Rocco Campanelli - President & CEO Kevin Miller - CFO

Bill Sutherland - Emerging Growth Equity

Ladies and gentlemen, welcome to the RCM Second Quarter Earnings Conference Call. Your host for today, Rocco Campanelli will now begin.

Thank you. Good morning, everyone. This is Rocco Campanelli. Welcome to the RCM Technology's second quarter 2016 earnings call. I'm joined today by Kevin Miller, our Chief Financial Officer who will begin with a legal disclaimer and then I will summarize the operating results for each of our operating segments, and then we will 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.

Thanks, Kevin. We are pleased with the results of the second quarter of fiscal 2016 as they are in-line with our internal expectations we continue to build our pipeline with new and existing clients. Our healthcare segment continues to post outstanding results by setting historically high second quarter revenues and gross profits. 2016 Q2 revenues and gross profit grew over 2015 by approximately 48% and 33% respectively. Our schools program continues to perform very well with a 100% of our school openings filed in New York City, Chicago and Hawaii. On our last call, we announced that we won the Hawaii paraprofessional contract that was supposed to start on August 1st, the beginning of the current school year. However due to a protest by a competitor our participation in this contract is currently delay until September 1. Although we are getting a late start, we remain optimistic that this new contract will have a positive impact on our healthcare revenue and operating income in 2016. The healthcare operating units that had the best second quarter with the travel nursing and permanent placement divisions, both groups set historic record quarterly revenues. Our travel nursing division is now at an annual run rate of $10.2 million. We are pleased to announce that in July we started a Locum Tenens Staffing practice. For those unfamiliar with this term, Locum Tenens is the staffing of physicians. This is a very large market and one in which we expect to be very competitive. As we build the business from the ground up and make significant investments in resources and infrastructure we anticipate some negative contribution from this group. If we closely follow the trajectory of our travel and HIAM initiatives this business will be generating positive quarterly contribution operating income by the middle of 2017. Just as a reminder our healthcare group has a seasonal decline in revenue in the third quarter because schools are closed for the summer. Our Aerospace Division continues to perform very well in both technical publications and engineering with a strong backlog. We continue to deliver on our existing contract and are receiving new task orders from our clients on a daily basis. Our second quarter technical publications revenue and gross profit also achieved historical high. Our Canadian engineering performance in the second quarter was in-line with expectations but also disappointing as we were hopeful we might see an uptick in our revenue run rate and utilization. As I mentioned in our last call, Bruce Power has a significant spend profile for this year and the foreseeable future and we are very well positioned to benefit from this work. Unfortunately they have not awarded the significant engineering workload as quickly as we have expected. We continue to win work however not at the rate we had hoped, which continues to result in a larger bench than we currently need. We have cut cost as much as we can without jeopardizing our ability to perform the work once it materializes. We are confident that our backlog at Bruce Power will continue to ramp up sometime this year and into 2017 and 2018. We have also been awarded a sizable engineering contract from Ontario Power generation and anticipate several new OPG projects to be awarded in the next couple of months. Our U.S. Energy Services Division continues to do well with a nice backlog. Our offices in Pennsauken, Reading, Oakland and Mississauga are all exceeding our expectations. We are very pleased that RCM Energy Services name recognition has grown exponentially over the past year as confirmed by many of the new contracts we have been awarded by new clients including turnkey engineer procure construct substation contract. As RCMT's name recognition continues to grow we are optimistic that energy services market share will grow accordingly for years to come. As I also mentioned on our last call we anticipated a soft Q2 for our IT segment but the results were worse than expected. It's important to note that the second quarter of 2015 includes $0.8 million in revenue and $340,000 in gross profit from our QAD business which we sold at the end of fiscal 2015. After considering the QAD business revenues, Q2 2016 revenue decreased by a disappointing 22% as compared to 2015. We experienced declines in almost all areas as we were not successful in replacing several large revenue sources with new work as well as many of our consultants completing assignments compounded by a lackluster staffing sales. The leaders of our IT segment and in particular Tim Brandt have a multi-year track record of delivering growth. So while we anticipate continued softness in Q3 we are optimistic that our efforts to increase sales and recruiting activities will garner improved results in the near future. As we look ahead to the balance of this year we expect continued weakness in Q3 but if Canada ramps as we expect healthcare continues to outperform with schools back in session, Energy Services and Aerospace hit their targets as we expect and we see improvement in IT, we will see a very strong Q4 and really good momentum as we head into 2017. Thank you. And I'd like to open the call up for questions.

