Rocco Campanelli - President and Chief Executive Officer Kevin Miller - Treasurer, Secretary and Chief Financial Officer

Thank you and welcome to the RCM Technologies' Second Quarter Earnings Conference Call. Mr. Rocco Campanelli will now begin.

Good morning, everyone. This is Rocco Campanelli and welcome to our second quarter 2015 earnings call. I am joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin with a financial summary of the second quarter followed by my summary of the operating results. And then we’ll open it up for questions. Kevin?

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. 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 in term of some prepared comments. So to the 13 weeks ended July 4, 2015, we had consolidated revenues of $45.286 million and a consolidated gross margin of 26.7%. Our engineering revenues were $19.827 million with a gross margin of 21.9%. Information technology was $14.859 million with a gross margin of 30.4%. So our specialty healthcare at $10.600 million in revenues and a gross margin of 30.5%. I have several prepared comments, so we’re obviously disappointed with our Q2 results. The primary reason for the decline in revenues, gross profit dollars and operating income is due to the previously disclosed and to a very large contract with our largest 2014 end client. It was our expectations towards the end of Q1 that this large contract would be renewed and we retain significant engineering staff in Canada and anticipation of serving this large expected contract renewal. Additionally, we had several other large contracts with our largest 2014 end client in the pipeline that we thought we had a strong chance of winning. We did not win those contracts either. Our revenues with this end client trying significantly in Q2 and our gross margin percentage also suffered in order to carry the bench to perform on the contracts we expected to win. To put some context regarding the numbers, our 2014 and 2015 quarterly revenues with this end client were as follows. In Q1, we had 11.2 million - excuse me - in Q1 2014, we had 11.2 million of revenues. In Q2 2014, we had 11.8 million in revenues. In Q3 2014, we had 9.5 million in revenues. In Q4 2014, we had 8.1 million of revenues. In Q1 2015, we had 7.1 million in revenues. In Q2 of 2014, we were down to 3.8 million of revenues. So for Q2 that’s a year-over-year decline of about 8 million in revenues. If we ignore this large end client, the rest of our engineering revenues actually grew about 12%. Another significant factor in our Q2 and Q2 year-to-date declines has been steady decline in the Canadian exchange rate. Our effective Canadian exchange rate was 81.3% for Q2 2015 versus 91.3% for Q2 2014. The change in the exchange rate for Q2 2015 cause our revenues for Q2 2015 to drop by 900,000 or effectively to 1.7% decline on a comparative basis. Our effected Canadian exchange rate was 80.9% for the six months Q2 2015 year-to-date versus 90.8% for Q2 2014 year-to-date. The change in exchange rate for Q2 2015 year-to-date cause our revenues for Q2 2015 year-to-date to drop by 2.1 million or 2.1% drop on a comparative basis. Unfortunately, the Canadian exchange rate appears to be getting much worse, as of yesterday, the Canadian dollar exchange rate was 77%. Our IT segment modestly grew both revenues and gross profit in Q2 2015 versus Q2 2014, despite of 2.5 million revenue decline from its two largest fiscal 2014 clients in our life sciences group. However, activity levels in our IT segment continue to be vigorous and strong as Rocco will about or expand on a little bit during his comments. Our specialty healthcare segment had another monster quarter, as we said historic quarterly highest in both revenues and gross profit. Q2 2015 revenues and gross profit grew by about 20% and 28% respectively as compared to Q2 2014. With growth coming from several different product lines, our travel healthcare group which was less quarter-over-year through is already on a run rate of close to $4 million. Our health information management group is close to $2 million run rate. Our perm [ph] division also continues to do well along with of course our core offices in New York City, Philadelphia and Albuquerque. We won two significant contracts of Chicago Board of Education during the second quarter. As announced in the press release, we won excluding contract to provide all temporary nurses and to also schedule credential and train all nurses including permanent staff in the Chicago Board of Education. That contract is expected to be worth about 7.5 million per year over four years and has a provision that allows the Chicago Board of Education to renew for an additional two year. We are hopeful this will be a six year contract. Additionally, we were one of three vendors awarded an MSA to provide therapy service to Chicago Board of Education. We do not yet know the value of that contract but we’re hopeful it will be at least 1 million. I also have several comments regarding the second half 2015 outlook going forward. When we last spoke, we mentioned that we had a strong pipeline. More specifically we believed we had a high probability to win three major unmanned contracts named as far as our last call is concerned. The first one is the Chicago Board of Education contract which we alluded to on our last year, but officially won an announcement in Q2. The second major contract we believe that sometime in Q3, we will announce a significant six year MSA with our other major engineering client in Canada. For this particular client, we generated about 2.3 million in revenues in Q2 and we expect revenues to steadily increase over the next two quarters with this client. We don’t expect the quarterly run rate to significantly ramp into sometime in fiscal 2016. While we don’t have a good handle yet on the revenues going forward, we do believe that the annual revenues from this client of the capacity to at least double from the current levels. We have not signed this contract yet, so I need to caution everyone we do however have high levels of confidence we will make this contract very soon perhaps within the next several weeks. The third major contract that we believe we would win last time we spoke was a major contract we left with our largest 2014 end client in Canada that unfortunately did not materialize. This will have a significant negative impact regarding previous expectations for the second half of 2015. I previously mentioned that we generated about 3.8 million in Q2 with this end client. We’d hope for a significant ramp with this client in the second half of 2015 as a result of winning the contract we thought we would win, but that ramp is not likely to happen in the second half of this year. We do however expect to maintain the current run rate through the second half of 2015 with this client and we also believe that this particular client will continue to spend a lot of money on engineering services over the next five years and hope to win our fair share work there. We also are very excited about our engineering pipeline outside of our two major Canadian engineering clients as Rocco will more fully discuss in his prepared comments. Our IT segment pipeline and our specialty healthcare pipelines also look good. On our last call, we were very optimistic about the second half of fiscal 2015. We remain excited about the second half of fiscal 2015 especially as we look to bolster our run rate for fiscal 2016. However, it is highly unlikely that our second half of fiscal 2015 operating income will exceed the second half of fiscal 2014. We do expect higher operating income in the second half of fiscal 2015 versus the first half of fiscal 2015 however. We also announced that we acquired a small company in early July called Substation Design Services, which generated about 1 million in revenue in the year prior to purchase. Rocco will further discuss some of the strategic reasons for this acquisition. Lastly, we generated about 2.4 million in cash flow from operations in Q2 2015, we anticipate improved cash flow from operations in both Q3 and Q4 of 2015 as we reduced our DSOs and continued to improve our balance sheet. I’ll now turn the call over to our CEO, Rocco Campanelli. Thank you for joining us this morning.

