Rocco Campanelli - President and CEO Kevin D. Miller - CFO, Treasurer and Secretary

Ladies and gentlemen thank you for joining the First Quarter 2015 Earnings Call. Your host for today is Rocco Campanelli. Mr. Campanelli you may begin.

Thank you, Matthew. Good afternoon, everyone. This is Rocco Campanelli and welcome to the first quarter 2015 earnings call. I am joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin with a financial summary of the first quarter followed by my summary of the operating results for the year. And then we’ll open it up for questions. Kevin? Kevin D. Miller: Good afternoon, 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 the SEC, as well as our press releases that we issue from time to time. Thank you. I will now provide selected sectorial and other pertinent data and commentary. So as you probably saw form the press release we had consolidated revenues of $47,966,000 comprised of engineering $22,791,000 information technology, $14,655,000 and our specialty healthcare at revenues of 10,520,000. We experience in the first quarter of 2015 a blended gross margin of 27.7% comprised of the following, engineering 24.7%, information technology, 31.1% and our specialty healthcare segment had a gross margin of 29.6%. Some highlights for Q1, while revenues experienced a modest decline as compared to Q1 of 2014 gross profit and operating income grew by 8.5% and 15.6% respectively. Our specialty healthcare segment led the way with historic quarterly highs in both revenues and gross profit. Our travel healthcare group which was launched just a little over a year ago is already on close to a $4 million annual run-rate and growing quite nicely. As Rocco mentioned in our press release, we recently informed that we are being recommended to the Board of Education of a major city school system as an exclusive provider of school nurses. We expect this new client to immediately become the specialty healthcare segment’s either the second or third largest client within an annual spend north of $6 million and that account will get started in September. Between now and then we will be gearing up to service the client. We also, through our healthcare have a very robust pipeline of potentially nice size opportunities. So that group is really performing quite well. Our information technology segment experienced another strong quarter, especially when considering that, and we mentioned this on our last call for 2014 year end that our two largest IT clients in fiscal 2014 had cyclical project expand in fiscal 2014 and those projects significantly contracted in fiscal 2015. Those two clients, just to put some context on it, those two clients contribute $3.7 million in revenues in Q1 of 2014 versus $1.6 million in Q1 of 2015. So it was $2.1 million decline from those two large clients. So if we exclude those clients our IT segment revenue actually grew almost 16%. We also improved our IT gross margin percentage in Q1, 2015 versus Q1, 2014 by nearly a 100 basis points which helped the IT segment grow its gross profit dollars Q1, 2015 to Q1, 2014 and this is the sixth consecutive quarter that we have grown quarter-over-quarter gross profit dollars. Our engineering segment grew its gross profit by 7.5%, for its 11th straight quarter of gross profit growth as compared to the prior year, behind the strength of about a 350 basis point increase in gross margin percentage when comparing Q1, 2015 to Q1, 2014. Our 2015 outlook going forward, while we remain optimistic that fiscal 2015 operating income will compare favorably to fiscal 2014, our quarterly operating income footprint will look very different this year as compared to last year. In fiscal 2014 we had our best quarter in Q2. This year we expect Q2 of 2015 to be our worst quarter with operating income likely be falling somewhere between $1.0 million and $1.6 million. The main reason for the shortfall in Q2 operating income is that we will have a gap in large projects for our Canadian Engineering Group. Rocky will discuss this in greater detail but the short of it is that we had a major project with about 60 engineers and at times many more than 60 engineers and in early April. As if our last call we expected to roll that entire workforce onto another large project, that unfortunately we did not win. And while we have several other major projects that we believe we're going to win in the pipeline, those projects are not underway yet. So those projects are experiencing a delay. However we do have a real exciting pipeline in Canada and we expect to win some very significant work in the near future. And as we described in our press release we need to hold onto our valuable engineers in order to deliver that work in the second half of 2015 and beyond. Many of those contracts are expected to span several years. So we need to hold on to the people obviously in order to deliver that work. So utilization will clearly suffer in Q2 of 2015 and that will have a major impact on the gross margin and consequently the operating margins as well. We are cautiously optimistic that we can make up the shortfall in Q2 in the second half of 2015 and still deliver decent growth when we compare 2015 to 2014 as we complete 2015. I also wanted to address cash flow, since the cash flow in Q1 was not good. Our DSOs at the end of Q1 were about 118 days as compared to about 109 days at the end of Q4, 2014. There are number of reasons for the spike in the DSOs but over the next three quarters we are very optimistic that we'll get those DSOs down considerably and that when we get to the end of 2015 we believe the DSOs will compare very favorably to 109 days that we ended 2014. And obviously will look even better as compared to 119 days that we had at the end of Q1. So at this point I'll turn the call back over to our CEO, Rocco Campanelli. Thank you for joining us this afternoon.