[Operator Instructions]. Our first question comes from Bill Sutherland with Emerging Growth Equity. Please go ahead.

In engineering you await the Bruce project actual the letting of the work, kind of what is the burden of carrying the spent right now? Kind of curious.

It's probably about 5%. Would you say 5%?

Yes roughly. It's pretty significant. We’re running 65% utilization and when that group is really humming we’re running around 85% maybe a little bit higher than that.

Bill, I mentioned in the call that some of our weakness, I didn't mention this in the call but some of our weaknesses is in the electrical INC area and the big project that we were just awarded by OPG is a multi-million dollar contract that is strictly electrical and INC so of that bench will be absorbed by that contract.

Yes that should get underway in early September maybe even late August and you know that one particular project is not going to be a cure all in terms of getting the revenues and the operating contribution margin up to a level that that we think we're going to see in Q4 but that combined with some other projects, we just think probably starting in September from knocking on my desk as I say that because our utility clients are notorious for telling us when projects are going to start and then they don't but our best intelligence today that we're going to have several large new projects underway at OPG in September and we’re not exactly sure when Bruce is going to really start to ramp, we just feel very confident that it is just based on the work that we know they have to do and the fact that we know we're one of their go to engineering firms to get that work done. So we remain very optimistic about both those clients particularly Bruce, it's just the timing is been a bit more than a bit frustrating for everyone here.

And just curious on OPG we’re coming up -- is that direct or are you going to work for Black and McDonald or through--

Yes a little above, we’re anticipating something called an engineering services agreement direct with OPG in the next couple of months. So there will be a combination of work that we will do with both Black and McDonald, E.S. Fox as well as direct with OPG.

So that will start to help your DSO in that group and then on the DSO front did you guys talk about kind of the progress you've made there, Kevin?

We didn’t but we have made quite a bit of progress which we're really excited about. Our DSOs at the end of Q2 on a consolidated basis are 97 and if you look at where we were say at the end of Q2 of 2015 we are at a 122 days. So basically in a year we've been able to shave 25 days off of our DSOs which we’re real happy about, but this continues to be a significant effort for the company. As far as my department our number one goal this year was to reduce DSOs and we didn't make a lot of progress in the first quarter for all kinds of reasons but a lot of the initiatives that we put in place at the end of last year and in the beginning of this year started to pay some fruit and we were down in 97 and we think we can continue to drive that down over the next couple of quarters now while the third quarter is going to be fairly soft from a revenue standpoint we're still pretty optimistic the fourth quarter will put up some decent revenues. So we can combine that with continued you know improvements to DSOs, we should see some nice cash flow. As you know when you see a jump in revenues which we hope to see in -- hope and expect to see in Q4 there is going to be a cash flow drain right? But we’re hoping that with the improvement in the DSO's we expect to see -- we can see a jump in revenues in the fourth quarter but at the same time not have that negatively impact cash flows. So we've got a number of initiatives going on, you know where we've made the most progress in DSOs is in our healthcare group. The end of the first quarter last year we had about 141 days and as of the end of Q2 we've gotten that down to 91 days. So you’re looking at close to 50 days trimming of the healthcare DSOs. And that's mostly coming from the school contracts which are just the billing processes at the schools are very complex and on top of that you know the personnel there tends to move very, very slowly, but we've done a lot of things to revamp the processes here that have helped a lot to get those DSOs down.

