Rocco Campanelli - President & CEO Kevin Miller - CFO

Bill Sutherland - Emerging Growth Equity

Ladies and gentlemen, thank you for joining the RCM Technologies’ 2017 First Quarter Earnings Conference Call. Your host for today, Rocco Campanelli will begin.

Thank you. Good morning, everyone. This is Rocco Campanelli, President and Chief Executive Officer. Welcome to the RCM Technologies' 2017 first quarter earnings call. I'm joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin with the legal disclaimer and then I will summarize the operating results for each of our operating units, then we will open it up for questions.

Good morning. Our presentation in this call contains 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, Kevin. We are pleased with the progress we’ve made in our first quarter of 2017, meeting our most recent expectations. As we’ve discussed just two months ago, we experienced a slow start to 2017. However, as we look to the remainder of 2017, we believe we will have better operating results over the next three quarters as compared to 2016, and our positioned to have a strong year. I will discuss each operating division individually. Healthcare continues to post outstanding results by setting historic revenue and gross profit records in the first quarter of 2017. With $18.5 million in revenue growing close to 18% and gross profit of 4.6 million growing close to 13% as compared to the first quarter of 2016. The major contributors to our continued growth and healthcare, include our travel nurse division, our Chicago office and our Hawaii professional -- power professional contract which currently has about 90 full time equivalence on staff as compared to the 40 we reported just two months ago. Our engineering division had its highest revenue quarter since the second quarter of 2016. As anticipated, our gross margin was low at 25% due to the lower utilization as a result of some rework we experienced. We expect gross margins to steadily improve on a sequential basis through fiscal 2017. Engineering has materially improved their backlog and pipeline in the first quarter of 2017 as compared to both the first quarter and fourth quarter of 2016. We were happy to recently announce the acquisition of RAF Services. RAF specializes in turnkey above ground, inspection repair and cleaning services as well as concrete, steel, masonry and roofing, routine maintenance, inspection and design. Their services range from development of individual work packages to the generation of complete bid in construction packages for new facilities and major facility upgrades. RAF will add a new dimension to RCM's existing significant engineering capability. And we are excited to welcome them to the RCM family. Their proven track record of providing engineering, design and inspection services will be value to many of our existing customers and supplement the services we currently provide. After a slow start in January, IT significantly improved revenue, gross profit and operating income in both February and March. That trend is expected to continue to through Q2 and beyond. Our IT teams are rolling out more areas of specialization in their offerings as well as continuing to increase sales activity levels and implement improved recruiting processes in an effort to continue to increase both revenue and gross profit. While the project pipeline does not currently include the types of large projects closed by this team in previous years, the pipeline is building and is expected to fill continued improvement for the remainder of 2017. Thank you for attending RCMs first quarter conference call. We look forward to updating you on 2017 in a few months. I’d like to open it for questions.

[Operator Instructions] Our first question is going to come from Bill Sutherland. Please go ahead.

Thanks, operator. Rocco and Kevin, good morning.

Hi, Bill. Morning.

Just little more color on you said the top three performing parts of healthcare travel, Chicago and Hawaii. Chicago, is that principally focused on the education contractors?

Well, the biggest chunk of revenues are coming from Chicago public school system. But we’ve recently with the acquisition that we made last year we added about 15 other school contracts, schools contracts and some rehab contracts as well, but mostly school contracts outside of the City of Chicago. And those are all primarily therapy services as oppose to nursing which is what we’re mostly providing with CPS. We do have a therapy contract with CPS as well. And we do have a few therapies out with them, but the majority of our revenues to CPS are coming through nursing.

Bill, the integration of that acquisition is going very well. We’re making great headway in integrating their entire organization with the rest of the RCM Healthcare.

And so why you up to it the 90 headcount is that where you would expecting to adapt to [Technical Difficulty]

No, we really didn’t expect to get to this may people this quickly. It’s a huge spend on the part of Hawaii, but unlike the nursing contract we have exclusive contract. The professional contract has five including us has five approved vendors. But the other four vendors were all incumbent, so we were the only new vendor added to this contract and as you may recall Hawaii school year starts in August. But we weren't actually added to the contract, because there was a protest, it’s a long story that we need to get into, but the net result was, we didn’t actually get added to the contract until September. So we started kind of on April. So we’re incredibly proud of the team we have there to get that many paraprofessionals out when we were sort of frankly starting at a pretty big disadvantage compared to our competitors. So no, we didn’t expect to have this many, this quickly. I mean, we have, we had and continue to have a lot of optimism around us having a full summer to recruit more paraprofessionals for next year. What we can get that up to is hard to say at this point. But we think we can do even better next year. Because last year, we weren't allowed to recruit, like we weren't allow to do anything until we were officially on that contract. This year is going to be completely different, because a lot of the recruiting for this happens over the summer time.

