RCM Technologies, Inc. (NASDAQ:RCMT) Q1 2023 Earnings Call Transcript
RCM Technologies, Inc. (NASDAQ:RCMT) Q1 2023 Earnings Call Transcript May 11, 2023
Kevin Miller: Good morning and thank you for joining us. This is Kevin Miller, Chief Financial Officer of RCM Technologies. I am joined today by Brad Vizi, RCM’s Executive Chairman. Our presentation in this call will contain forward-looking statements. The information contained in the forward-looking statements is based on our beliefs, estimates, 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 the SEC as well as our press releases that we issue from time to time. I will now turn the call over to Brad Vizi, Executive Chairman, to provide an overview of RCM’s operating performance during the quarter.
Brad Vizi: Thanks, Kevin. Good morning, everyone. As discussed in March, after finishing 2022 strong, RCM started 2023 slower than expected, with a sequential decline in run rate, primarily due to project timing and program ramp-up in our Engineering segment. But as anticipated, the cadence of activity increased as we move through the year following us – allowing us to retain our offensive posture as we continue to build on the foundation carefully laid in each of our business units. Also, despite the steady drumbeat of company shedding staff, RCM continues to hire. In my experience, the best time to invest is when others pull back, fortifying our greatest asset, our workforce. If anything, we believe wholesale restructuring in certain parts of the economy’s labor force should provide further secular tailwind to our business model.
In addition, increasing employee turnover, technological dynamism and perennial macroeconomic uncertainty further incentivize companies to focus on what they do best and embrace us as a value-added partner with decades of experience in human capital management. Now I will briefly provide an update on each business unit, starting with Healthcare. Our Specialty Healthcare Division had a solid first quarter, exceeding our fourth quarter performance and demonstrating sequential growth. The increased demand for nurses, allied health and behavioral health professionals significantly contributed to our success. Our dedication to delivering best-in-class healthcare staffing solutions to our clients has been the primary driver of our results. We have attracted new hospital and K-12 school clients, and our existing clients have increased their essential workforce further fueling growth.
In addition, we have a robust pipeline of new school districts across the United States. This expansion presents significant growth opportunities, and we are excited about its potential. Our focus on providing highly skilled and experienced healthcare professionals to school districts will drive our success in this growing market. The current nursing and behavioral health professional shortages in schools have become a significant concern for educators and healthcare providers. The post-pandemic environment has further stressed a system already facing decades of underinvestment. This shortage of healthcare professionals impacts the student’s health and well-being. It poses a significant challenge for educators and healthcare providers responsible for ensuring they receive the best care and education.
The need for nurses in schools has become even more critical. Nurses play a vital role in educating and promoting health among students. Additionally, the need for more behavioral health professionals in schools has become a significant challenge for educators. The lack of mental health resources makes it difficult for schools to provide students with the necessary support to cope with behavioral health issues. At RCM, we understand the importance of collaboration with our clients to address these shortages and support students. We are committed to working closely with our K-12 partners to find innovative healthcare staffing solutions and ensure students receive best-in-class care. On the Life Sciences and IT front, our HCM practice continues to excel by expanding our managed services agreement with a large workforce management technology provider.
The program has been so successful that we have become the largest partner for one of its core offerings and expanded our partnership into the client’s second flagship offering. Collectively, the two programs bolster our multiyear managed service portfolio. Our Life Sciences team has secured several new clients, including two large-scale manufacturing commercialization projects. In addition, our shift to long-term managed service contracts has largely mitigated our exposure to business volatility. We see increased opportunities for 2023 as we expand our services and reach across all our primary service offerings. The shift in focus away from one-off episodic engagements to long-term offerings has provided a platform for growth in all economic conditions.
Photo by ThisisEngineering RAEng on Unsplash
Moving to Engineering. First quarter RCM Processing Industrial results were modestly above plan with strong growth in backlog and pipeline. A high level of startup and commissioning work at our job sites and the timing of new customer projects led to performance below the Q4 run rate. However, the strong uptick in bookings at the end of the quarter demonstrates delivery to the forecast and a trajectory for year-over-year growth. Growth is forecast to continue as additional projects become fully funded and current demonstration scale work fuel multiple production scale ventures. The potential of the Process Industrial group and most notably, the Thermal Kinetics business unit continues to flourish with diversification in customers and markets, evidenced by backlog and recent awards.
RCM Thermal Kinetics has gained momentum with several new clients and strategic partnerships, including Solugen, global leader in scalable synthetic biology, bringing sustainability and nontoxic ingredients to the chemicals industry. You can read more about the work in the March edition of manufacturing today magazine, where Solugen is featured in a major editorial. New partnerships like this complement longstanding ones with companies like Fluid Quip Technologies where we have brought another two fuel ethanol projects online in Q1, both in Brazil. As the push for a carbon-neutral future and increased demand for materials drives investment for facility owners, RCM Thermal Kinetics is also seeing an increase in demand for equipment in the aluminum rolling mill industry.