Just want to focus on one other thing and that's obviously the IT side which is having some growth issues. Is there -- you said it's kind of cross all the group's, are there couple in particular you'd call out and then if you could give us some color on the gross margin which was also under pressure.

Sure. Well you know the biggest groups, the biggest contributors from 2014 and 2015 are obviously having the biggest impact on the downstream. So Life Sciences has seen a big drop, we've seen a big drop in our HR services which had their best year ever in 2015. So that's not such a surprise because they had such a meteoric year in 2015 but those are probably off the top of my hand two biggest areas where we have seen a negative impact especially life sciences but really you know it's been across -- it's really been you know in most of our groups and as Rocco discussed basically we had a bunch of big projects running in 2014 and 2015 and as those came to an end unfortunately we just have not been able to replace them and you know. So we're working to get IT back to a more acceptable revenue level. When we talk about gross margins I think it's important to note that our IT gross margins historically at least recent history the last two years the gross margins have been well above industry averages I believe, where we've been 29%, 30% 31% for a company that has a large portion of the revenues coming from pure staffing to get those kind of gross margins is I think is quite extraordinary. So we saw a big drop in Q2 with margins at 25.4% versus 29.8% in Q1 and there's a combination of factors going on there but the biggest one is that some of these things big projects that we had were at very attractive margins and they manage it and we have not only have we not replaced them at the top line we haven't been able to replace them with some of the margin rich contracts that we've enjoyed in the last 6 to 8 quarters. So I think what we probably really want to know is what does that mean going forward which is I think the 25.4% is not -- I don't believe is going to be indicative of the margins that we're going to get on a going forward basis but I think it's unlikely that we're going to be seeing these 30% margins any time in the near future, it's just very, very difficult to hit those kind of margins. Some of our successes here have been a bit of our own worst enemy right with the gross profit dollars that we put up in Q2. I think we'll see improvements where we're going to settle in on the gross margins in the next couple of quarters. I just don't know yet, but I imagine it'll be somewhere in between 25.4% - 29.8% that we think we enjoyed in the first quarter.

And do you think you're kind of plateauing at the Q2 levels for as revenue or I mean as you look at our?

I think that there is a good chance we'll probably see lower revenues in Q3, just because and the biggest reason is because of the schools. You know we lose a lot of revenue--

Yes, IT, specifically I know you have the seasonality Q3.

As far as plateauing probably yes for Q3 I don't expect radically different revenues in Q3 versus Q2, but you know up or down but hopefully you know starting in Q4 we will start to see that you know slowly uptick, I know that we have a fantastic sales and recruiting staff and I know that they've been tremendously successful the last three or four years. So we had a couple of bad quarters which when you have assignments the generally run on average six months long there's a pretty good chance you're going to see at some point a little bit of a trough which is what we're seeing here now. But Rocco and I are very confident that with all the success they've done in the past that you know we'll see more success in the future.

I mean it's the hiring surveys I see for IT are kind of mixed. So it's not like you had a big win at you're back but you know you got a lot of reputation you can sell on.

Well you know to the credit of -- the market is pretty soft from what I'm seeing but with the credit of the guys in our IT group they don't talk about that, they don't talk about market exhaust it's irrelevant to them what's relevant to them is they just need to go out more quarter and win their share of business and you know we're confident they're going to do that.

[Operator Instructions]. Our next question comes from Anthony Hanlen [ph], he is a shareholder. Please go ahead.

I was wondering when your school contract in New York is up for renewal. How long does that last now?

We have one more year.

One more year, that's good. Thank you.

Our next question comes from Frank Kelly [ph], an Investor. Please go ahead.

Couple of questions, the annual report has that gone out to shareholders as of yet? I know it's where traditional goes out but--

As far as I know everything's is out.

Okay. And then second, as of today what is the number of shares issued in outstanding? I know we talked about that in the summary.

