Rocco Campanelli - President and CEO Kevin Miller - CFO

Good morning, and welcome to the RCM Technologies Year-End Earnings Call. Mr. Rocco Campanelli will now begin.

Good morning everyone. This is Rocco Campanelli and welcome to the 2014 year-end earnings call. I am joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin with the financial summary of the fourth quarter and the year as a whole, followed by my summary of the operating results for the year. And then we’ll open the call up for questions. Kevin?

Good morning, everyone. Kevin, I’ll also begin with the legal mumbo-jumbo here. 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 risks, uncertainties and other factors, to which they are subject, please see the periodic reports on Form 10-K, Form 10-Q and 8-K that we file with the SEC, as well as our press releases that we issue from time to time. Thank you. Since we now provide the secretarial data for both Q4 and the year in the press release, I’m going to dispense with just regurgitating the numbers that are already in the press release. If there’s anybody on the call that hasn’t seen them and has any questions, I’ll be happy to answer any questions on the secretarial data during the Q&A session. So I just first wanted to point out some highlights for Q4. Our consolidated revenues for Q4, from continuing operations with the highest since 2001, and as most of you know, we were a vastly different company in 2001. Our consolidated revenues also experienced their tenth straight quarter-over-quarter REIT growth. Our Engineering revenues also experienced their tenth straight quarter-over-quarter REIT growth. Our IT revenues experienced their ninth straight quarter with quarter-over-quarter growth. And they also experienced, in Q4, their highest quarterly gross profit dollars in four years. Our Healthcare grew up experience their highest quarterly revenues and GP dollars in company history and for the first time, passing a 10 million quarterly revenue milestone. They also experienced their sixth straight quarter-over-quarter with revenue growth. So my highlights for fiscal 2014 that I would like to point out. 2014 consolidated revenues from continuing operations were the highest since 2003. And 2014 consolidated gross profit dollars from continuing operations are the highest since 2001. Our 2014 Engineering revenues are the highest in company history, and the engineering, the strong engineering performance was primarily led by our Canadian Energy Services in our Aerospace Technical Publications Group. 2014 IT revenues and gross profit dollars are the highest since 2011. And that strong performance was led by our Life Sciences solutions, East staffing practice, and our HR Solutions practice, and our Puerto Rico staffing office. One thing I wanted to point out is, we did assist two major life science clients in 2014 for combined revenues of $12.8 million, for those two large clients that were generated in 2013, but really peaked in 2014. We only expect as those projects tend to come to completion, or more of a steady state in 2015, we expect those revenues to run at roughly 40% in 2015, as to where they ran in 2014. But we really look forward to seeing our IT group, our entire IT group replace those revenues with new large clients. 2014 with Healthcare revenues and gross profit dollars are the highest in company history. Growth was led primarily by our Honolulu office, which recorded $8.5 million in 2014 versus $3.9 million in 2013. And then of course, we were able to get some nice contribution from our new HIM and travel nursing practices. So 2014, I want to point out for Healthcare group was really a major investment year as we invested over a $1 million in SG&A, as compared to 2013. And the primary reason for that was to really set the division up for what we think is going to be really, really nice growth in 2015 and beyond. We really have high expectations for the Healthcare group on a going forward basis. We will continue to invest in the SG&A in the Healthcare group, because we think it has such great potential. But we do think in 2015, we’re going to see a little better leverage from the gross profit growth in 2015 than what was on 2014. A few other things that I want to talk about as we look out to 2015. First, a little bit of a word of caution, I just want, for those of you who that maybe or not familiar that we have significant operations in Canada and what’s going on with the Canadian exchange rate, which has dropped to 80.0%. Obviously, we’re not in the business of projecting out the Canadian exchange rate, and we’re not sure if that’s going to continue to fall, or hopefully come up a little bit. But when we converted our 2014 Canadian revenues into US dollars for our consolidated US reporting purposes, those revenues came over at 90.4%. So you’re looking at a potential drop of 10%, which translates to, if we were to take our revenues generated out of Canada in 2014 and applied today’s exchange rates, you’d be looking at a reduction in reported revenues of $6.2 million. So it’s certainly not an immaterial number as we look out to 2015. So as we look at 2015 as a whole, we are optimistic that the organic growth, organic top line growth, and gross margin in percentage improvement. We can leverage gross profit dollars, hopefully into at least double-digit operating income growth. We are particularly focused in 2015 on improving our gross margin percentage, especially in our engineering and healthcare segments where we think there’s room for improvement as compared to 2014. We also expect to generate significantly better cash flow from operations in fiscal 2015, as we concentrate on reducing our net debt as you know, we issued a $2 per share dividend last year. And we borrowed $20 million in Q4 in order to fund that, but we ended the year with just under $14 million in net debt since we always maintain some cash balance. So while we have a very aggressive goal for 2015, our goal is to reduce the net debt to zero by the end of 2015. Obviously there are a lot of factors that could derail that goal, but that is our target and that is something that we’re really - our entire company is gunning really hard for, to get that net debt down to zero. That’s all I have as far as prepared remarks. Thank you for joining us this morning. And I will now turn the call over to our CEO, Rocco Campanelli.

