RCMT Earnings Call Transcriptbeta

Executives: Rocco Campanelli – President and Chief Executive Officer Kevin Miller – Chief Financial Officer

Analysts: Bill Sutherland – Emerging Growth Equity

Operator: Ladies and gentlemen, thank you for joining the RCM Technologies Third Quarter Earnings Conference Call. Your host for today, Rocco Campanelli will begin.

Rocco Campanelli: Good morning, everyone. This is Rocco Campanelli, RCM’s President and Chief Executive Officer. Welcome to the RCM Technologies' 2016 third quarter earnings call. I'm joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin with a legal disclaimer and then I will summarize the operating results for each of our operating segments, then we will open 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, 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.

Rocco Campanelli: Thanks, Kevin. We typically experienced our lowest revenue in the third quarter due to seasonality with the largest decline coming from school summer closings impacting our school contracts, but also summer vacations for our billable personnel across all three segments. As we look to fiscal 2017, we believe we are positioned to have a very strong year. I will discuss each segment separately. Our healthcare segment continues to post outstanding results by setting an historic high for third quarter revenues growing about 13% over the third quarter 2015. Our schools program continues to perform very well across the country. We are especially proud of our 100% fill ratio in Chicago and Hawaii school nursing programs where we have exclusive contracts. We recently won a school nursing contract with the city of Detroit. Although it’s too soon to tell with certainty, we believe this contract could be worth up to $400,000 per year. In any event, we are very pleased to win another contract with a large school system. On previous calls, we announced that we won the Hawaii paraprofessional contract that was initially suppose to start on August 1st, the beginning of the current Hawaii school year, but for RCM only it was delayed until September 1st. We were initially concerned that as the only new provider, the other four incumbent suppliers were given a one month head start to recruit paraprofessionals for Hawaii. We are happy to announce that as of today we have approximately 30 paraprofessionals working for Hawaii. We are optimistic that our paraprofessional roster will grow as the school year progresses and we have high hopes for future school years when we have an entire summer to recruit and train paraprofessionals. Our travel nurse division continues to hit the ball out of the park. We expect to generate over $10 million in revenue in fiscal 2016 and hope to hit a run rate in Q4 approaching $12 million. We continue to aggressively seek experienced travel nurse recruiters and are happy to accept any referrals, so if you would please spread the word. While we don’t expect any meaningful impact to operating income in 2017, we are pleased so far with our Locum Tenens division, which opened in early July. We have signed several MSAs and we are actively recruiting our first physician. We fully expect to achieve another record quarter for revenues and gross profit in the fourth quarter for our healthcare segment. Congratulations to our entire healthcare group, a fantastic 2016. Our information technology segment revenues for the third quarter continued to lag prior year results as several large contracts ended in late 2015 and early 2016 and were not replaced. And we have also experienced an unusually high number of consultants completing assignments at the same time. We continue to make investments in sales and recruiting resources in our information technology group, while focusing on increasing our sales activity levels and improving our recruiting process. Our HR Solutions division began new training and software implementation projects with a major workforce management company as well as implementation services for a new human capital management software system for a leading provider of these products and services. Our IT Solutions Group also started several projects with United Technologies, which has been a 25 year RCM engineering client, and we're excited to begin providing IT services to them. We are also confident that in the next several quarters, we will begin to see improved results in this segment based on the recent changes we implemented and a strong performance culture that has driven the impressive growth we realized in revenue, gross profit, and contribution operating income in 2012 through 2015. This is also important to note that the third quarter of 2015 includes $800,000 in revenue and $300,000 in gross profit from our former QAD business, which we sold at the end of fiscal 2015. The first three quarters of 2015 includes $2.6 million in revenue and $1.2 million in gross profit from our former QAD business. Our engineering segment has performed reasonably well with two notable exceptions. First, selectivity is increasing. We continued to see a lag in project awards for our major Canadian engineering clients. Additionally, we have fixed price work with a major utility in the United States that has resulted in a drag on gross margin. We expect the majority of this drag on gross margin to come to an end in 2016. We have seen a definite rise in our backlog and proposal activity in Canada and expect Q4 to have significantly better results in Q3. More importantly, our backlog and pipeline at both our major Canadian Engineering clients are considerably higher than they were at this same time last year. We are optimistic that our Canadian Engineering Group will contribute significantly better revenues and gross margin in 2017 than we saw in 2016. This optimism is based on several recently awarded direct OPG contracts as well as a variety of large direct OPG contracts that we are currently bidding on that we are particularly qualified to perform. In addition, our Bruce Power purchase orders, awarded in October, grew exponentially versus the previous nine months. And our Bruce Power proposal activity is higher than it’s been all year. Our U.S. Energy Services division also continues to do well with a nice backlog in pipeline. Our focus on transmission and distribution engineering has led us to develop a new service area in testing and commissioning substation equipment. Our clients tell us there is a huge demand for service companies with this capability. We recently won multimillion dollar contracts in Canada and Northeastern United States commissioning substation equipment. We have also recently been awarded a five year engineering relay replacement project for 100 substations for a large U.S. based utility, and a large back fit electrical and distributed control system design engineering project for an oil refinery in carousel. Additionally, we recently initiated decommissioning project for two coal plants in the northeast as well as engineering associated with four fuel cells for a large fuel cell manufacturer in the northeast both of which are new services for our energy services group. Our aerospace division continues to perform well in both technical publications and engineering with a good backlog. We are expanding this group to offer these same services in Canada and anticipate opening a new office in Huntsville in January to support a new Sikorsky multi-year technical publications contract. We also continue to deliver on our existing contracts and are receiving new task orders from our clients on a daily basis. We anticipate a significant increase in consolidated revenue and operating results in the fourth quarter as compared to our third quarter driven primarily by new historic record revenues in our specialty healthcare segment and an increase in activity and improved gross margins for our engineering segment. We believe we are poised for a very strong 2017. Thank you for attending RCM's third quarter conference call. We look forward to discussing our fourth quarter and updating you on 2017 in a few months. I would like to open the line for questions.