Our technology provides a high-value solution for recovering expensive rolling oils through a distillation process and supports plant operators in meeting environmental compliance while reducing costs. This is another example of diversification in customers and markets our technology-led business model serves. Energy Services continues to build growth and momentum through the first quarter. The team kicked off several projects with one of North America’s largest utilities mid-quarter and is seeing the backlog and pipeline grow substantially for this work well beyond 2023 with multiple 7-figure PL awards secured during the quarter. The Energy Services Group continues to grow its footprint and is pleased to announce the opening of its new office in Germany.
This achievement is well aligned with the group’s mission to be a trusted partner as we grow our footprint to better align with the expansion of these key relationships. We were awarded a substantial project for a large European utility client during the quarter. We look forward to strengthening its ability to support the modernization of the grid and partnering towards a carbon-neutral future for energy across Europe. The Energy Services Group has one of the most robust portfolios of clients and backlog in its history. It remains focused on building upon this sturdy foundation to deliver efficient, quality focused, innovative solutions for our clients’ success. Aerospace continued to drive growth through the first quarter of 2023 by adding customers and expanding scope with existing clients while adding new capabilities and seasoned executive management to complement the existing team.
We have added 3 new customers to our portfolio and broken into the Aerospace component and engine market, presenting huge potential. Our new senior management team provides much needed experience and expertise in the manufacturing realm of this environment. Our employee base in the space and air mobility arenas continues to expand into other adjacent areas in engineering and aftermarket with both new and current customers. Our sales pipeline is the largest it has ever been with potential to close on 5 to 7 new clients and opportunities before year-end 2023, gaining us a foothold in many of the largest and most successful OEMs in the industry. The depth and breadth of this new business – of this new development will include new air mobility clients, vertical flight, sea vessels and commercial airlines.
Our recruitment team remains ready to compete and utilize its network, agility and speed-to-market approach, which has proven successful with several recent ramp rate requirements at clients. Additionally, we added a Senior Vice President, aftermarket with experience in negotiating maintenance agreements, leading cross-functional teams and surplus parts strategies and establishing partnership agreements in new market segments. This addition will help drive diversification into other areas of aftermarket. The aftermarket segment continues to be an area of growth throughout the industry. Attending aviation week, MRO Americas in April, we learned that demand for air travel remains strong, while skilled labor and park shortages continue to be challenging.
This combination is ideal for RCM’s aftermarket solutions as had been in our many discussions with OEMs and MROs. Before turning the call to Kevin, who will cover our financial results in more detail, I will take a moment to touch on our progress on the capital allocation front. Since the start of the year, our clean balance sheet and high cash generating business model have allowed us to repurchase over 1.2 million shares including purchasing 334,000 shares in an opportunistic private transaction. In addition, as we work through our seasonally strongest cash generated quarter, we maintain great financial flexibility to pursue growth programs and react opportunistically to capitalize on market anxiety. Now I will turn the call to Kevin to discuss the Q1 2023 full year financial results in more detail.
Kevin Miller: Thank you, Brad. Regarding our consolidated results, revenue for the first quarter was $67.2 million. The decrease in revenue was mainly due to the following: in Healthcare, we have a comp against our peak COVID impact in Q1 of 2022. So naturally, we saw a decline in revenue as the pandemic shifted to an endemic. However, as telegraphed on our last call, we saw solid sequential growth as the underlying non-COVID-related demand for our services is robust. As for Engineering, Q1 ‘23 was a quarter we occasionally see where there is a gap from several large projects ending around the same time and not getting immediately replaced with new projects. We expect our Engineering group to see sequential increases throughout the rest of 2023.
Gross margin in the first quarter was 28.3% versus 28.6%. We saw outstanding gross margin performance from Healthcare and Life Sciences and IT. However, we saw weak margin performance in our Engineering due to lower utilization associated with project gaps. As we look to the second quarter, we expect Healthcare to continue to experience its underlying sequential growth trend. However, due to school closings, we expect to see a sequential top line decline. Our second largest school client closes at the end of May, and most other school clients are not in session through June 30. We are optimistic that our Engineering group can match whatever sequential decline we see from Healthcare. As for IT, we expect to see a modest sequential increase in the second quarter.
As we look beyond the second quarter, we expect our Healthcare group to continue to see strong growth trends. As we get through summer school closings in Q3, we believe that Q4 ‘23 will be Healthcare’s best quarter in 2023 by a significant amount. In addition, we are incredibly excited about new schools and our behavioral health offering for the 2023-2024 school year. We expect to continue to see significant sequential gains in our Engineering group as we realize our strong project backlog and continue to convert the pipeline. With the recent managed service wins in Life Sciences and IT, we anticipate sequential growth each quarter in 2023. In summary, we believe we are lining up an impressive fourth quarter and run rate as we head into fiscal 2024.
This concludes our prepared remarks. At this time, we will open the call for questions.
Operator: [Operator Instructions] And it does look like we got at least one question in so far from Alex Rygiel from B. Riley Financial. Your line is now open.
Operator: And with that, there are no further – We just got another question, Bill Sutherland of Benchmark. Your line is now open.
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