Thank you, Kevin. Our outstanding fiscal 2014 performance was a direct result of the efforts of our valuable employees. I feel privileged to lead RCM as we grew revenues, gross profit, and operating income before severance and other charges by 13.5%, 16.5% and 37.3% respectively. As we consider fiscal 2015, we know that exceeding our 2014 performance is the challenge, and one our entire leadership team has embraced. I’m optimistic we can continue the momentum into 2015 and beyond. As we sit here today, I believe that RCM has never been positioned better to continue to grow at a rate that will deliver strong returns to our shareholders. This will be accomplished by focusing our attention on diversifying our service offerings, our client base, our geographical presence, especially with new multi-million dollar clients. I want to take a moment here to highlight some of our 2014 accomplishments and then discuss our plans for 2015 for each segment. Our Engineering segments excellent performance is mainly attributed to our Canadian Energy Services Group led by Dan White. And our Aerospace Technical Publications Group led by Rick Wood. Our excellent performance in Canada, which grew our population by more than 100 engineers, was largely driven by projects that Ontario Power Generation, and Bruce Power, and generated about 15 million in revenue. As some of you may know, they are two of our major RCM clients and are undertaking large nuclear refurbishments in the next 10 years, with expenditures in the billions. We don’t expect significant growth at OPG in 2015, but we do expect our work at Bruce Power to steadily increase throughout 2015. We also believe that we are in an ideal position to continue to grow revenues at Bruce in 2016 and beyond. We have challenged our Canadian Engineering Group to expand outside the nuclear industry in Canada, by providing our services to commercial buildings, rail and oil and gas industries. We have had some early successes by being awarded a general servicing agreement by the Toronto Housing Authority. We are also very excited about adding Frank Petraglia, in December, to lead our US Energy Services and North American transmission and distribution efforts. He’s only been with us several months and has already helped us land a master services agreement with Siemens Canada. And we are optimistic we will also be awarded a master services agreement with Siemens USA, as well as other OEM’s and new utility clients. Major focus for our North American Energy Services Group will be growing our transmission and distribution practice. We believe the Point Comm acquisition will serve as a cornerstone for these efforts. If we annualize Point Comm’s revenues for the 2014, RCM generated about $5 million in transmission and distribution related revenues. We are just scratching the surface here, as this is a massive market for our services. We also made progress in late 2014 by winning a contract with a large gas pipeline company in the United States. Our excellent Aerospace performance was mainly attributed to our Technical Publications Group led by Rick Wood. Rick’s team continues to increase their services at Sikorsky, and Pratt & Whitney. We expect that our Technical Publications Group will open an office in Montreal sometime in 2015 to service Pratt & Whitney Canada. Our Aerospace division as a whole, will expand its sales and marketing focus to make full use of our United Technologies one company master services contract by performing services outside our traditional United Technologies customers. I’m especially happy to announce that our Puerto Rico staffing group has already taken advantage of this contract late in 2014, and placed several people at a UTC division in Puerto Rico. This was a great cross-selling win. Our IT Consulting and Solutions segment is led by Tim Brandt and his business units had a spectacular 2014, growing gross profit dollars by 19%. That growth is mainly attributed to our Life Science solutions and our East IT staffing practice, both groups are led by Bill McGuckin. Our Puerto Rico IT staffing office run by Carlos Costas, and our HR Solutions practice run by [indiscernible] and David Pena, also made significant contributions to our growth in IT. In 2014, we enjoyed the success of assisting two major life sciences clients as Kevin mentioned. We generated $12.8 million in revenue at those clients on a combined basis. RCM has helped these two major clients get some regulatory issues under control and completing these projects, we expect a more normalized revenue going forward as Kevin mentioned. I’m proud of the extremely aggressive sales culture that Tim has developed in his units. Revenue, gross profit and net operating income growth is demanded every year. And I’m confident that IT CNS sales and recruiting team, which in my opinion is second to none, is up to the task. Our Healthcare segment run by Mike Saks and Marc Chafetz, grew revenue in 2014 by 21%. As Kevin mentioned, we made a conscious decision to take a step backward as far as profitability is concerned, as we invested over $1 million in SG&A to build for the future. The major trust for our growth was in Hawaii, as Kevin mentioned, but we also expanded our foreign recruitment and gain traction from our new travel and HIM programs. Our pipeline in Healthcare is very strong, especially opportunities with the new school systems. I’m confident that our Healthcare division will have a very strong 2015. We look forward and are optimistic about another successful year in 2015. I would now like to open it up the call for questions.