Operator: [Operator Instructions] Our first question is going to come from Bill Sutherland from Emerging Growth Equity. Please go ahead.

Bill Sutherland: Thanks, operator. Hey guys.

Rocco Campanelli: Hi, Bill.

Kevin Miller: Hi, Bill.

Bill Sutherland: So, it sounds like for sure this is – this will be a trough quarter for you guys.

Rocco Campanelli: Yes.

Bill Sutherland: Q3?

Rocco Campanelli: Yes. With the seasonality and some of the – the seasonality and healthcare, I mean, healthcare actually had a good quarter. It's just doesn't look good compared to the other quarters because of the seasonality.

Bill Sutherland: Was it – and while you mentioned that Kevin was it kind of the normal seasonality, it's hard to tell last year because you kind of grew through the seasonality?

Rocco Campanelli: Yeah. No, it was normal and that’s an exactly a perceptive observation for last year, but yeah, the seasonality is normal. Now, if you go back several years, we didn't have the Chicago contract. So as we add these big school contracts, the seasonality gets bigger and bigger, right. So, when it’s just New York, it was one level. When we added Hawaii, it was another level. And then now that we've added Chicago, it's another level. And…

Bill Sutherland: Detroit…

Rocco Campanelli: And Detroit, which is not going to be a big contract relative to those other three that will add some seasonality next year. And hopefully, we’ll add some more big school contracts and we'll see even more going forward.

Bill Sutherland: Are you guys actively in proposal process…

Rocco Campanelli: We are always looking for new school contracts. And not only we are always looking for new school contracts, we're looking to expand our presence. The best example being the paraprofessional contracts in Hawaii. Now, in Hawaii, we have currently knocked on wood have an exclusive nursing contract. So we don't have to compete with anyone – with any of their suppliers there. The paraprofessional contract, which the overall spend, is much bigger than the nursing contract, we have four competitors there we’re competing with. But that's a big stand and we're not going to get huge numbers there overnight, but there's the potential to really expand where we are today with 30 paraprofessionals. We think we can get a lot more – it's probably we're going to grow gradually for this school a year, but when we get a whole summer to recruit and train because we're doing a lot of training on. And we're going out and finding paraprofessionals that we think are somewhat qualified, but maybe with some training can be some of the better – and we're doing that training in-house ourselves. So that that could grow and I hope it does and that will also expand the seasonality for 2017, I hope we have that problem.