Thanks Kevin. As Kevin mentioned, we are disappointed with our performance in the second quarter. Although our specialty healthcare segment and IT segment performed well, our engineering segment’s revenue declined by 6.2 million in the second quarter of 2015 versus the second quarter of 2014. This decline was mainly due to the completion of the major contract in Canada. That being said, we are very pleased that our specialty healthcare segment achieved historic highs for both revenues and gross profit for the second consecutive quarter this year. We believe we’re also pleased to recently announce that we’re awarded contract for the Chicago school system nursing program which will be accretive to our fourth quarter revenues and gross profit. Our healthcare segment’s travel nursing program, health information management program, as well as our permanent placement programs continued to perform very well. Our IT consulting and solutions division performance was solid with a number of staffing placements at new clients and existing clients significantly higher than last year and the June and July placements were the best they have even been. Our IT CNS life science group just closed a major project that will be realized in the next three quarters and will add 15 consultants to the project. Our HR solutions group and Tech Finance East have had a solid second quarter and together with our Microsoft Solutions group; our Mid-Atlantic group and our Midwest group will perform well in the remainder of the year. As previously mentioned, our Canadian Energy Services Engineering group had a setback in the second quarter and that a major project came to an end and we lost several projects that were in our pipeline that we expected to win. These events significantly increased our utilization and required us to downsize staff and reallocate resources. We believe that this drop in awarded project in Canada will be short live and that we are confident we will be awarded a six year master service agreement with another major Canadian utility. We believe that agreement will be signed very soon possibly within the next few weeks. We believe we will experience a significant increase in the run rate at this client beginning late in the fourth quarter and will last for the foreseeable future while plant refurbishment activities are implemented. The timing and size of this work is unpredictable but during contract negotiations, a major issue for our client was our ability to significantly grow our staff while maintaining the quality of our product. Our U.S. Engineering Services Group is performing well as both the backlog and pipeline are strong. We are very pleased with our recent acquisition of Substation Design Services. They bring four new transmission and distribution clients to RCM as well as a small very qualified group of managers, engineers and designers. As I have mentioned in previous calls, we feel that the transmission and distribution industry sector is one of RCM’s biggest growth opportunities and much of our sales and marketing hours and dollars are being focused in this area and we are beginning to see results from our efforts. We have recently closed new work at several OEMs we are currently negotiating terms and conditions for three utilities in the Midwest that will result in new projects with new clients. We have been shortlisted for a general services agreement for an energy delivery company in Canada and we recently won $7 million of work for two utilities in Northeast. Our aerospace group also has a solid backlog and pipeline. It has recently been awarded a technical publications multimillion dollar project that will add 15 writers and illustrators to our staff for three years. We are cautiously optimistic of about Lockheed Martin's acquisition of Sikorsky. We feel that this acquisition could result in opportunities beyond Sikorsky at other division within Lockheed. As Kevin and I both mentioned, we disappointed in our second quarter performance but we are optimistic in our ability to deliver good results for the remainder of the year and believe we are positioning RCM for a very strong fiscal 2016. Thank you for your time today. We will open up the call for any questions.

