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Edited Transcript of RCMT earnings conference call or presentation 7-Mar-19 3:00pm GMT

Q4 2018 R C M Technologies Inc Earnings Call

Pennsauken Mar 12, 2019 (Thomson StreetEvents) -- Edited Transcript of R C M Technologies Inc earnings conference call or presentation Thursday, March 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley S. Vizi

RCM Technologies, Inc. - Executive Chairman & President

* Kevin D. Miller

RCM Technologies, Inc. - CFO, Treasurer & Secretary

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Conference Call Participants

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* William Sutherland

The Benchmark Company, LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the RCM Technologies Fourth Quarter Year Earnings Conference Call. Your host, Bradley Vizi, will now begin.

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Bradley S. Vizi, RCM Technologies, Inc. - Executive Chairman & President [2]

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Good morning, everyone. This is Brad Vizi, Executive Chairman of RCM Technologies. Welcome to the RCM Technologies 2018 Fourth Quarter Earnings Call. I'm 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?

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Kevin D. Miller, RCM Technologies, Inc. - CFO, Treasurer & Secretary [3]

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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 file with SEC as well as our press releases that we issue from time to time.

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Bradley S. Vizi, RCM Technologies, Inc. - Executive Chairman & President [4]

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Thanks, Kevin. We are pleased with our fourth quarter and fiscal 2018 performance. Our fiscal 2018 adjusted EBITDA of $8.9 million grew by approximately 12% over fiscal 2017. More importantly, we believe we are poised for strong performance in fiscal 2019. I will discuss each division separately.

Our Specialty Health Care staffing group set another quarterly revenue record with $23.1 million, growing by 4.3% over the fourth quarter of 2017. Our fiscal 2018 revenue of $83.7 million exceeded fiscal 2017 by 17%.

The major driver of 2018 growth was our school business. We generated $16.2 million in the fourth quarter of 2018 from all of our school contracts versus $14.7 million in the fourth quarter of 2017. Our fiscal 2018 revenue from school contracts was $55.1 million versus $40.5 million in the prior year, growth of 36%.

We are off to a great start in 2019 and 2020 school year, and we expect growth to continue to be robust throughout 2019. Elsewhere in Health Care, you may recall we started Locum Tenens and HIM businesses greenfield. We are proud to report that both businesses have hit stride and are nicely accretive to overall performance.

Locum Tenens finished 2018 with $1.5 million of revenue, up from $120,000 of revenue in 2017. Our HIM Group saw revenue of $4.6 million in 2018 versus $3.9 million in 2017. Worth noting is relative underperformance of our permanent placement business. Fiscal 2018 perm revenue was approximately $1.5 million versus $2.3 million in 2017. If not for softness in our high-margin permanent placement business, which is the most cyclical business within our Health Care division, Health Care consolidated performance would be in line with its 5-year trend of 15% to 20% growth in EBITDA contribution. The other major contributor to 2018 gross margin dilution was the New York state minimum wage increase of $2 per hour. This impacted our Power professional gross margin in New York City as we were unable to get a growth rate increase in 2018. However, we anticipate this headwind of 2018 being a tailwind in 2019.

In the fourth quarter, we received indication from our partners in New York City that we will get a retroactive bill rate increase to cover both 2018 and 2019 minimum wage increases. We anticipate that the combination of continued sales growth and sequential year-over-year improvement to gross margins will lead to a healthy uptick in operative performance in 2019. We are looking forward to another record year in Health Care.

We saw our Engineering performance rebound in the fourth quarter of 2018 with revenue of $23.6 million as compared to $19.4 million in the third quarter of 2018 and $21.2 million in the fourth quarter of 2017. The primary driver of the strength was our acquisition of Thermal Kinetics. We would like to take this opportunity to welcome the Thermal Kinetics team to RCM. We have high expectations for this group as we continue to build on our Process and Industrial business.

As we occasionally see in the Engineering group, several major projects have come to an end, which may result in softness in the first quarter of 2019. However, we have several very large long-term EPC projects in our pipeline that we believe will move into backlog within the next 90 days. Though timing of large projects can be uncertain, pipeline activity is very strong. We have worked diligently the last 12 months to position ourselves in the marketplace as thought leaders, overlaying value-added technology solutions into our delivery model. We are also investing in business development resources with a focus on adding and leveraging strategic client relationships to enter new geographic markets.

