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

Bill Sutherland - EQ Equities

Ladies and gentlemen, thank you for joining the RCM Technologies’ Third Quarter 2015 Earnings Conference Call. Your hosts Rocco Campanelli, President and CEO; and Kevin Miller, Chief Financial Officer will begin.

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

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 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 provide a few prepared comments pertaining to Q3 2015. We experienced a decent lift in Q3 2015 as compared to Q2 2015, increasing operating income by almost 58%. We expect to see another lift in operating income in Q4 2015. Our specialty healthcare segment led the way with another excellent quarter, as we set historic Q3 highs in both revenues and gross profit. Remember, Q3 is a seasonally lower quarter for healthcare as we have summer school closings for all three of our major school contracts. Q3 2015 revenues and gross profit grew by about 50% and 53%, respectively, as compared to Q3 2014. The growth came from several different product lines. Our travel healthcare group which was launched in late 2013 is on an annual run rate of about $5.6 million. Our health information management group which we call HIM which was also launched in late 2013 is on an annual run rate of about $3.7 million. Our perm division also continues to do very well along with our core offices in New York City, Philadelphia and Honolulu. We kicked off our exclusive Chicago nursing contract in September which contributed about $600,000 in revenues in Q3 2015. Our IT segment modestly grew both revenues and gross profit in Q3 2015 versus Q3 2014, in spite a $2 million revenue decline from its two largest fiscal 2014 clients. Activity levels in our IT segment continued to be vigorous and we are excited about the prospects as we head into 2016. While we certainly recognize our engineering segment’s poor performance as compared to last year, we did grow gross profit dollars in Q3 2015 by about 13% as compared to Q2 2015. We also signed a very important MSA with Bruce Power that Rocco will discuss further. Bruce Power revenues were at CAD$3.1 million in Q3 of 2015. We expect this quarterly run rate will slowly but steadily increase each quarter going forward. The Canadian exchange rate, I will remind everyone to dollars, is currently at about 75%. Lastly, we generated about $10 million in cash flow from operations in Q3 2015, largely based on collecting a large amount of receivables in Canada. We anticipate continued positive cash flow from operations in Q4 of 2015 and into 2016 as we work to further reduce our DSOs. I’ll now turn the call over to our CEO, Rocco Campanelli. Thank you for joining us this morning.

Thank you, Kevin. Our third quarter 2015, although not as good as third quarter 2014, we have been able to increase our operating income almost 58% over second quarter of 2015. All three operating divisions are seeing very positive signals that fourth quarter will be improved over third quarter 2015 and that 2016 will be significantly improved over 2015. That being said, as Kevin mentioned, our specialty healthcare division achieved historic highs for the third quarter in revenues and gross profit, which is a very positive signal because of the summer months and schools being out for summer vacation. We are currently fully staffed in all of our school contracts and we have approximately 50% more school nurses than we’ve ever had. Our three other healthcare divisions, permanent placement, travel nursing and HIM are all performing exceptionally well. Our IT consulting and solutions division performance continues to be good with a number of staffing placements at new clients and existing clients, much higher than our average past performance. Our IT C&S life sciences group, our HR solutions group and tech east group have all had a solid third quarter and expect all of our IT C&S groups to close out the year with respectable results. Both our US and Canadian energy services divisions are showing signs of significant growth potential. As you know and as Kevin mentioned, we announced the award of a six-year engineering Master Services Agreement at Bruce Power. We were also recently informed that we were selected to participate in the Bruce Power multiple award task order contracting model. This model has two avenues to receive work. One avenue is for non-specialized engineering services and the second avenue is for specialized services. We have been selected to participate in both avenues. We are particularly excited about this because we are one of very few preferred suppliers that will be considered for the non-specialized work which is our bread and butter work, mechanical, electrical, civil structure and instrumentation and control engineering. Our US engineering energy services group continues to perform very well, both backlog and pipeline remain strong. We were recently informed that we were awarded an Engineer of Choice contract for Atlantic City Electric, Delmarva and Pepco. This contract opens the door for multi-disciplined transmission and distribution engineering services at these utilities as a preferred vendor. We were also informed that we are being awarded an owners engineer contract at the recently announced PSEG 600 megawatt [indiscernible] combined cycle power plant. We have also been awarded Master Services contracts and work at Verizon, MasterCard and Fordham University. Our aerospace engineering group backlog and pipeline remain strong and continues to perform well. Fiscal 2015 has been a difficult and challenging year, particularly in our larger segment, engineering. However, we have brought on many new clients that have the potential to be multimillion dollar clients on an annual basis. For most of these clients, we’re starting with small projects, which is typical. However, we believe at least a few of these clients will award is much larger engagements in 2016. We are excited about our progress in 2015 and we will convert this progress to real results in 2016. I’d like to open up the call for questions at this time.