[Operator Instructions] There are currently no questions in queue. We’ve got a question from Don Zoro [ph] at BCM. Please go ahead.

Thanks for the detail on the sort of the process of trying to sort of go forward, and try and beat what was already a nice year. Is it, I mean does it require economies to get, and I had to step out for part of that, so if you’ve addressed this, I’m sorry. Does it require for any sort of economic change, I mean I know depending on each business it’s the engineering or things like that, it has to do with a local economy. Or if things are getting better in a particular industry or getting worse. But it acquires some sort of continued economic expansion of even where we are today in order to try and hit these numbers that you guys would like to meet?

I mean each business is very different as it pertains to the economy. I think the business that’s probably the most impacted by economic wins is IT, just because we’re in a lot of different industries and companies tend to cutback capital spending in times when there are economic issues. But we feel like, on the IT side, that we have such a small percentage of the overall market that for us to be really impacted. There would really have to be some pretty bad stuff happening in the economy. So as long as the economy is sort of steady state, low growth, or even not doing badly, but we’re not in a situation where we had the big recession in 2008 and 2009, we should be fine. We have a great sales team, a great recruiting team, they execute every day outstanding, they’re used to being in the trenches every day, and fighting the battle every day. And they’re not going to be concerned about the general economic wins when it comes to going out and winning business. When you look at the other two business lines, I think healthcare is kind of the unique animal, when it comes to the economy. They’re certainly impacted because hospitals, and rehab centers and schools are always looking to cut expenses. But the flipside to that is, people are going to get sick regardless of what’s going on in the economy. I feel like that’s an industry that’s somewhat protected, I mean they’re not 100% insulated, but they’re somewhat protected by general economic wins. Obviously, when you have a recession that we had in 2008, 2009, we were certainly impacted by that. But I don’t see that as a bad economy is going to really be anything catastrophic for that business. And then when you flip over to the two major engineering businesses, which is Energy Services and Aerospace I mean Aerospace is impacted a lot by government spending on aerospace initiatives, which it didn’t necessarily target the economy. And then Energy Services I think is impacted somewhat by the economy, but it’s not, it’s nowhere near like other industries.

In the Engineering sector, our focus is to increase market share. And if you take a look at the spend, our focus in North America is an addition to nuclear and power generation, its transition and distribution. And in the next ten years, the infrastructure in North America on transition and distribution the spend is going to be in the hundreds of billions. And we’re positioning ourselves with some agri-clients that we currently have, and expanding it to the OEMs. And we’re looking to increase market share, we have a good reputation, we’ve delivered good product. And there’s a tremendous demand for experienced, qualified engineers to manage and deliver engineering product in the transmission and distribution industry. So regardless of the economy, this infrastructure has to be changed, and there currently is a real shortage of the types of people that we have. And are growing new people all the time and bringing in new graduates, and mentoring them, and getting them certified and qualified to deliver this product. In Canada, these plants that need to be, they are like to be extended. And we know that there’s going to be a spend over the next ten years, and refurbishing done. And we’re positioned very well to do that.