As many of you who follow RCM are aware, historically, we have been too content servicing a handful of clients. Increased investment in business development will support sustainable growth in Engineering, further monetizing our core capabilities. We look forward to providing further detail on a number of internal initiatives as pipeline activity is converted to backlog in subsequent quarters.

Based on current activity levels, we expect that we are going to experience a very strong second half of 2019 and set ourselves up for an even better 2020 with increased visibility.

We continue to see sequential revenue growth from our Information Technology Group with revenue of $8.5 million in the fourth quarter of 2018. This is our highest quarterly revenue since the second quarter of 2017. Worth noting, on a comparable basis in the fourth quarter of 2017, revenue of $7.7 million includes $0.5 million from our Microsoft business unit, which was divested at the end of fiscal 2017. Accounting for the divested Microsoft revenue, we saw fourth quarter 2018 Information Technology grow 18%.

Several business units contributed to this growth. Though revenue growth came in on target, fourth quarter gross margin was lighter than expected in our Information Technology group due to transitory reasons. The major drivers of the downturn were low utilization among salaried staff, seasonal holidays and outperformance of staffing relative to higher margin solutions. We expect to see improved gross margin performance going forward.

On a companywide basis, we expect to have a strong 2019 compared to 2018. However, we caution that our first quarter may demonstrate year-over-year softness, mainly due to large project timing in the Engineering Group and a particularly strong comparable period in the first quarter of 2018. Despite this softness, we continue to invest in people and technology to position the business for long-term success. This concludes our prepared remarks. At this time, we will open the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will be coming from Bill Sutherland.

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William Sutherland, The Benchmark Company, LLC, Research Division - Equity Analyst [2]

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So I wanted just to get a little more color on how you think the year is going to be starting out. You've got some timing issues in Engineering. But it sounds like Health Care should be trending kind of as you would expect it for the full year and then IT Services as well?

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Kevin D. Miller, RCM Technologies, Inc. - CFO, Treasurer & Secretary [3]

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Yes, Health Care should have a good -- should have a strong fourth quarter, Bill. We expect to see a little bit of softness in the Engineering, and we expect to see decent revenues in the first quarter out of IT. The one thing that we have, particularly in the first quarter, which really is across all of our lines, is the increase in the statutory employment payroll taxes. So that will also impact companywide and typically -- if you strip everything else out, and the quarters never work that way because there's always things helping margin and hurting margins. But if you sort of strip everything away, we generally see around a 50 basis point decrease in gross margins, like, sort of across the board. It's more pronounced in the higher salaried individuals in Q1 as compared to Q2, Q3 and Q4 just because the higher salaried people eventually, you're not paying social security taxes. But the biggest one is actually the unemployment taxes. As you know, the various states sort of frontload those unemployment taxes. So that typically has a -- that will certainly hurt IT a little bit, as far as the gross margin is concerned. The -- some of the utilization issues that we experienced in the fourth quarter are going to carry over a little bit into the first quarter. We've addressed those issues in IT, but they're going to have a little bit of an impact on the first quarter as well. So we expect decent revenues for IT in the first quarter, but we'll probably continue to see some softness in the gross margin in the first quarter, although we certainly expect that to pick up as the year goes on.

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William Sutherland, The Benchmark Company, LLC, Research Division - Equity Analyst [4]

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Okay. Can you guys give us a little color on how Thermal Kinetics performed? And it looks like they can perform going forward for you.

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Kevin D. Miller, RCM Technologies, Inc. - CFO, Treasurer & Secretary [5]

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Sure. Well, they contributed about $2.58 million in revenues in the fourth quarter, with gross margin of roughly 27%. Thing with Thermal Kinetics is they're capable of putting up some very good numbers. But they historically are pretty lumpy because they're typically working on 2 or 3 large projects at a time. So I think when you look at the fourth quarter performance, and you look at their historic financials, which you can pull out of the 8-K, that's the type of performance we expect to see going forward with just putting a caution out there that their performance is historically pretty lumpy from quarter to quarter.