[Operator Instructions] We have one question from Bill Sutherland from EQ Equities.

On Bruce Power, just so I understand you’re running in the quarter you’re in at $3 million, or was that an annualized rate?

In Q3, Bill, we did CAD$3 million. So if you multiply that by 75%, roughly you will get to US dollars. We saw rapidly Canadian exchange rate has been changing last year. I like the good Canadian dollars, because I just can’t predict what’s going to happen with rates.

And so, Rocco, you said that based on the programs that you’re going to be on going forward, can you give us a sense of upside that you could have with Bruce? I’m not looking for you to pinpoint it.

I can talk a little bit about that, Bill. Just, we will caution you in the fact that we are reasonably confident that that $3 million a quarter run rate is going to increase quite a bit as much as double. We just don’t know when. We don’t know if that’s going to be Q2 2016 or Q2 of 2017. And frankly, we think it has the ability to even more than double at some point. But as I’m sure you can appreciate with these types of contacts, things can change. So for us to sit here and tell you what we’re going to do, I mean, obviously we have some ideas of what we think we are going to do. But to share them in public with so many uncertainties as to all the things that can change and our experience with utilities, if they tell you something happening six months from now, either nine, 12 months, we’re still waiting for that to happen. And that’s all utilities, they spend very, very slowly. We are very optimistic with the Bruce Power MSA will significantly expand from the $3 million as much as doubling or more. We just don’t know if that’s going to be mid-2016 or mid-2017, we just don’t know. We are very confident that we’re going to see just a justice steady ramp on that increase.

And with the other utility, LPG, is there any visibility, I think that’s running – maybe you can tell us what level that’s running at?

We think they’re going to remain at least $10 million annual client per year going forward and that has the potential to do more as well. There are not going to be running at the levels that they were in 2014 for anytime in the foreseeable future, but they are still going to be very meaningful clients.

So the growth will be Bruce and then the US transmission and distribution work?

We have a lot of irons in the fire in the United States and in Canada. We have not to date this year won any really big T&D awards except for a decent sized T&D award, Sniper. But we are working with power companies. If they like the work that we do, the way that this typically works is they don’t just to give you a $5 million contract, right, they might give you $300,000 contract. And then if you do a good job on that, they give you a $500,000 contract. And if you do a good job on that, what we’re hearing from some of the big power companies is [indiscernible] with some of the T&D work that’s coming out of some of the real big players. And we feel like there is a real opportunity for us to get a meaningful chunk of that work, at least meaningful to RCM.

Just to add a little bit to what Kevin said, Bill, we acquired this company SDS last quarter. We received the engineered choice contract with Delmarva, Pepco and Atlantic City Electric which this company previously did work for. But they were limited to protection and control electrical engineering work. And we just heard today that we’ve been awarded a multidiscipline purchase order for Atlantic City Electric, which brings the additional strength of RCM’s engineering capability to Atlantic City Electric. And we are excited about that because it would be the first time SDS actually did anything other than electrical Oakland and Pennsauken offices to do the civil structure portions of that work. So the strategy of buying SDS and expanding SDS with our additional engineering capability out of our other officers is working. And to further clarify some of what Kevin said, about Canada and Bruce Power, Bruce Power is waiting on power purchase agreement before a significant effort is spent on asset upgrades and refurbishment of six of the Bruce Power units. We are optimistic that that power purchase agreement is pretty close. But again, what Kevin said this it’s in the hands of government and government works at their own pace. But just based on the amount of communication that we’ve had with Bruce Power, we are on regular calls about the preferred supplier agreements and we are optimistic that it’s sooner than later. That being said, what Kevin said is 100% right.