Bill Sutherland: So on an annual basis, the school business is about how much of your total healthcare now?

Rocco Campanelli: Well, the big three clients or the big three school contracts are about 45% of our revenues

Bill Sutherland: Of healthcare?

Rocco Campanelli: Of healthcare revenue.

Bill Sutherland: Yeah, yeah, yeah, just asking because with all the ACI noise, it's kind of comforting now you've got half your business – half your healthcare business, the schools. But is it immune to any of those ripples it seems to me at least? And the last question on healthcare was the gross margin a little light in the quarter expected to kind of drift back up to the upper 20s.

Rocco Campanelli: Yeah. No, we'll see that. We'll see that come back up for sure. The school contracts tend to have a little better margin on average, but what you're seeing in Q3 we're having a good year per revenues on nine months year-to-date, but we – and as you can appreciate Bill the [indiscernible] is going to be somewhat sporadic from quarter-to-quarter and we did not have a good firm quarter in Q3. So that clearly impacted the gross margins.

Bill Sutherland: Right.

Rocco Campanelli: And then our travel business is growing so quickly that that is also negatively impacting the margins, but on the flip side our travel margins I think are quite good as I look out to some of the other – some of our competitors, but they're still dilutive to the overall margins. However, the contribution margins in that business are quite nice because you don't have the heavy selling costs. You have heavy recruiting costs, but it's an interesting business if you – if you can get good recruiters, you can really drive revenues in that business.

Bill Sutherland: Right. Let me just ask one on engineering, as you look at your impressive new business pipeline, is the gross margin kind of ranging in the normal range?

Rocco Campanelli: No, our gross margins in engineering are low right now for a couple of reasons the two major reasons are we're just not getting the utilization in Canada that we need to get and we're really striking the balance. We have made some painful cuts in staff up there. We let some people go that I can assure you that we didn’t want to let them go, but even still we're not getting utilization up there today that we can get once it starts humming. So the plan there is once the revenue start coming up, we're going to get better – we can bring back some of the really good people that we let go and also get better utilization. And then we also have a couple of fixed price contracts with one particular utility in the U.S. where we're just realizing some pretty lousy margins.

Bill Sutherland: Yeah, I was also interested when you look at some of the new business you guys have tied up particularly as you get into the some this testing commission business, the substations. Are you expecting that gross margin profile would be kind of the same there?

Rocco Campanelli: Well, it would be the same as when you're looking at quarterly margins that are good.

Kevin Miller: Right.

Rocco Campanelli: Okay. Okay.

Kevin Miller: Quarterly margins that are not so good. So we're generally looking for projects with margins in the upper 20s to lower 30s. It doesn't always happen that way because sometimes in a competitive situation you want to do decent size job and it's going to be 22% you’re going to take it, but generally speaking we're looking to drive up engineering margins over the next quarter. And as we get better and better and some of these new service lines, we're going to look to drive them up even more.

Bill Sutherland: Okay and then just one last one for me. On the balance sheet, great job on the debt. Where did – I haven’t calculated DSO, where debt come out and where are you on your path to target?

Rocco Campanelli: The DSOs are improved, but we've got a little ways to go. You know in the short-term, we've got a little ways to go on the DSOs. They can definitely get better. I expect them to be better in the fourth quarter than where they were in the third quarter. And I expect them to continue to get better next year. That that is a major, major focus of ours driving the DSOs down.

Bill Sutherland: Great, sounds good, thanks guys.

Operator: And our next question is coming from [indiscernible]. Please go ahead.

Unidentified Analyst: Hi, guys. So I missed part of the call. So I apologize. Can you just talk a little bit more about what's going on up in Canada? I mean I know you've had delays [indiscernible], you just haven’t seen these contracts that are supposed to come through, but just haven't. And then we just talk about sort of what's going on up there?

