RCM Technologies, Inc. (NASDAQ:RCMT) Q1 2023 Earnings Conference Call May 10, 2023 1:00 PM ET
Company Participants
Kevin Miller – Chief Financial Officer
Brad Vizi – Executive Chairman
Conference Call Participants
Alex Rygiel – B. Riley Financial
Bill Sutherland – Benchmark
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.
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.
Question-and-Answer Session
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.
Alex Rygiel
Thank you, Kevin. Just – and thanks for the added guidance there. As it related to your comment about Specialty Health sequentially being down a little bit, it sounded like you suggested that 2Q sequential down would be basically offset by the Engineering team. So I wanted to confirm that first?
Kevin Miller
Yes. I mean sure. Obviously, we don’t know what the exact revenues are going to be in Q2, but we are – like I said, we’re optimistic that the two will offset each other.
Alex Rygiel
Great. And then Brad, bigger picture here, very bullish comments from a macro standpoint, your capital allocation, share repurchases in the first quarter would suggest your confidence kind of heading out. You referenced a number of new customers, and it sounds like, therefore, backlog is growing. I know you don’t disclose backlog, but can you help us to sort of understand maybe how backlog has changed year-over-year sequentially and how do you see that growing throughout the year?
Brad Vizi
Yes. Backlog is certainly building. But what’s probably more encouraging is pipeline activity and the level of confidence that we have, not only is it broadening across the portfolio, but the size of the work and the level of involvement with our clients is also increasing. So again, as we continue – as the business continues to mature, and we have increased confidence in cadence, we’re certainly willing to share that. Inevitably, given the project-oriented orientation of some of what we do when you start in kind of precise guidance, it becomes a little bit more difficult, particularly when you’re balancing growth versus profitability?
Alex Rygiel
Very helpful. Thank you very much.
Operator
And with that, there are no further – We just got another question, Bill Sutherland of Benchmark. Your line is now open.
Bill Sutherland
Thanks. Hey, guys. So as you try to think about the timing of the projects coming on in Engineering, does it feel like it’s going to be not just a back half weighted year, but maybe even more in the fourth quarter? Or would it be more evenly distributed?
Kevin Miller
Hard to say exactly, Bill, because some of the timing of the projects is difficult to project, but I think that we’ll see Q3 should be significantly better than Q2 and Q2 should be significantly better than Q1. And I think Q4 will be better than Q3. So I think we’re good. I think both Q3 and Q4 would be strong as we sit here today and forecast the backlog rollout and the realization of pipeline, but Q4 should be better than Q3 as well. So we’re optimistic we’ll see [indiscernible] each quarter as we head out.
Bill Sutherland
And you typically get a seasonal Q1 seasonally off at least a little bit from Q4, just because of the projects that get wrapped up, and you have to start new ones.
Kevin Miller
Typically, yes. Every year is a little different, but we often see that. One of the things that impacted us in the Q1 in addition to some major projects ending is one of our major aerospace clients lost a contract, and we had about 30 people come off building, which is fine. These types of things happens when you’re in the business of filling gaps for clients, you’re going to wind up with some gaps yourself, but we’re seeing that rebuild and we think the second half for aerospace is going to be dynamite. Brad mentioned that we have a whole bunch of new clients that we’ve never worked with in the past that we think we’re going to close. And we’ve added several new clients in the beginning of this year. They’ll take a little while to ramp and then we have five to seven more that we think we could close between now and the end of the year. So we’re really, really excited about what we have going on in the Aerospace group despite not going up in the Q1 number.
Bill Sutherland
Yes. And then when you look at the clients that you’re onboarding in education in the fall for this coming school year. Do these tend to have contracts to kind of start September 1ish or do you have some that are a little off the traditional education calendar? Just curious…
Kevin Miller
The contracts are kind of a bit all over the map, but a lot of the newer contracts that we’re getting are general M&As, right? And if you win an MSA with a school client in April, you may or may not be able to place some people with that client at the end of the current school year. Sometimes we can add a few people. Sometimes you win a contract and it’s okay, we’re gearing up for September of 2023. But we’re optimistic that when the new school year rolls around and some of our clients start in August, some of them start in September, we’re really optimistic about a lot of the new contracts, either contracts that are new, and we’re not – and we don’t have a lot of providers there or contracts potentially that we could win between now and the 2023-2024 school year because we’re talking to a whole bunch of schools that we feel good, that we can close sometime over the summer so that we can get some people in there in September. And then you’ve got school contracts that we won for 2022, ‘23, you don’t always go in there and put 30 people in. In the first year, you might put in 10 and then the next year, maybe you get up to 30 and then next year, maybe you get up to 40 or 50 if the school is big enough to support that many people. So it’s really kind of all over the map. But I think the bottom line is we’re very optimistic about when we look at the new schools that we’ve added and the pipeline schools that we haven’t added yet that we think we can add, we’re really excited about ‘23, ‘24, and we won’t see that impact until September, end of August. So that’s the main reason we talk about Healthcare having a great Q4. That’s why we think we’re going to have a really good Q4 for Healthcare.
Bill Sutherland
Got it. And then Brad, on capital allocation, you guys have repurchased 1.2 million shares through the end of 1Q or…
Kevin Miller
No, through to-date.
Bill Sutherland
Through to-date, okay.
Kevin Miller
Through to date, right. So if you want – I know you always like to get our share count, I’ll be happy to give it to you.
Bill Sutherland
Yes. Absolutely.
Kevin Miller
So our share count as of today, and this is without dilutive shares, is 8,269,332. So that’s our share count as of today without dilutive shares. And the dilutive shares in Q1 were about 229,000 shares.