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William Sutherland, The Benchmark Company, LLC, Research Division - Equity Analyst [6]

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And then, are you all -- I mean, I don't want to tie -- get too granular, but was it helpful prior quarter looking at the Canadian Power Systems and Aero and Energy Services in relation to each other for the quarter?

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Kevin D. Miller, RCM Technologies, Inc. - CFO, Treasurer & Secretary [7]

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Yes, we've seen some weakness in both of those units in terms of Aerospace and Power Systems. We're addressing those issues. In the case of Aerospace, it's just more of -- we've got to diversify our client base. And that's something we're very, very focused on. But we saw a real strong fourth quarter for Energy Services. And we continue to expect Energy Services and, frankly, our Process and Industrial. Those are the 2 units that we really expect to see driving our growth in Engineering going forward.

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William Sutherland, The Benchmark Company, LLC, Research Division - Equity Analyst [8]

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Not so much Power Systems up north?

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Kevin D. Miller, RCM Technologies, Inc. - CFO, Treasurer & Secretary [9]

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No, we expect Power Systems to have more consistent performance than they've had in 2018. But we're not necessarily counting on significant top line growth coming out of that business unit. I mean, certainly, the potential is there because the 2 major clients that we serve certainly spend a lot with outside consultants. So the potential is there, but we're really not counting on that for -- to drive the overall Engineering growth.

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William Sutherland, The Benchmark Company, LLC, Research Division - Equity Analyst [10]

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Okay. Then moving over to Health Care. Should we think about the growth trajectory there kind of in relationship to the -- I mean, your education is the best -- I mean, the biggest piece now. I think you called out the paraprofessional headcount entering the school year was up dramatically for Hawaii and double-digit for New York.

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Kevin D. Miller, RCM Technologies, Inc. - CFO, Treasurer & Secretary [11]

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Yes, we've seen nice increases in both. And we expect to continue to see growth there as well. I think we're not going to see the kind of top line growth in 2019 for the schools that we saw in 2018 just because there aren't any new contracts driving that. But we will see bill rate increases and we will see increases in headcount. So we will see some nice growth there. What I think is particularly exciting about Health Care is that we're sort of in a position to drive operating leverage there, right? So while we're probably not going to see the kind of top line growth in 2019 that we saw in 2018, I think we can still see some nice growth in gross profit dollars and some nice growth in the contribution operating income.

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William Sutherland, The Benchmark Company, LLC, Research Division - Equity Analyst [12]

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Okay. The -- looked like the DSO improved quarter-over-quarter, Kevin?

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Kevin D. Miller, RCM Technologies, Inc. - CFO, Treasurer & Secretary [13]

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Yes.

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William Sutherland, The Benchmark Company, LLC, Research Division - Equity Analyst [14]

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Even with the revenue growth. Where do you -- so where was it exactly? And where do you -- where is your expectation as you (inaudible)?

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Kevin D. Miller, RCM Technologies, Inc. - CFO, Treasurer & Secretary [15]

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Well, we ended the year, I think, around 86 days, if I'm not mistaken, 86.2. And that's compared to 99.8 in the third quarter of 2018. We have a number of clients that can really cause our DSOs to flare up in any given quarter. And then we also have an arbitration going on with a major utility that is sort of polluting those DSOs. We expect that arbitration to come to conclusion by the end of the third quarter, maybe the second quarter, we'll see that probably in the third quarter. So that alone will improve our DSOs by the end of the year by quite a bit. As far as the schools -- as far as the other drivers that cause these occasional flareups, the major one is -- are the school contracts just because from time to time, there just are administrative issues that prevent us from getting paid. And we always get paid, and we always get them under control, like our DSOs for our schools were outstanding in the fourth quarter. While there are some administrative issues in New York, I'm expecting crappy DSOs in Q1, unfortunately. But going forward, we should see -- continue to see DSOs in the 80s. I think once we clean up the arbitration, I really think we can consistently see DSOs in the high 70s with the occasional flareup from either one of the schools or from time to time, we have big engineering projects where there are milestone deliveries that prevent us from -- where the collections can be a little bit lumpy sometimes on those contracts. Additionally, from time to time, we do business for some big companies that just -- they just drive the terms, like, for instance, we do business with GE and there are 120 days from the time they approve invoice. And if you want to do business with GE, those are the terms, you can either accept it or not do business with them. But anyway, I think to answer your question is, we should be in the upper 70s when we have a relatively clean quarter as far as DSOs are concerned.