Rocco Campanelli: Well let me give you sort of an overarching comments since you’re a finance guy John.

Unidentified Analyst: Yeah.

Rocco Campanelli: I was looking at our backlog, which is actual book contracts plus weighted average pipeline, which is you know kind of when we assess our chances of winning contract and if you think you have 50% of chance of getting it $10 million contract, you put it in at $5 million. And obviously that's speculative right because if you lose it, it’s zero; if you win it, it's 100%. But our weighted average pipeline and backlog today is 150% of what it was this time last year.

Unidentified Analyst: Yeah.

Rocco Campanelli: So we did about US$20 million revenues – we're going to do in the neighborhood of $20 million for fiscal 2016, which is a big disappointment from where what we thought we were going to do this time last year. But this time we’re – I actually did this yesterday. I compared the weighted average pipeline in the backlog at the same time last year to where it is today that's 150% better. And knock on wood some of the pipeline opportunity that I think we're probably assessing a little bit conservatively. I think we've got it a good chance of winning a lot of those. So if and again this is speculative, but if the percentage is hold, $20 million, 150% of $20 million is $30 million.

Unidentified Analyst: Right.

Rocco Campanelli: If we can get another $10 million out of Canada in U.S. dollar revenues and of course exchange – what happens in exchange rates influences that too. Right now, the exchange rates have been up. And hopefully maybe with the Trump Presidency, a lot of people are speculating the price of oil is going to go up and if that happens over the currency rate between the U.S. dollar and the Canadian dollar. But anyway the short of it is, we feel much better about where we are. Last year at this time, we had an okay pipeline in backlog, but the back to talk at our clients was lots of work is coming. So we were really optimistic last year. This time now compared to last year, we have a better backlog in the pipeline of actually identified contracts that we can bid and hopefully win. And I think some of the comments that we're getting out of our two big clients are maybe a little bit more believable that this work is coming early next year. And again, I'm knocking on my best because I say that because until these are notorious we’re saying yeah, we’re going to award this project in January and June [indiscernible] rewarded it. But we're feeling a lot better…

Unidentified Analyst: And it’s just more of political foot dragging of these things finally getting issued.

Rocco Campanelli: It's political. Some of it is utilities in general, but especially nuclear utilities. They're going to be really careful in terms of doing everything that they need to do before they let out work. There's a lot of free work that they have to do for us to provide an accurate estimate and schedule for all portion of the work.

Unidentified Analyst: Right.

Rocco Campanelli: So lots of the preliminary engineering and specification development has to be done by them in order for us to even come close to a good estimate. In Canada as well as everywhere else good resources are tough to grow and they're in a process both – both our clients of growing those resources internally as well. And at OPG, for example, they just started the refurbishment on – they just trip the breaker on the first plant, but we've been able to get direct OPG work instead of through a construction contractor. So we're more and more optimistic at OPG and very optimistic at Bruce Power because we’re getting our share at Bruce Power.

Unidentified Analyst: Great, okay. And then hopefully, we’ll get some infrastructure projects done and build USA by Mr. Trump.

Rocco Campanelli: Yeah, yeah. We're optimistic about the U.S. We’ve diversified our service areas more I think in the past six months here in the U.S. than in the past couple of years. So we have a good list of diversified clients. And we've got a good backlog of commissioning projects. We have a good backlog of fuel cells, which is really new for us. And pretty much in demand for emergency power for hospitals and universities. And we have an agreement with a big fuel cell manufacturer to do the design engineering for their installations.

Unidentified Analyst: Okay.

Rocco Campanelli: But I think we're pretty optimistic here in the U.S. on the engineering – on the on the energy services side of the business as well as the aerospace.

Unidentified Analyst: Great, okay, thanks very much. Good luck.

Rocco Campanelli: Thanks.

Operator: [Operator Instructions] And Mr. Campanelli and Mr. Miller I am waiting for callers to join the queue. I do not see any callers in queue at this time.

Rocco Campanelli: Well, thank you very much everyone. And we look forward to updating you in a couple of months. Thanks for joining the call.

Operator: Ladies and gentlemen, thanks for joining this conference call. You may all disconnect and have a great day.