So just a couple of quick ones here on the other two segments. So with IT, I think it might be helpful for me at least to just go through the way you have broken up – not broken up, but the way you have segmented that part of the business and it seems like it’s in three groups or four, if you include life science?

We have an HR group and IT. IT consulting and solutions pretty much consists of Microsoft solutions group and HR solutions group, life sciences group that’s focused in the New Jersey and New York, Pennsylvania area, life sciences group that’s focused in New England and IT consulting group in the Midwest, in the mid-Atlantic and in the east. And also IT solutions group on Ireland.

And then we have a Puerto Rico office that is focused on the businesses in Porto Rico which just happens to be a lot of the business as life sciences, because A, that their expertise and B, there are lot of life sciences companies in Porto Rico, that’s a combination of staffing and project work.

And the Porto Rico offers more recently has expanded into some engineering staffing work.

So these are all discrete profit centers, if you will?

Yes. They work together very closely; obviously we keep separate profit centers for each of the offices. So we can see what each office is building. We don’t necessarily see them as discrete groups, we see them very much as integrated groups working together.

And then where is the growth potential for you at this point in that group?

The HR solutions group is probably – is the one that had most explosive growth this year and we’re really excited about their growth prospects going forward. If you want to just look at share of dollar potential, the life sciences group has the greatest potential for just big dollar growth just because it’s our biggest group and they get bigger projects. And frankly we think we are very good at it. I think we can continue with anybody in that space.

Kevin mentioned about big projects, is that we had a huge Atrium project, we had a huge Johnson & Johnson project and there is good potential for those size contracts in the future. And I think we are well organized to capitalize on those type of projects.

And then just so I get the sense of order of magnitude in the school nursing side, you said your nurses that you have out are up 50% as we start the school year. So should I think of that as kind of a way as order of magnitude of how much that group could grow in the next 12 months?

It’s going to keep growing because the Chicago contract is expected to be about $7.5 million annually and we only had $600,000 to Q3, just because the school hadn’t started till September. So we’re going to see a lot of growth from that contract, it’s already baked in frankly. We are the exclusive provider and that contract is a multi-year contract. So we’re really excited about that. And then we have some other really interesting school – not necessarily from nurses, but we have some other really interesting large school contracts in the pipeline. Obviously, we have to go win them. But our success rate at winning large school contracts is quite good. We have a lot to offer to these big school districts that want to outsource some of their healthcare staffing. So we expect to continue to see nice growth out of those groups. The two groups that are just growing leaps and bounds every quarter are the travel nursing and HIM.

You said they were – the run rates for HIM is 3.7 and travel was how much, Kevin?

5.7, I believe, is the number.

And that compares – just to get me a sense of how far that’s come, that compass to the year ago, this is a run rate number, not a quarter number, but...

No, this is a quarterly number times four.

Right, that’s what I mean.

I don’t have the 2013 numbers for the both of those groups...

Okay, so it’s almost a minimum as opposed to comparing against?

I mean we had real revenues in 2014, but nothing compared to what we are doing this year. I mean, we have really, really good people running those two groups and we have tremendous pipelines in place. So we are looking for star recruiters to fill those orders.

We know it’s tied up there?

It’s tied. But our guys are doing a really good job of earning those people.

And then the one those things was I know you mentioned in the past looking at the home care, not as an agency, but just as non-licensed?

