: This concludes our prepared remarks, and we will now open the call for Q&A.
Speaker Change: Yes.
Speaker Change: As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.
Speaker Change: A moment for our questions.
Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Our first question comes from Joe Gomes with Noble capital you May proceed.
Joe Gomes: Good afternoon, Thanks for taking my question.
Speaker Change: Hi, Joe.
Speaker Change: Thank you for the segment information much detail there.
Speaker Change: Just wonder if you could give us a little more color on the 33% year over year revenue decline in the on demand segment.
Speaker Change: Yes, I think Joe where we've seen the most challenges in our operational accounting.
Speaker Change: <unk> group and that we're not alone in that I think that's just a reflection of the difficulty in the marketplace.
Speaker Change: And the fact that challenge is not moving around right now and so many clients are just trying to get by with incumbent employees in it.
Speaker Change: Their seats.
Speaker Change: Where we're seeing more opportunity as we've talked is really on the consulting side, especially around tech and digital.
And significant project work around ERP.
Speaker Change: System implementation and supply chain.
Speaker Change: <unk> type projects so.
Speaker Change: We're trying to position ourselves where the work is.
Speaker Change: And we do expect this to be just a cycle and that that will also be the part of our business that I think recovers the fastest when we see.
Speaker Change: The economic environment improve.
Speaker Change: Okay, and then on the call you mentioned a couple of things one that you were seeing significant quarter over quarter growth in the pipeline and larger engagements that historically and I was wondering if you might be able to kind of quantify those to some extent.
Speaker Change: Ideas.
Speaker Change: What kind of growth Youre seeing.
Speaker Change: On both of those.
Joe Gomes: Sure Hi, Joe.
Speaker Change: So our growth pipeline has increased significantly so we look at just this week our growth pipeline compared to the ended the first quarter.
Speaker Change: We're up about 15% and if you look at it compared to the end of the fourth quarter at the end of our fiscal it's up almost 20%. So we definitely are seeing more opportunities come.
Speaker Change: Come through the pipeline and some of it is also due to the cross selling efforts that we have been we have been executing internally.
Speaker Change: Okay, great. Thanks for that.
Speaker Change: One more.
Speaker Change: If I may.
Speaker Change: I know, it's very very early days, but we did see the FERC rate card are you seeing any kind of loosening our positive momentum from clients about starting projects I know that was one of them.
Speaker Change: Our hope for kind of a benchmark.
Speaker Change: Benchmark is one rates were cut we're going to start to see some of this stuff.
Speaker Change: <unk>.
Speaker Change: Again, I understand it's early days, but just trying to get your impression of what you see here over the past week.
Speaker Change: 10 days.
Speaker Change: Yeah. So Joe we both know this it's all about confidence in the marketplace I think.
Speaker Change:
This will start to give clients more confidence where we're seeing it. The most I would say is all of a sudden Europe is starting to see the close is actually happen and projects starting.
Speaker Change: They had a very slow August for example, and I think it wasn't just because the interest rate environment had not settled yet, but we had elections in the European marketplace.
Speaker Change: And I.
Speaker Change: I think just confidence hadn't developed we had clients who engaged in significant layoffs in the early part of the summer.
Speaker Change: Clients don't want to bring.
Speaker Change: Outsiders and to quickly after that kind of event. So we've seen I would say the dust settle a bit and now we're starting to see decision, making happens just as we'd hoped.
I think they are in the pipeline has increased materially as well, which means we're getting to the right people. It's just a matter of timing and when we get the verbal that where the choice of provider. It's how soon can we start work. So the other thing I'd say about interest rates, it's not interest rate.
Speaker Change: <unk> decline.
Speaker Change: All by itself it gives clients more confidence, but I do think it will open up more transactional work and transactional work usually equates to <unk>.
Project opportunities for us.
Speaker Change: Okay, great. Thanks for taking my questions I'll get back in queue.
Speaker Change: Youre welcome Joe Thank you.
Thank you and as a reminder to ask a question. Please press star one on your telephone.
Our next question comes from Marc Riddick with Sidoti You May proceed.
Speaker Change: Hey, good afternoon, everyone.
Marty: Hi, Marty.
Marty: So.
I don't know.
Certainly early as far as some of the commentary that you made regarding.
Marty: Initial.
Speaker Change: Opportunities and client reception.
The segmentation.