Thank you Kevin. We're pleased with our performance in the first quarter with gross profit and operating income growing by 8.5% and 15.6% respectively. Our Q1 performance as Kevin mentioned was led by our specialty healthcare segment which set new historic highs from both revenues and gross profit. This success was achieved as a result of strong diversified growth in our large school contracts, international recruitment and executive search business units as well as successful strategic initiatives into new markets such as travel nursing and health information management. As Kevin also mentioned our IT segment recently scaled back two large projects at our two largest clients from 2014. Taking that into consideration, the group had a respectable quarter. As a matter of fact, the group grew revenues by almost 16% if you exclude these clients. I'm particularly excited by the fact that their strong performance was highlighted by growth coming from our Microsoft Solutions group which has not been a recent strong performer. Our HR solutions group, Tech Finance East and Porto Rico offices, which have been consistent performance all stepped it up in the first quarter. Our engineering group continued to perform well as they grew gross profit as compared to the prior year quarter for its 11 straight quarter. However, we do expect the temporary gap in revenues and a decrease in utilization to depress our gross profit in the second quarter, as Kevin mentioned. Unfortunately because of the nature of winning very large contracts we occasionally experience gaps in engineering as projects come to an end. We completed a 60% engineering project in April and we are experiencing delays in new project starts which will result in weaker Q2 revenues. The silver lining here is that the best thing about having diversified service offerings as RCM does, when one division shows weakness it is often supported by the good performance of the other divisions. With that in mind, I would like to highlight the following: Kevin already mentioned in our press release that RCM has been told that we are being recommended to the Board of Education of a major US city as the exclusive vendor for school nursing services as well as a recommendation to be awarded one of three rehab contracts for that same city. We have also been told that we have been awarded the renewal of our exclusive school nursing contract with the Hawaii Department of Education. A strong Q1 for our IT consulting and solutions group featured significant project wins by our Microsoft Solutions and HR Solutions teams with both wins collaboratively staffed by other IT CNS teams. The financial impact of those wins are expected to be greatest in Q2 and Q3. I am also happy to report that the IT sales activity level in April has been the largest in our recent past with significant new starts at new clients and new divisions at existing clients. In engineering we have been informed that our facilities engineering group has been just awarded a large advanced metering infrastructure project with a major transportation company located in New York. We are also about midway through negotiating a three to six year master services contract with one of our long-term Canadian Nuclear Utility clients. This contract will focus on engineering directed at asset upgrades for refurbishment as well as general operations and maintenance engineering to support operating unit. We are also waiting to hear on a large direct engineering support proposal from another Canadian Nuclear Utility. Our U.S. engineering services divisions focused on diversifying our client base and concentration in the energy markets is providing positive results. The study increase of bid activity has recently led to over 20 contracts awarded to RCM from 18 different customers. Our Aerospace engineering group continues to perform well with strong NOI and a sizable stable backlog. Lastly we are excited that all three of our segments have strong pipelines and we continue to be believe that we will show favorable results in fiscal 2015 as we ramp up for a strong second half. I'd like to now open it up for questions.

[Operator Instructions]. Our first question comes from Steve who is a private investor. Go ahead.

Hey guys congratulations on the expansion of gross margin.

Thank you.

That's pretty phenomenal. I had a question around the delays that you're having in Canada. Do you actually have 60 engineers on the bench at this point or…

No, we actually don't have 60 on the bench. The way we normally staff a large projects, we identify some key employees that we bring in as long-term employees that have the ability to become supervisors and managers and project managers. And we supplement those employees with what we call the fine term employees as well as engineering consultants. And these additional staff are well staff that we use for peaks, and generally as the work decreases we element that staff.

Okay, that makes sense. What’s the likelihood of what you are experiencing on the bench of their delays what’s the likelihood of bleeding into third quarter?

We think that is unlikely because of the current pipeline that we have. It is difficult to tell when exactly it is going to close we know what our client’s schedule for completion of this work and when they expect to install design modifications that we will be designing. So we think we have a pretty good handle on when this work will close but it is really is up to the fluctuations of the client schedule. We really do not think it’s going to bleed into the third quarter.

Okay, thank you. Kevin D. Miller: And we have done couple of small jobs that will definitely help in mid-May and June. They are not the big jobs that we are expecting to win but there are couple of small multimillion dollar jobs that will and that will help with second-half of the second quarter and they will go into the third quarter and you know obviously we if do not win some of these projects that we think we are going to win then we will adjust the bench accordingly.

Okay. And one last question on your DSOs, which moved from 109 to 118. Even at 109 that seems abnormally long within the industry, why is that? Kevin D. Miller: Well you know it depend on what industry you are looking at? You look at the IT industry it is incredibly long but our IT DSO aren’t that high. I mean if you look at some of the big engineering firms that do significant project work that we do with milestone driven jobs, our DSOs are high and much higher than they should but they are not super high. I mean if we see a lot of engineering firms in the 80 to 120 day DSOs depending on what that engineering firm does and DSOs in the healthcare business tend to be a little bit higher as you probably know, Steve, than in the IT business. But all that being said you know our DSO even at a 109 or much higher than they should be. There is a couple of factors going on there we are working really hard to fix and we believe that we are going to make some really significant headway between now and the end of the year.