Yes. That group really – we launched three businesses right around the same time timeframe, the third being the senior care and we found that that was a much more difficult market to break into, it’s possible that if we invest a lot more money and the way we typically going to these markets is kind of in a low risk fashion. So we will hire one or two people to get the business off the ground. We hire really good people with really good experience and then we like to back show them as business starts to build. So for instance, HIM was profitable from day one. The first month in business we made money.

It’s a big project.

And we’ve never had a month where we’ve lost money. The travel business we had some losses for the first six months, but they worked really significant until that really started to take off. We took the same approach with senior care and I think for us to really go into their business and be successful we would have to take a very different approach than the approach that we ultimately talk and at this time we don’t think that that business is something we want to make a big investment in.

Money and time can better be served elsewhere for the returns that we were getting at senior care.

It sounds like you got [indiscernible] in this group?

We started three businesses from scratch and two of them are enormously successful in our view. So when you are starting businesses from scratch and you can get two of them to be profitable that quickly and growing operating – and growing revenues that quickly, we’re really proud of it the job that our management team has done with health care group was the last few years. It’s really been outstanding.

[Operator Instructions] Our next question is going to come from [Steve Baber] he is a shareholder.

[indiscernible] I thought that was a really good guideline you just had and answered some of my questions. But I want to just focus on your balance sheet [indiscernible] progress on receivables, what is your target as far as DSO?

It’s a moving target, Steve. I mean, we went from 122 Q2 to 106 in Q3. It’s still not nearly where it needs to be. I expect to be under 100 for Q4 and my goal and I’m not exactly sure when we’re going to get there, but I believe we can get there pretty soon. Certainly, by Q1, it’s around 90 days. And then ultimately, I would like to be around 85 days.

So we tend to make the progress you think you want to make in Q1, you can find yourselves [indiscernible]?

Obviously, absent other things that we might do from a capital allocation standpoint, yes.

And speaking about what have you actually done on the share repurchase program?

Well, we purchased 100,000 shares in Q3 and we continue to be selectively looking to buy shares to the extent that we can for a price that we think makes sense for the shareholders. But we did reactivate it in Q3, as I’m sure you noticed from the press release.

I did, yes.

We have a question from [Frank Kelly].

First, I want to thank you for the informative session and congratulations on a less damaging Q3 than you had prepared us for in the last call. It seems like Canada, some of the hemorrhaging up in Canada has subsided. The second comment I had was more of a question is where do we stand on SG&A? It looks like we’re running at a 23% on SG&A net of financing cost, obviously. What are the plans in that arena to kind of look some of the [indiscernible]?

As you know, Frank, we’re always looking to cut SG&A wherever we can. Had we hit the kind of sales and gross profit goals that we expected to hit – are you getting a reverberation here? If we’d hit some of those goals, I don’t think anybody will be too concerned about the SG&A, or obviously when your gross profits declining and your SG&A is coming up, it has the opposite effect, right, on the income statement. So we’re not real happy with obviously the operating income, but a lot of the SG&A that’s increased this year has come from some areas that, A, we think are important. For instance, we’ve invested about $900,000 in the [esk] of the SG&A, about $600,000 of that has come from healthcare, just because as those businesses are growing, we need to keep adding recruiters to fill the orders that are coming in. So the $600,000 that we’ve invested in healthcare has paid very good dividend, that’s right. And we’ve invested about another $300,000 in engineering and while that doesn’t appear to repay dividends because of some of the declines in Canada, it really has paid dividends because we have had nice performance in energy services. So we’ve invested about $150,000 in esk this year for engineering and about another $150,000 in the esk for IT, which as you know if you don’t keep investing in your esk and hiring new sales people, then you can’t expect to keep growing your gross profit the way that our IT group has. As far as the rest of the increases to SG&A, a lot of it – a big number is we shifted our strategy a little bit in Canada where we previously had senior managers that were focused almost entirely on building at OPG and as OPG came down and we realized that we really need to focus on getting new clients in Canada that mark OPG and our – Bruce Power, we took three or four people and said, okay, these people are capable of going out and selling new projects. So about $400,000 of the increase is just a reclassification of part of the compensation for people that were typically intended to be [indiscernible]. So $400,000 of that is just moving expenses on the income statement. We have about $350,000, just to follow up with the $400,000 in Canada, Frank, we’re seeing some nice opportunities outside the nuclear market in Canada, where we have outstanding proposals in Alberta, for a client in Alberta and a client in Ontario – a combined cycle plant and we have some good opportunities in the facilities design and engineering area that is materializing as a result of the money we’re spending in marketing outside of nuclear. And as a matter of fact, we recently won some small boiler design plants in Canada. And as you know, if you look at Canada, it’s been 99% nuclear and we’re really making a concerted effort to not have all our eggs in the nuclear basket and we’re making some progress.