Speaker Change: Updates and changes in go to market changes I was wondering if you can talk a little bit about maybe as far as.
Speaker Change: Initial thoughts are.
Speaker Change: Or or administered alone reality, some of the areas or or maybe client.
Speaker Change: Five industry segments that are maybe most responsive to this it seems as though from your prepared remarks that.
Speaker Change: It's touching on larger.
Clients I was wondering if you could talk a little bit about maybe if there is any.
Speaker Change: Particular types of clients.
Speaker Change: A bit.
Speaker Change: Really receptive.
Progressive: Hi, this is progressive.
Speaker Change: I think overall, we're seeing it.
Speaker Change: Not just any particular industry or sector.
Our ability to now expand beyond financial accounting conversations that's actually driving the cross sell and we're seeing that across all of our sectors.
Speaker Change: So it's not any one particular, one that's actually steaming ahead of the others. So we've just unlocked or what we've been building over the past few years to further expanded to additional buying centers and thats where were starting to see more momentum.
Speaker Change: And then can you talk a little bit about maybe some of the <unk>.
Speaker Change: Internal planning and maybe either.
Speaker Change: Conversations with staff training things like that that might have gone along with this system.
Speaker Change: Okay.
Speaker Change: Sure.
Mark: Yes, Mark we lost you at the very end so if my answer and maybe the dresses answer in combination is not what you wanted let us know, but youre absolutely right. I mean, we are positioning our sales force now to have a broader portfolio of solutions and capabilities to bring <unk>.
Speaker Change: We are not expecting them to do it all by themselves I think this.
Organizational design and operating model evolution clarifies, who they turn to for support to talk shop.
Speaker Change: And really going to market together this model for our salespeople is not to create lots of different sales.
Speaker Change: Individuals calling on the same client, we really view our sales team is a concierge type partner to our clients to bring forth the capabilities of our enterprise no matter, where they get and clients are reacting very positively to that they don't want lots of people calling on them.
Speaker Change: They want a trusted partner, who can help understand their problem and then plug the client into us in the right way. So with that addressed would you have anything to add I think internally. We've also done a significant amount of work that started last fiscal and really getting organized around our capabilities and practices.
Speaker Change: As well as definition of personas that we target.
Speaker Change: What they are buying behaviors and patterns or powder kind of approach those conversations and bringing the right expertise to the table.
Speaker Change: We also vetted in depth the capabilities and the consulting business.
Speaker Change: Really aligned to the fact that we have depths repeatability methodology bank.
Speaker Change: Not just the fact that we can rely on the on demand business to bring the experts in time. So this is what's allowing us to move up the food chain in these conversations and then we're able to leverage our on demand capabilities to start to scale on those projects that we're lapping.
Speaker Change: Great and then the last.
Speaker Change: Question for me is more along the lines of.
Speaker Change: Particularly around the acquisition opportunity.
Speaker Change: Yes.
Yes.
Speaker Change: Reference point, but I was wondering if you talk a little bit about maybe what youre seeing.
Speaker Change: Thanks, a lot.
Speaker Change: One.
Speaker Change: Target.
Speaker Change: Our valuation.
Speaker Change: Yes, I think right now Mark we're very focused on completing the integration of reference point continuing to complete the integration of cloud go to support more of our digital business, and especially bringing those capabilities together globally.
Speaker Change: So we're heads down in execution right now and is the dress just shared we've done a lot to add.
Account planning tools to add training material to our go to market teams tool kit. So that we're doing a better job of representing what we already have and getting the return on the investments that we've made so that's where we're very focused that's not just.
Speaker Change: Say, we are looking at the marketplace as we see assets coming to market that could be interesting, but right now I.
As a team we're focused on execution.
Speaker Change: Yes, Mark I Couldnt hear you completely answer your question was also on from a capital allocation standpoint.
Mark: With with us.
Mark: I was focusing more internally on execution and pursuing deals more opportunistically would you expect to shift the capital allocation priority in this coming quarter to focus a little bit more on share buybacks.
Speaker Change: Great. Thank you very much.
Speaker Change: Youre welcome.
Speaker Change: Thank you I would now like to turn the call back over to Shannon for any closing remarks.
Shannon: Well I want to thank everyone for joining us today, and we look forward to updating you after the close of our second quarter. Thanks, very much and please check out our new website.
Speaker Change: Thank you. This concludes the conference. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
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