Okay, good. That is all I have, thanks.

Thanks, Steve.

Our next question comes from Frank, who is a private investor as well. Kevin D. Miller: Hi, Frank.

Hi, Kevin and Rocco.

Hi.

A couple of quick questions, again congratulations on it on the gross margin that is really something hopefully in Q2 the bench won’t take [ph] it too much we can maintain that. I have a question on G&A. It looks like it moved up about $700,000 or 7% over the same quarter last year which probably had some onetime chargers in that quarter already. Could you share some light on what is going on there? Kevin D. Miller: The major thrust of the SG&A growth frankly is the revenue growth and obviously the acquisition that we made last year. Those are the sort of two biggest factors but as our healthcare group in particular has gone from a run-rate in the low 30’s to the run rate in the 40’s and as we have opened up new offices and added infrastructures particularly to service our Huawei and to service some of the new offerings such as last year we didn’t even have a travel healthcare group for instance. In addition to that we have added some infrastructure in Canada to support the growth there and particularly in our aerospace group as well and then of course you got sort of just the normal -- you got to give people raises and rents increase and all of that but the major driving factor to the increase in the SG&A is supporting the growth and then the Point Comm acquisition.

Great. So that running at about $3 million run rate on increases do you see that revenues because we don't see it in the first quarter but do you see revenues covering that in the respective G&A ratio that we would expect? Kevin D. Miller: Well yes. But where I expect to see the most leverage is through why we're going to go back towards on a gross margin basis in Q2 because of what we've already described. I do expect to see some nice gross margins in third and fourth quarter and I do expect to see some revenue growth as well. So a common -- and frankly unless there is any major changes I don’t expect to see -- and what I say changes, if we have a big opportunity where we need to staff up for to grow SG&A. We'll need to grow SG&A a little bit too in healthcare to service some of the big contracts that we have come in towards the end of the year, but to answer your question more directly I don't see big increases in the quarterly SG&A as we go out.

Great. And then a second question is net borrowings are up over almost $6 million in the last three months, obviously three of it coming from AR and that… Kevin D. Miller: About of five of it Frank is coming from AR. If you I don't know if you had a chance to study that the sort of abbreviated cash flow statement that we put in the press release. But about $5 million, $4.99 million is coming from AOR increases. So the lion’s share of the decrease in cash is coming from the accounts receivable. Then we had, as you know our transit accounts receivable and payables are pretty have positive from quarter-to-quarter right, depending on the timing of when we need to pay our subs. And at the end of Q4 we had a kind of a nice cycle where a lot of payments came in towards the end of the quarter for our subs that we didn't pay unit 2015. So we didn't have that lump sum [ph] during the Q4. So that ate up about $2 million of cash. And then we had through payroll, as you know a lot of our bonuses are paid, a lot of the managers bonuses are paid in the beginning of the fiscal year following the previous fiscal year. So and then also the $1.6 million in payroll the combination of bonuses and then of course the timing of payroll right because at the end of Q4, our payroll cut off was weak prior to the ending quarter. So you get a whole week of labor without paying for right. Whereas in Q1 we have a payroll that comes the Friday before we closed. So in Q2 that will flip right because we have 13 week quarter so we'll get a little bit of that's just sort of the timing, when you add up those items and then of course we had some positive things in terms of the accounts payable going up. That's the lion’s share of the cash flow. But I think what's most important is that while some of these things like payroll and more so the net of the transit account receivables and payables that's kind of haphazard from quarter-to-quarter whereas the accounts receivable is not. The accounts receivable was just too high at the end of the quarter. I've seen some decent progress in the beginning of the second quarter and we've potentially got some big payments coming in from some other clients in hopefully second quarter, if not the second quarter the third quarter. So as I'm sitting here today my firm belief is we're going to see some really good cash flow in Q2 through Q4.

Great which is segue into my last question; on the line of credit obviously at year end we used we drove down some bank funds to pay a dividend. What is -- is their plan to payback those funds for the dividend if any in this year in 2015? Kevin D. Miller: I'll be very disappointed if we don't get to the end of the year and have significantly less debt than we have today. So when we get those receivables down the major purpose -- the major direction of those funds is going to be to pay down the debt.

Great super, keep up the good work. Kevin D. Miller: Okay thank you.

Thank you Frank.

[Operator Instructions]. There are currently no questions in queue at this time.

Thank you everyone for joining the first quarter of 2015 conference call and we look forward to speaking to you again after the second quarter. Thank you very much for your attendance.

Thank you, ladies and gentlemen. Your conference is concluded. You may all disconnect.