RCM Technologies, Inc.
Q3 2018 Earnings Call Transcript

Published: 9 Nov 2018

[Operator:]

Good morning ladies and gentlemen, and welcome to the RCM Technologies Third Quarter Earnings Conference Call. Your host today is Bradley Vizi. Mr. Vizi, you may now begin.

[Bradley Vizi:]

Good morning, everyone. This is Brad Vizi, Executive Chairman of RCM Technologies. Welcome to the RCM Technologies 2018 third quarter earnings call. I am joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin with the legal disclaimer and then I will summarize the operating results for each of our business units before opening it up for questions. Kevin?

[Kevin Miller:]

Good morning, everyone. Our presentation in this call will contain forward-looking statements. The information contained in the forward-looking statements is based on our beliefs, estimates and assumptions and information currently available to us, and these matters may materially change in the future. Many of these beliefs, estimates and assumptions are subject to rapid changes. For more information on our forward-looking statements and the risks, uncertainties, and other factors to which they are subject, please see the periodic reports on Forms 10-K, 10-Q, and 8-K, that we filed with the SEC, as well as our press releases that we issue from time-to-time.

[Bradley Vizi:]

Thanks, Kevin. Though third quarter operating income came in at the low-end of our expectation, as a result of project timing within engineering services, we believe that we are well-positioned to deliver a strong finish of the year and enter 2019 with momentum. On a year-to-date basis, our adjusted EBITDA of 6.4 million exceeds 2017 by a robust 16%. I will discuss each division separately. Our Specialty Healthcare Staffing Group set a new third quarter record with $15.1 million in revenue growing by 5.4% over the third quarter of 2017. Despite record revenue, we continue to fine tune our strategy to better mitigate the inherent seasonality of the school business we experienced each year during the third quarter. Perhaps the best news for our Specialty Healthcare Division in the third quarter with our Locum Tenens practice posted $500,000 in revenue as compared to $22,000 in the third quarter of 2017 positively contributing to operating income. Though it took longer than expected to scale this business from its Greenfield build out, we believe we have reached a tipping point and now have one additional operating platform to drive performance going forward. We expect our Specialty Healthcare Group to hit a new revenue record again in the fourth quarter of 2018.Our major school contracts have gotten off to a great start. We ended the fourth quarter of 2017 in Hawaii with 170 power professionals and as of today, we have approximately 250 power professionals. We ended the fourth quarter of 2017 in New York City with three -- with 630 power professionals and 100 therapists. And as of today, we have approximately 725 power professionals and 140 therapists. We believe that our strong start to the 2018, 2019 school year bodes well for performance in fiscal 2019. Despite expected seasonality in our engineering segment, we are disappointed with our engineering revenue and gross profit in the third quarter of 2018, but those that have followed RCM for a while know that our engineering segment generally has large projects with major clients, and sometimes the flow of those large projects resulting quarterly cyclicality. It is typical to see projects while in the summer months as many of our client's award projects to be completed in fall through spring. Our Energy Services Group which operates in the U.S., Canada and Serbia posted revenue of $9 million in the third quarter of 2018 as compared to $8.8 million in the third quarter of 2017. We are seeing an increase in awards and bidding activity in our transmission distribution markets including a recently secure award of an EPC project. Our Energy Services Group has a robust pipeline of projects we are bidding on right now for 2019. We are looking forward to continued strong performance from energy services, as our backlog and pipeline continue to build. Our Canadian Power Systems Group which mainly service Bruce Power and Ontario Power Group generated $4.8 million of revenue in the third quarter of 2018 versus $6.4 billion in the third quarter of 2017. We anticipate an increase in activity and new project towards with both OPG and Bruce Power resulting in an uptick in quarterly revenue and improve utilization going forward. Our Aerospace Group generated the revenue of $5.3 million in the third quarter of 2018 versus $6.5 million in the third quarter of 2017. The major driver of the decrease in revenue is decreased activity from our major aerospace clients. As mentioned on previous calls, we are far too reliant on a small number of aerospace clients. Our primary goal in the next 12 months is to diversify and grow our client base, similar to what we've accomplished in energy services over the past two years. Related to this objective, we have recently been notified that we have been awarded a GSA contract to deliver aerospace services to the Federal Government. While we expect this new revenue source to take some time to develop, we anticipate that it will grow into a substantial market for RCM. We are encouraged by the activity in our Information Technology Group. Our third quarter revenue and gross profit grew sequentially and over the prior year, it has been three years since our Information Technology Group accomplish this feat. It is also worth noting that we sold two IT engagements to major North American IT Solutions firm in the cybersecurity and cloud computing space that will be delivered out of Serbia. These two engagements will start small with about 15 consultants, but have the potential for substantial growth. As a result of significant changes to leadership and investment in our sales infrastructure, we are now starting to see positive results from our Information Technology Group. Companywide on a consolidated basis, we anticipate improved performance for the fourth quarter of fiscal 2018. We look forward to discussing our progress in February. This concludes our prepared remarks. At this time, we will open up the call for questions.