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William Sutherland, The Benchmark Company, LLC, Research Division - Equity Analyst [16]

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Okay, okay. And then last, in terms of capital plans and -- debt, obviously, went up a bit in the fourth quarter for the acquisition, I assume, primarily.

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Kevin D. Miller, RCM Technologies, Inc. - CFO, Treasurer & Secretary [17]

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Yes.

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William Sutherland, The Benchmark Company, LLC, Research Division - Equity Analyst [18]

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And so when you look at 2019 and your priorities for use of capital, how...

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Kevin D. Miller, RCM Technologies, Inc. - CFO, Treasurer & Secretary [19]

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Well, number one is to continue to pay down debt. We certainly expect to have -- while our cash flow quarter to quarter may be a bit lumpy, when we get to the end of the year, we expect to have -- drive -- generate very nice cash flow for 2019. And I think our first priority is to pay down debt. Typically, we would like to see get somewhere 1.5 to 2x EBITDA. We're fine going up to 2.5 on a temporary basis. We generally don't like to see it above 2.5, although certainly, we have no problem going above 2.5 if it's temporary and it's for a specific reason. We'd like to leave a little play in there for the -- as far as the EBITDA to debt ratio is concerned. So when you do have these occasional flareups, you don't need to go and get a covenant waiver or anything like that. So I think, our first priority, Bill, is to pay down debt. As far as once we bring the debt more in line with where we'd like to see it, I think that we are interested in continuing to look for very specialized low-risk acquisitions that really add to our growth strategy. As far as anything after that, that remains to be seen but I can -- the one thing I can tell you is that every single board meeting, we talk about capital allocation and capital structure, and we look at all the levers every single quarter. You know what those levers are. But I would say that the first 2 priorities are probably paying down debt and looking for some small low-risk strategic acquisitions.

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Operator [20]

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(Operator Instructions) Our next question is coming from [Anthony Hanlon].

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Unidentified Analyst, [21]

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Do you still think that running 3 businesses that have nothing to do with each other is the correct model for the stockholders?

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Bradley S. Vizi, RCM Technologies, Inc. - Executive Chairman & President [22]

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Yes, Anthony. I'm not sure how long you've been following RCM, but RCM has had 3 businesses for as long as I've been following RCM, so over a decade. And they have managed to equip to deliver significant value for shareholders. So to the extent that, that changes, we will certainly change our strategy, but as of now, we'll continue to run the firm as a human capital management business.

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Unidentified Analyst, [23]

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So you think you're doing really good right now for the last couple of years?

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Bradley S. Vizi, RCM Technologies, Inc. - Executive Chairman & President [24]

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Well, if you take the last couple of years out in isolation, right, that's one thing versus the last 5 years. The majority of our shareholder base has been with us for a 5-year period or longer. How long have you been with us, Anthony?

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Unidentified Analyst, [25]

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I understand that period. I understand the period before it also where you were flat for 10 years. And it seems to me like you keep reporting that this is doing great, this one is doing great, but that one is not doing too well because of some reason. So when you have 3 different companies, you always have something that's not doing well. And that has an effect on the multiple on your stock and where the stock trades.

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Bradley S. Vizi, RCM Technologies, Inc. - Executive Chairman & President [26]

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Understood.

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Unidentified Analyst, [27]

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Very few conglomerates do well. GE is a really good example.

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Bradley S. Vizi, RCM Technologies, Inc. - Executive Chairman & President [28]

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Understood.

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Operator [29]

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(Operator Instructions) There are no more callers in queue for questions.

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Kevin D. Miller, RCM Technologies, Inc. - CFO, Treasurer & Secretary [30]

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Okay, everyone, thank you for joining our call, and have a great day.

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Operator [31]

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