Okay. Then in IT, do you feel like sequentially based on how you see the pipeline building, some smaller deals in this area now all things you mentioned that, this is like a starting point, this 18.5 million for the quarter.

18.5 in terms of healthcare?

It’s healthcare. I’m sorry 8.6 I read the wrong line.

Right, right. With 8.6 with IT. We’re hopeful that’s going to be our bottom. We had really, really crappy January, excuse my language. And February and March were much better than January. So we saw a little bit of an uptick towards the end of the first quarter and we’re hoping to see that carry into the second and third quarter. You get a little bit of seasonality in IT in third quarter with summer vacations and that. But so we don’t have this many billing days and we have a few soft days. But putting that aside, we’re hopeful to see some continued momentum there. But as Rocco said, at this point, we don’t have any of the sort of big contracts that look imminent that have sort of fueled the growth to some extent in 2014 and 2015 and into part of 2016. So the answer your question is we’re cautiously optimistic that we’re going to see some sequential growth there going forward.

We’re having some success on the areas of specialization I mentioned and they’re really are three areas that IT has been beginning on and beginning to get some nice traction and one of them is cyber security, which is a big issue in United States and around the world. And especially our mid-Atlantic office that does a lot of work with government contractors is seeing a nice bump in revenue and cyber security. We’re also focused on web enablement where we take applications from the computer to mobile devices and iPad and we’re seeing some nice traction there. And we have a reasonable contract implementing and integrating legacy programs with salesforce.com at one of our big client. So our Senior Vice President and the entire sales team is focusing a lot of their efforts on the specialization as opposed to commodity type staffing.

Sorry. Rocco, so cyber security with an OEM with some client or is it just you guys going and doing consulting?

We’re doing consulting. At least at the beginning, we’re doing consulting.

And then last Kevin looks like a little bit of improvement on receivables. Although, I guess it was on slightly lower revenue. What were DSOs or kind of where you, how you think that tracks for the year?

Well, I think we’re going to continue to see even better DSOs as we move out. I could give you the exact number, hold on, I don't have that in front of me. If you want ask another question, while I look that up I'll give you some precise numbers.

Yes. Rocco on RAF, I was little surprised, because let me focus…

Bill, I'm losing it. Can you say that again?

Yes. So, on RAF I know it's a new capability for you just give me a little more sense of the set?

Sure. So, we’ve actually worked with RAF bringing them in as a subcontractor as well as us being a subcontractor to their services. There are a small company on Long Island and they are pretty much over the years since 1991 have developed a strong capability in tank cleaning. And they are pretty much the go-to-company for a major utility in the Northeast. One of the things that they do is on the civil structural side is that they look and inspect tanks post cleaning and do the program management for tanks. And last year, although they are very small company, they were awarded many sole source contracts with this utility. But last year they were involved in a competitive bid for $3 million for a multimillion gallon tank for this utility. And they saw very nice margins on that contract. And this year, we expect to bid RCM and RAF or RAF under RCM for this sister contract for that particular utility. And we’re really optimistic about getting that work. And we’re already expanding and presenting their capability together with our capabilities with other utilities in and around the area. So, although we do quite a bit of civil structural design inspection they had the niche of doing this tank cleaning program management which is driven by federal requirements for all utilities. And these days there are many companies that own tanks that are no longer permitted to burn a number six fuel oil and a lot of tank work that we expect to come down the pike is to come and go in and convert the number six fuel tanks to number two fuel oil tanks which would require complete cleaning, inspection and repair.

Okay. Sounds good. And…

So, getting back to your DSO question, just to give you some numbers, Bill. In Q1 of 2015, we’re at 118.2, Q1 of 2016 we’re at 103.2 and in Q1 of 2017 we’re at 87.1. So, we’ve been talking about the DSOs for a couple of years on the calls and how that’s the big focus of RCM and especially some really great people that work that report to me. This has been a big focus to get this down and we’re very excited to get it down in 87.1 at the end of Q1 and which was -- which is about a six day drop from Q4 which was 93.0. We’re hopeful and optimistic and we can get those numbers down under 80, hopefully by the end of this year that is I'll tell you, that is our goal is to get those DSOs under 80 by the end of the year. So, hopefully combined with some top line growth and some continued improvements to DSOs we can get their [indiscernible] down a little bit low while at the same time increasing sales and operating income rate.

Just on that point and then I'll jump off. Did the education contracts do they have a long DSO cycle?