So similar to maybe five years ago in healthcare, where we were pretty dependent on the New York City marketplace and New York City school system, in particular, we really took a page from the healthcare book which is, okay, let’s take a step back and figure out long term how are we going to grow this and let’s move some resources around, that’s what we’re doing in Canada, the sales cycle and engineering projects is pretty long, Frank, as you know it’s longer than the other two businesses. But we feel like we’re making some pretty good progress there. And reallocating some key people’s time to selling other projects, not nuclear in Canada, is important to us. And that’s about $400,000. We had about $150,000 in just good old rent increases, as you know, leases in place, all of them take typically increase. We added some space in tech division which is growing very, very quickly. We also have had the worst year ever for medical claims that I’ve ever been associated with. So we’ve got $300,000 in medical claims that we had at the corporate level. We have $350,000 increase in stock option expense. We have $120,000 in SG&A that we added on a nine-month basis for the acquisitions of Point Comm and SDS. I think that pretty much covers most of the $2.2 million. So it’s a combination, Frank, of investment and good old fashioned cost that just go up every year, regardless of what your gross profit is. The good news I think is that if we grow the gross profit like I think we’re going to grow next year, hopefully we’ll see some of the opposite effect where SG&A is just coming up a couple of percentage points and your gross profit is maybe coming up three times on a percentage point basis and then you see the opposite as you know. Right now, we’re seeing, if you grow your gross profit 10% and you grow your SG&A 4%, you know what that does to your operating income. Unfortunately right now, we’re seeing the opposite, but from our standpoint, a lot of the investment in SG&A is either A, necessary or B, just circumstance or unavoidable. So does that fully answer your question?

I guess, what I was looking at, your Q2015 over Q2014 same, it bumped 5% and if you’re transferring cost of sales down to SG&A on the volumes that you’re talking about, some of that is explainable. But I guess my concern would be how much of that, right, because those SG&As never tend to go away and you’re taking it from your billable side, those individuals are now not billed. So it’s kind of a double-whammy. But it sounds like you guys have got that at least at this point accounted for.

I’m pretty optimistic you’re not going to see the same thing next year.

Cash on the balance sheet, certainly turned well in the Q3, congratulations on collecting all of the receivables. With that, are borrowings have gone down and allows a little bit more room and freedom on the line and keeping in with a clear capital structure that we did, I don’t know, six months, maybe a year ago, do you think with continued cash over the fourth quarter collections that perhaps will be some room to potentially to share some of that with the shareholders in a form of dividend?

We don’t have any plans to do that right now, Frank. But we certainly have those conversations at every Board meeting. And it’s certainly not something that is rules off the table. In fact, it’s something that we’ll continue to have some pretty thorough conversations about at the Board level.

And typically, over the past, you’ve always been declared at the very year-end, because the Board have a feel for that it’s not [indiscernible] calendar year-end, but it could be at any point during the fiscal year?

Again, we will continue to have those conversations. I mean, obviously, if we were to consider something like that this year, that’s something we would probably focus on on December as we get more clarity on the cash flow this year

There are no more questions in queue at this time.

Well, thank you everyone for participating and I hope to see some of you at our Annual Meeting in December, if not our next call will be in February, March timeframe. Thank you very much for your participation.

Thank you, ladies and gentlemen, for joining. This completes your conference call. You may all disconnect and have a wonderful day and weekend as well.