[Operator:]

[Operator Instructions] Our first question comes from Bill Sutherland. Please go ahead.

[Bill Sutherland:]

Thank you, and good morning guys

[Kevin Miller:]

Good morning, Bill.

[Bill Sutherland:]

I got on a minute or so late and rather you were saying the Locum business has really picked up and any other business lines prior to Locum that you called out on the call this morning?

[Kevin Miller:]

Well, we did talk a little bit about the '18, '19 school contracts?

[Bill Sutherland:]

Oh, yes, I got that. Yes, I got that.

[Kevin Miller:]

So we talked about that a little bit. Obviously, that impacts New York City and State of Hawaii; other than that, and the Locum business which did about 500k in revenues and had positive contribution margin. That's all we discussed.

[Bill Sutherland:]

Okay. Well, maybe then on a couple of questions in healthcare. I know you've been seeing some headwinds in the placement business, it's reflected in the gross margin as well. Let's kind of get an update on that. And then, you've mentioned -- you guys have mentioned the HIM business and I guess I'm not sure because of the IT or healthcare but --

[Kevin Miller:]

No, the HIM business is part of healthcare though. So let's talk about PERM [ph] a little bit, which unfortunately has been significantly down in 2018 as compared to 2017. So, our dedicated PERM Group did about 332K in firm revenue in Q3 of '18 versus 451K in 2017, so down about 119K. Year-to-date, we are running at about 1 million this year versus 1.5 million year-to-date last year, so down over 500K and as that's very profitable revenue because basically you're only variable costs against that is are commissions. So that has impacted not so much top line. Obviously, but it impacts the gross margin and the gross profit and the contribution margin. You also asked about HIM and HIM is not having a great year relative to last year either. We are up 500,000 in revenues year-over-year. So it's growing this year, but it hasn't grown in '18 at a rate that we hoped it would but we do believe that that's going to be a really nice engine for growth going forward. We recently won a nice contract, the contracts tend to be fairly short term three to six months, typically when like an 18 month engagement in this business but that's going to give us a nice little job in November and December and into the first quarter for health care and we were really just bullish on HIM in general just because it's such a big market and we feel like at this point we're still small players in that market and can grab. We can get a lot of business going forward, we really think that can be a big growth driver going forward.

[Bill Sutherland:]

Can you called out a couple of pieces of business that are being handled I guess in Serbia in your center of excellence where are you as far as head count they're now on and?

[Kevin Miller:]

Right, well our headcount is as far as the engineering is roughly 40 people right now so it's we're up about 10 from where we thought we might be a little bit higher than that I don't know exactly what it is today? Right now we have 6 IT people out. One who, runs a practice and five that are on billing and we have a couple more doing some internal software development as well, so we probably have about in total seven or eight maybe nine IT persons working out of Serbia. The engagement that Brad referenced we have five people on that now by the end of the year we expect to have about 15 on these two engagements one is a cyber security engagement another one is a cloud based computing engagement. We feel like those 15 people can grow quite a bit just on those two engagements and what's nice about these engagements is they have the potential to sort of be recurring because they're not working on like a specific assignment for our customers and clients, so we really think that can grow quite a bit. And I think it's also nice to be in these two areas that are areas and this is where a lot of spending is going on as you know. So we're hoping that we can use these engagements as really great references to go after similar were in North America, we're not under any illusion that IT Serbia effort is going to just must around quickly but we think that it has the potential over time to be. You're not end.