Well, historically in New York City has been a nightmare frankly. But now we’re running around 50 days in New York which is just frankly incredible because that’s been at various points 180 days or 200 days. I mean it's just, we have a women who works for us her name is Cheryl Preziuso and she has a team that she's put on, on this to really bring it down and it's been the progress we’ve made there has been incredible. Hawaii is now running around a 100 days. That has historically run a lot higher than 100 days and Chicago runs around 90 days. So our focus this year in healthcare is to continue to get those DSOs down in both Chicago and Hawaii. Hawaii will be a little bit more of a challenge in the short-term, just because their systems that they have in place are a bit archaic. But we think, we can continue to make progress there and we feel, we continue to make progress in Chicago. And there is a few target areas in engineering, engineering DSOs have come way down as well, but we’ve got one or two clients that just, we really need to work on. And hopefully between working on the two schools and a couple of engineering clients that continue to be issues. We can get them under 80. And then of course, one other thing that we’ve done over the last couple of years is, our engineering folks have done a much better job of breaking contracts. No so much for contracts, but breaking the POs with the managed task work into smaller bits so that we can get paid quicker. Because historically one of the big drivers of our horrible DSOs has been not the best laid out milestone.

Yes. Contractual terms and engineering historically have been pretty unattractive payments between phases of jobs and unattractive is an earnings statement, when you're doing a fixed price job you get paid based on a particular delivery. Well, we’ve been pretty successful breaking up the delivery, so that we get paid more often.

Okay.

It's not so much the delivery sometimes, it’s the delivery and then the approval from the client. The approval can take a long time. So any way, but we’ve been working really hard on multiple fronts to improve the DSOs. And we think, we can continue and obviously we’re not going to see 20-day reductions like we have over the last couple of years. But there is still room for improvement there.

Absolutely.

Okay. Thanks guys. I’ll catch-up with more detail upon. I appreciate it.

Thank you, Bill.

Our next question is going to come from John Varro. Please go ahead.

Can you just gives us a little update on what’s going on up in Canada on engineering side?

Okay. Well, there is quite a bit of activity at Bruce Power and I’m not really sure off the top of my head if I mentioned that. We were tasked with moving 80% of our resources that work on Bruce Power to the local site. So we’ve expanded our footprint in the Bruce Power area with anticipating hiring and moving quite a bit of our engineering capability that work on Bruce Power to the local area. And we have increased our backlog at Bruce Power significantly over the past quarter and actually this year. And we’ve also been successful with winning some nice work at extending the life at Pickering Plant for Ontario Power Generation. And we’re also back working with our engineering, our extended services, master services agreement with Black and McDonald on the Darlington refurbishment. So we feel that our Canadian operation will improve its revenue and gross profit and utilization for the remainder of the year.

Is that like a sequential quarterly movement through the end of the year?

Yes.

Okay. So those projects up there and sort of getting that organized is flowing a little smoother than what had been?

Much, much smoother.

And when you say, you back on that master service contract, all of the issues and things are all straightened out and moving forward?

Pretty much all the issues, we still have one dispute on the Ontario Power Generation contract, which is a minor dispute compared to the large dispute we had several years back. And to the most part, the disputes that we’ve had with Black and McDonald, through Black and McDonald to OBG have been resolved.

Okay. So, this sort of -- we were all talking about the sort of waiting for Godot -- for this contracts to finally start ramping up is they're getting people on position and getting ready to go?

Well, we have quite a bit. I think if you take a snapshot right now there are more than 70 people working just on Bruce power.

Great. Okay.

And over those 70, I'm having our Senior Vice President of Canadian Operations stationed at Bruce Power for several days a week and many of those 70, I think -- I know are physically at Bruce Power. And so, we’re -- and we’re growing -- we’re adding on a weekly basis.

[Operator Instructions] And we have another question from Mr. Varro. Please go ahead.

Just as a follow-up, we had a couple of quarters ago or last quarter you had this issue where a contract came up which is rolling off and didn’t get renewed. We don’t have any of those contracts rolling in the next couple of quarters do we?

You're talking about IT.

Yeah. On the IT side. Sorry, yeah.

See, the nature of our business is that and you're talking about a major large contract. The nature of our engineering business as well as our solutions IT business is that you start working and you have a finite contract under a finite schedule. And they end, I don’t see anyone any ending in the next six months of any magnitude. But, they'll always start and they'll be multimillion dollar contracts and they'll come to an end.

Right. Okay. But I mean no surprises, I mean as long as we start to keep on top of the…

I don’t see any surprises.

No, we don’t have any big contracts that are ending that we need to replace. But, you also have to consider that the business that we’re in clients can stop contracts anytime they want. Sometimes they delay them sometimes they cancel them. So, but there is nothing looming out there that on a specific contract that is a concern that I'm aware of.

Okay. Great. Thanks very much.

[Operator Instructions] Gentlemen, there are no questions in the queue at this time.

Well, thank you very much for joining the first quarter 2017 conference call. And we look forward to talking to you in a couple of months. Thank you.

I would like to say thank you ladies and gentlemen for joining. You may now disconnect. And have a great day.