Bill Sutherland
Wait, you…
Kevin Miller
Well, so let me just say you’re not confused. As of today, our share count without dilutive shares is 8,269,332 but let me – I’ll give you the Q1 as well because I know you like to get those, some additional confusion, hold on, let me just flip to the Q, which I expect to file at the end of the day to our footnote here. So our share – our diluted average share count for Q1 was 9,401,867. And that includes 229,356 of dilutive shares for Q1.
Bill Sutherland
I understand Okay. Okay. No, I understand what you’re saying. And then you’re just kind of an opportunistic posture in the authorization is how big at this point?
Kevin Miller
As of today, $23.5 million we have left for potential purchases.
Brad Vizi
Yes, I think the one thing I’d add to that, Bill, is we’re not capital constrained whatsoever and we have a high level of confidence in the business that we’re building here and the teams that we brought on and have filled out and are increasingly enhancing and the activity that they’re generating. So we obviously have done a good job converting cash flow over the last few years. We anticipate to continue to generate significant amounts of free cash flow. We actively evaluate bolt-on opportunities that we feel like we can grow materially as part of the RCM platform. So with kind of the stock trading at the current levels, it’s – the decision tree is relatively straightforward. What we like to do in terms of capital and the high-return projects we like to target, they’re not mutually exclusive. It’s kind of the ones that make sense, we’ll move forward. We have plenty of capacity to deploy capital where it makes sense.
Bill Sutherland
Got it. Okay, thanks, guys. Appreciate the color.
Operator
Alright. And next up, it looks like we have Frank Kelly, a Private Investor now on the line.
Unidentified Analyst
Hey, gentlemen. Good mooning. How are you, Brad? How are you Kevin?
Kevin Miller
Good.
Brad Vizi
Hi, Frank.
Unidentified Analyst
Great. I was looking at AR, our DSOs are considerably up year-over-year, I think they’ve got to be pretty incredible. And then I turned around and I look at interest expense on our line, would it be – what do we have to say about that? And it looks like it’s the $9 million in increased line that we’ve used. We could save $0.5 million in interest versus collecting that cash. What do you guys think on the DSO? And what’s happening there?
Kevin Miller
Sure. I mean the DSOs are definitely up in Q1 and certainly above a level that we’ve been accustomed to for the last 2 years. As you know, Frank, they can fluctuate for all kinds of reasons. We often see a spike in Q1 just because I think we usually see a lot of our clients push to get cash out the door at the end of the calendar year. And then sometimes they take a little pause in the first quarter. So it’s not unusual to see a spike in the first quarter. But I would tell you that, frankly, they’re a lot higher than in Q1 than I’d like to see them. And I think they’re higher than what we expect to see going forward. I think if we look at the last year, those are quite good. But the Q1 of 2023, they were not good and when we expect them to come down. As far as DSO is concerned, obviously, obviously, a decline in DSOs will – assuming no big increase in revenue, will help us to decrease our debt, and that would obviously help decrease our interest expense. But the main driver of the debt is obviously the repurchase program, which we will take that trade-off and the share count versus a little bit of interest expense all day long in terms of the EPS and having a leverage ratio [indiscernible].
Brad Vizi
Yes, Frank, just to put a fine point on the interest expenses is under any sort of reasonable assumptions, we don’t see kind of after-tax interest expense to be much more than $1 million. We don’t anticipate significant leverage relative to our earnings power or anything like that. We have a great relationship with our bank. So – but your point is well taken. It wasn’t our best collections quarter. The finance team is on it. We anticipate a good free cash flow in Q2 as we would have seasonally anyways. But there’s also opportunity to improve DSOs from where we’re at.
Unidentified Analyst
Great. Great. Great. I’m sure you guys are on it. The other question, could you shed some light on the gain of sale of assets, which kind of a one-off extra $400,000 this quarter. What was that as related to?
Kevin Miller
So as I’m sure you’re aware, we sold our Canada Power Systems Group in 2021 and that – there were some escrow funds associated with that. And the accounting on that is you don’t recognize the gain until the cash comes in. That was just a matter of us collecting the last amount of escrow funds. We – it was like a one-third, two-thirds collection. We collected some last year, which is what I think it was in the fourth quarter or the third quarter, it was recognized maybe. That was a smaller amount because that was a portion of the escrow and then the balance of it was paid out this year. And there’s no more funds that deals done, the escrows will return to us.
Unidentified Analyst
Great. Great. Just the extension on that was about 2 years, right?
Kevin Miller
18 months, Frank, which was – which, frankly, was a rough negotiation, but we got it in 18 months.
Unidentified Analyst
Great. Great. Last question on the capital allocation, the program that the company is currently pursuing, do we see that to continue throughout the rest of – the remainder of 2023?
Brad Vizi
Yes, certainly through the remainder of 2023. We continue to be open-minded. Look, as the business continues to strengthen, we continue to grow EBITDA, right, and share count is lower. I mean that just further opens up the field. Like I said, we’re not ruling anything out. Like I said, I don’t think that it’s fair to anticipate any type of a distribution or dividend this year, but going forward, we’re not completely opposed to it. It’s something that we do talk about.
Unidentified Analyst
Great. Appreciate it. Keep up the good work.
Kevin Miller
Thank you.
Operator
With that, gentlemen, we no longer have any questions in queue. [Operator Instructions] And at this time, I’m seeing no further questions in queue.
Kevin Miller
Thanks, everyone.
Brad Vizi
Thank you, everyone, for your time today. We look forward to our next update in August.
Operator
Alright. Ladies and gentlemen, that does conclude your call. You may now disconnect your lines, and thank you again for joining us today.
Read the full article here