[Bill Sutherland:]

Well.

[Bradley Vizi:]

Keep going, as we have more questions?

[Bill Sutherland:]

Yes, sorry. Doesn't just jump to one of the P&L and then I'll get in queue remarkable job on the SG&A this quarter. Actually we think about kind of the level at which you need to WE should expect in the future?

[Bradley Vizi:]

Sure, I mean the Q3 is down for a couple reasons, obviously the seasonality in the Q3 SG&A particularly on the commissions. But as and I've discussed on previous calls. We're very focused on getting as much efficiency out of our SG&A as possible while at the same time reinvesting some of that into primarily into sales generating activities. So, in terms of the SG&A in Q3 that's obviously lower than what you're going to see going forward, but I think you're going to continue to see a lot of discipline in terms of our quarterly SG&A spend.

[Bill Sutherland:]

And I surprised, good job on the cash this quarter too. I'll get back in queue. Thanks.

[Operator:]

[Operator Instructions] Our next question is coming from Frank Kelly. Please go ahead.

[Frank Kelly:]

Good morning gentlemen. How are you?

[Bradley Vizi:]

Good, Frank. Good morning.

[Frank Kelly:]

Great, in the area of other expenses I noticed we had $300,000 this quarter, could you share some light on what some of those numbers are composed of?

[Bradley Vizi:]

It's primarily interest Frank.

[Frank Kelly:]

Primarily interest okay. Is it up off of last quarter?

[Bradley Vizi:]

It's not up by a lot.

[Frank Kelly:]

Right but borrowing are down, so that's why I kind of one of the things.

[Bradley Vizi:]

You're looking quarter end borrowings Frank, so that can be a little bit misleading but our interest last quarter was 400,000 it's about 306 this quarter, so we're down about 100K.

[Frank Kelly:]

Okay and where do we see that in then next quarter going as far as borrowings and interest numbers?

[Bradley Vizi:]

I would expect debt to probably increase in Q4 as you can appreciate it's a little bit difficult to predict because our receivables really sort of drive that number. And of course there are other things that could drive that like an acquisition or anything along those lines but absent any out of the typical quarter events. I expect the debt to go up and the interest to go up in Q4 just because I expect a big jump in our revenues in Q4 relative to Q3.

[Frank Kelly:]

Great and DSOs, I noticed AR for Q3 as has gone up a little bit as well where we see the historical DSO.

[Bradley Vizi:]

I think that our DSO's will come down in the Q4 relative to Q3. I think we'll see some improvement there. We have not the seasonality particularly on health care business kind of distorts the DSO's a little bit because a lot of the school revenues come in August and September right, so we take typically get very little if any collections in the quarter but because you have no revenues coming in July that this low revenue base but you've got this sort of high receivables. We also continue to have some issues with our largest client which is the New York City Board of Education as you know Frank, the collections are never an issue with a client but computer glitches and approvals and all kinds of other things in any given quarter can be an issue with them and we had some issues in Q2 with New York City and in Q3 we started off fast and furious we collected a ton of money in July and August and then in early September they just shut everything down. We didn't get it payment for all of September so unfortunately we have a fair amount of receivables still outstanding from 17,18 school year which I'm hopeful will get all cleaned up in Q4 we'll say but they're a bit of a wildcard. And unfortunately they tend to drive our DSOs quite a bit.

[Frank Kelly:]

Great. Thank you.

[Operator:]

[Operator Instructions] Gentlemen, there are no more call. We thank you for questions.

[Bradley Vizi:]

Okay, everyone thank you for attending the RCM Technologies Q3 call, looking forward to speaking with you in 2019.

[Operator:]

Thank you, ladies and gentlemen for joining today's call. You all may disconnect here at this time and have a great day.