[Operator Instructions] And our first question is going to come from John Bero [ph] from BCM. Please go ahead.

Hey guys. Just can I go to this - the contract that ended, the way you described and if I understand it correctly that contract is isn’t completed, in other words the bigger contract overall?

It’s not, there was a second phase to that contract and unfortunately we didn’t win it.

But the group that you sort of worked under if you will that higher due is the persons you really go fired on that if I understand it correctly.

Yes.

So there were getting - they get replaced, can you pick up that work from the new people?

See what happened with that contract is they were replaced and our ultimate client wanted to have one contractor perform the remaining engineering design and construction of that contract, because then they become ultimately responsible for the project. RCM brought the engineering through revision zero of the entire project. All upgrades to that - to the engineering design will be performed and be the responsibility of another company that’s responsible for the entire engineering procurement and construction for the remaining - the reminder of the contract.

Got it, okay. And then as far as the former group that you worked with that’s like anyway you are going to intense upon because you have good relationships with these other contractors that are up there, so?

We do have good relationships. The issue with the go forward path much of the balance of plant work for this client was for one of the units. And the allocation of budget is for only one unit. So the next - ones that unit is complete, the government will allocate a budget for the remaining units. So much of the engineering on that one unit has already been completed.

Right, okay. So you’ll still be potentially eligible when they put those other contracts out for bid?

Yes, and we continue to do work on OM projects for operating units at that client. Actually we won $2 million worth of minor modifications work for existing, for the operating units that - at that client and we are wining other work on a regular basis, but not to the extent of the work that we won for the refurbishments.

Right, okay. And then the other client that you are hoping to win the certain contract, they are - as an entity they are at least as big as an entity as one that you lost?

Well, they were actually going to - go into in the refurbishment in the next 10 years of approximately 6 of their plants. So this becomes way one of the primary engineering contractors at this client and we are very optimistic that we are going to get a very big portion of the balance of plant engineering upgrades during the refurbishment of each plant.

Okay. Okay, thank you.

Since there are no further questions in queue - we just received a question from [indiscernible] who is a shareholder. Please go ahead.

Hey good morning.

Good morning, Steve.

Given therefore what’s happened in Canada, do you have - you saw the bench that’s recurring?

While, we’ve significantly reduced the bench, so you know - I mean we always have a little bit of a bench in Canada, but we significantly reduced our bench.

Great.

And hopefully we are going to be hiring a very large percentage of some of the people, some really talented engineers that we had, we hope to be hiring lot of back hopefully in the future.

Okay, looking to SG&A per staff, it seems to up quite a bit maybe 8% over 2014, what was that primarily for and what are the results getting out of that?