Okay and on the healthcare side, I mean that’s obviously great, this program in Hawaii. Is that a, can you take that program and replicate it? And when I say replicate it, obviously it’s a bidding process right? So you’ve got other contracts that potentially are around?

That program that we had in Hawaii is a replication of the program that we have for the New York City school district. And we have as I mentioned in my statement –

But is that a school, I thought that was like a prison.

No, we have three accounts in Hawaii okay, the biggest one is the, we supply 100% of the nurses to the entire state of Hawaii school system. Hawaii has one school system and we supply 100% of the nurses, they outsource the entire function. Then we have two other clients there as well. We have a correction client and we also have a large hospital group. So we have three major clients in Hawaii and we’re looking for more. There is more work, there are other divisions at the state of Hawaii school system where we can supply other types of healthcare professionals other than nurses. But you’re right, that there’s RFP process and we can’t go after that business till the RFP comes up, but there are some RFP’s coming up. There’s one coming up in 2016 and then maybe more coming up in the future, but to answer your questions in terms of replicating the school model, there aren’t that many school systems out there as big as New York and Hawaii, but there are some other big ones out there. And I’m not going to disclose the school system for competitive reasons, but we’re bidding on one right now that we think could be a homerun for us if we win it. And we feel like, with our experience in Hawaii and New York, and then we’re in another dozen smaller school systems, that we have a real good chance of winning it.

Is that a first half of 2015 potential win or a second half of 2015?

If we win it, it would probably, would start impacting in July.

When would you win it in the first?

Well sometimes when you think you’re going to win things and then when you open the win, they’re very different. So it’s not like –

They’re supposed to announce it by the end of April, they can announce it whenever they want.

I don’t think, I think it will go down to the wire –

And does that, and just a sort of more simplistic, if you have these contracts in Hawaii, these various contracts, and then you have the contract at New York. Does it make it easier and more cost effective if you have one in Oregon, Washington, California? As opposed to having it, winning it in Oklahoma, Iowa, in the center of the country, or it doesn’t really matter. It’s more, it’s more important to have it, this, it be of bigger size?

Well we’d much rather get bigger size, because definitely that’s going to be more profitable. It depends, like we have a contract in Albuquerque for instance, and I don’t know how many people we have there we might have half a dozen people. Well we don’t need an office in Albuquerque to service that, we can do it in Philadelphia. But in the size of the contract we have in Hawaii, we need an office. So, and it all depends if it’s just providing some people, or it’s a full outsourcing solution. So it depends, but there’s certainly our economies of scale on each opportunity, but the bigger the opportunity, the bigger the investment that you need to make in order to get the infrastructure in place to service it.

Are any of these different divisions require more upfront capital to expand in the business than in another, like –?

It’s not really capital, if you’re talking about capital and - well a sense of CapEx, no. There’s not a lot of CapEx to date. But you might have to go and get an office and hire two or three recruiters if it’s a bigger count. We have a couple of recruiters that are dedicated to Hawaii. And then we also have, in that particular instance, we had to hire some nurses to oversee the nurses that are going out every day and they’re billable, but they’re not billable at the same rate as the nurses that are just purely billing as nursing supervisors. So there is –

Are you billing the investment through that through Medicaid, or is it actually a contract directly with the state and –?

No, it’s a contract directly with the state. Well with the school board, whoever the particular - in the case of Hawaii it’s the state school board. In the case of New York, it’s the New York City school board.

I’m on the board of an all timer - we have this huge new home healthcare business. And of course with that you have to hire a bunch of people, plus you’re depending upon who is serving whom. You may be getting paid by Medicare or Medicaid or even maybe getting actually private pay?

I would love for you to send me an email, and send me some more information about that so we can see how we could help you.

And all of that requires different item in your, in order, the business has gone from zero to $3.5 million in 2.5 years, but it also requires money because you’re not getting reimbursed and you’ve got all these other different issues, but okay.

Our home healthcare, we have a home healthcare division that we just started in the last couple of years. And ours is all private pay at this point, we haven’t opened it up to Medicaid, so our receivables are excellent in that. We’re not getting a detraction in our home health aid projects as opposed to travel and HIM, but we’re optimistic about that practice as well.

And there are currently no other questions in queue.

Well thank you everyone for your participation, and we look forward to talking to you at the end of the first quarter. Goodbye everyone.