Well we're going to file the Q today and as of August 9, we had 12.295 million shares.

And then over on the financials. I see we've got a little bit of movement in the right direction on SG&A costs, where does -- can you show any color at 22 and 22.3 is where we're running a little higher than that for the period of 7/4/15. Where do we see that leveling loss at on a regular run basis?

Well you know Frank it's really a function -- if you’re talking about SG&A as a percentage of sales it's really a function of sales right? So we can absorb some pretty nice sales increases without significant increases to the SG&A. So you know I'm going to hesitate to give you any sort of prediction as to where it's going to come in as a percentage but I think that if you just look at the SG&A dollars I see them as being flat for a little while. If we see some big sales increases we will see SG&A growth. Additionally we're going to see a little bit of an SG&A growth from locum tenens business that we're starting. But as you know we typically start pretty slow. We have a small office. We have a leader that we've already hired, we will hire a couple of recruiters and as that business starts to grow we will grow the SG&A. So I don't see the SG&A as a percentage of revenues shifting much until the revenue shift because as the revenues go up that should continue to come down.

And the comments I had were questions -- well salutations to Michael and Mark over in healthcare, they're really doing a bang up job actually it looks like they're almost carrying the organization. Again they're doing an outstanding job in growing that and even in the engineering side the margins are slowly improving but as as you guys talked about is the IT -- the IT is for the first half of the year down almost 20% or $6 million. Some of that QAD but what -- I mean these things are anticipated, the sale of QAD was anticipated for a long, long time and these long contracts we know they're coming down. What on the management side any color -- a couple of quarters ago addressed this is, on the management side you see these things coming on forecasts. What is being done to address these ahead of the curve because it sounds like a lot of this stuff is happening real time or even post time in this case where is management addressing those kind of things? As these things are very predictable particularly in IT staffing and project work that we have. We know when the contracts end, we know that they need to be replaced and you know it doesn't seem that that we’re there yet on the management side. What we doing to address that?

Well Frank on the management side we're always looking and adding talented sales people and recruiters in order to drive the growth of the organization and we're always looking at the poor performers and shedding some of the poor performers. And for example you talk about -- we've known for a long time that some of these projects are coming down in particular in life science. We've made some major modifications to the organization by adding two Vice Presidents, one in the East that has had an historic good reputation and good productivity and one in Boston, that's been with us for a long time and has a combination of both sales and technical capability and adding sales people and recruiters under those people in order to offset some of the downturn in life sciences. Unfortunately these big projects are a tough sell and they don't come by every day. But we're optimistic that the changes in organization that can be made over the past six months will bear fruit. We're changing the targets based on the downturns so we’re having our sales people and recruiters giving them increased targets, we're giving increased recognition in the form of compensation for the good performers. So there are many things that we do on a day to day basis in anticipation of a downturn and striving for growth just sometimes they don't work out as planned but I'm optimistic about the performance of this group. You know the HR Solutions Group, we've invested money in a new ADP requirement and we're hopeful that we're going to be doing increase work with that specialty within ADP. So you know across the Board I think that they'll improve. I'm confident they'll improve.

Great, because I see in the first quarter was bundled [ph] to say the least and the second is even worse and what we heard today was that we don't see the third quarter revenues in that group being much, much greater than -- if greater than where they were for 2Q. We certainly have that picture now being in the middle of August but my hopes obviously is that folks just put on the forecast and the looks of it this kind of situation doesn't pop up again as we approach year-end and projects that we do have now roll off and are now replaced for 2017. And that's kind of a senior, senior level divisional responsibility I think you'll agree, but hopefully we can get that turned around by fourth quarter and show some positive results there. Thank you, gentlemen

Thank you, Frank.

[Operator Instructions]. We have no further questions at this time.

Thank you everyone for your participation and look forward to our next call. Goodbye.

Thank you. Ladies and gentlemen this concludes your call. You may disconnect at this time.