Well I can tell you, I can give you some color. I thought just deal with the 26 week. So we have SG&A increases about 1.86 million, so about 540,000 of that is selling expense, 400 of that is selling expenses increased - selling expense increases in our specialty healthcare group. These guys have been growing like crazy and we’re adding people and just adding recruiters mostly to handle all the work particularly in the travel group, the HIM group, we’ve been hiring more people to service account which is our accounts in why that are growing. So that’s just a lot of it in response to demand, some of it is in response to what we think is future demand. We’ll be adding a lot more SG&A in the third quarter, a lot more selling expenses in the third quarter to get ready for the Chicago contract. The other balance is about a 150 K is combined selling expense increases for IT and engineering group, some of that’s just year-over-year salary increases and in the other case just hiring new people to generate new work. We’ve seen a tremendous return already in the healthcare group. Our IT group continues to perform well, obviously the investments we’ve made in the selling and the engineering hasn’t shown up yet but we believe some of the selling cost investments we’ve made in the engineering will pay nice dividends down the road. Some of that is year towards the transmission and distribution work that Rocco alluded to in this comments. And we are - we signed a couple of contracts - couple of MSAs with some OEMs, we’ve gotten some new work out of that. We haven’t done a huge amount, the amounts work that we expect to get. And as Rocco mentioned, we are working on contracts with three Midwest utilities where a lot of not all that work will be TMD work. So we haven’t got huge return on that yet, but we expect to going forward. If I go down to and take the S out of the SG&A and look at the G&A, some of the increases we headed about $240, 000 increase 26 weeks versus 26 weeks to our stock compensation expense. We - unfortunately this year, we’ve had the worst medical claims experienced in my 15 years that I’ve been here. We’ve - it’s just sort of a little bit bottle up because you know Steve with when yourself insured on the medical, we are just happening to have a bad year with a bunch of high claims and we were about 300,000 over our estimated claims you’ve build into your premier cost which obviously the company has. Additionally for the first six months, we had - we made an acquisition, a small acquisition up in Canada in the second half of this year, Polycom that’s about 80,000 increase to G&A, additionally for - we have sort of shifted some of our strategies in Canada to try and diversify our client base up there, so we’ve consciously taken some people that we normally have a 100% of their cost up in direct and we’ve said okay, you are not going to be 90% billable anymore, you are going to 40% or 50% billable because we want you billing after new clients. And the engineering sales approach is a little bit different than IT and healthcare and they generally need to be spending professional engineers or engineering people out on the sale cost as oppose to sale people. So we’ve moved some of that expense from direct to G&A for the 26 weeks, that’s about 350,000. Additionally we’ve had either - we’ve either had to get a few new officers where just get standard year-over-year rent increases. So for the 26 weeks, our rent is about 99,000 over last year. And then we’ve got about a 150,000 year-over-year in infrastructure costs increases just having to replace out of service items like having to do with technology and email and all that just software that we’ve been using that we’ve been really milking to the last dollar where this stuff just doesn’t working as well as short in the service and you just have to go and get new licenses because otherwise you don’t have the manufacturers, the software manufacturers to fix that stuff. So that’s about 150,000 year-over-year. That’s all, I just gave you numbers of total over than 1.7 obviously there has been some decreases in some other areas. Obviously the increase in - I don’t think too many people will be concern about the increase in SG&A that we had a corresponding growth in the gross profit, unfortunately we don’t like it’s exacerbated as you know as a bottom line. But there was some of the increases in. But those are the major components of the increases of SG&A.

Okay, can you just touch a little bit on the recently announced small acquisition and how these benefitting?

Yeah Rocco, can you answer that then I can.

Sure. The acquisition that we just closed had been in business for at least 15 years and they’ve had a solid group of clients where they did transition and distribution upgrades for Substations and some engineering associated with protection and control which is a high demand service in transmission and distribution. And they’ve had a long standing relationship with four clients that we that RCM historically we never did work at. And one of the things that we focus on when we make small acquisitions is either we are going to bring additional service capability or additional clients to RCM. And one of the problems that this particular Substation Design System services had was the client would not give them any projects because of the limited number of engineers and designers they have. And now that RCM has a bigger bench and a bigger capability then SDS. We feel that these clients will award larger projects to SDS. So that was pretty much our plan and strategy for SDS.

Okay, so would you see the benefits to be immediate?

Yes, immediately closed about eight projects right after the acquisition. They are all fully built and we think that we can integrate them into our existing clients and they can integrate us into their existing clients. So they are immediately clipped on to our engineering group, they report to our Senior Vice President and they are very flexible group of engineers.

Okay, are you giving any guidance for operating income in the third quarter of range?

No, we are not. I mean we only got is we are giving is as we expect the second half of the year to be better than the first half of the year. So we’ll see how it goes, but certainly Q3 should be a lot better than Q2.

Okay, thanks.

And that’s with some seasonality that we have in our business.

And we do have another question from [indiscernible] from Market Edge. Please go ahead.

Good morning

Let me - I questions have been answered. Thank you.

And there are no further questions in queue at this time.

Well thank you everyone for your participation in the second quarter call. We look forward to having a much to better to see in the third quarter. And thank you and we’ll talk to you in the third quarter. Bye.