Rocco Campanelli - Chief Executive Officer Kevin Miller - Chief Financial Officer

Bill Sutherland - The Benchmark Company John Zaro - BCM

Ladies and gentlemen, welcome to the RCM Technologies Third Quarter Earnings Conference Call. Your host for today is Rocco Campanelli, our President and CEO; and Kevin Miller, Chief Financial Officer. You may now begin.

Thank you. Good morning, everyone. This is Rocco Campanelli, President and CEO. Welcome to the RCM Technologies 2017 Third Quarter Earnings Call. I'm joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin our report 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 discussion.

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 very pleased with our 2017 consolidated third quarter results. Despite seasonality, particularly, in our Health Care segment, our third quarter operating income significantly exceeded our first quarter of 2017 and nearly matched a good normalized second quarter. Third quarter 2017 revenues, gross profit and operating income exceeded 2016 by approximately 10%, 16% and 278%, respectively. I will discuss each division separately. Following strong first and second quarters, our Engineering segment continued its upward trajectory. Third quarter 2017 revenues and gross profit grew approximately 23% and 44%, respectively, over third quarter 2016. Gross profit dollars of $6.2 million was our best quarter in three years and our second best quarter in our history. All three of our Engineering groups contributed to the great quarter. Our best performer for the third quarter was our Canadian Engineering Group, which mainly serves Bruce Power and Ontario Power Generation. Third quarter revenues of $6.4 million grew nearly 50%, and gross profit more than tripled as compared to 2016. The Canada Engineering Group backlog and pipeline is strong, and we are believed we are poised for a strong fourth quarter this year and fiscal year 2018. Three recent contract awards are worth mentioning at Bruce Power and OPG. We were awarded an $800,000 electrical motor control center replacement project, a $5 million procurement engineering project to support the main component replacement effort at Bruce Power, and a $400,000 value-based maintenance project at OPG. The remaining base load work continues with very high scorecard grades. Our Energy Services group, which operates in both the U.S. and Canada had another strong quarter. Revenues of $8.8 million grew by approximately 17%, and gross profit grew by approximately 28% over 2016. Our focus on the transmission and distribution market a few years ago continues to pay dividends. A significant amount of growth is coming from the following new or expanded customers: Alstom Grid Canada, American Electric Power, Con Edison, Covanta, Exelon, FirstEnergy, PSEG, ND Energy. We have recently been awarded a $1.5 million replacement -- relay replacement project at AEP. This award is directly attributable to relay replacement work we recently completed at AEP, which was delivered on time and on budget with very strong client satisfaction. In addition, we are in the process of opening an office in Buffalo, New York, that will focus on the process and industrial market sectors. We currently have work at Praxair and Thermo-Kinetics, and our objective is to leverage this work and office to diversify our services into the gas processing, chemical manufacturing and metals industries. We are also very optimistic about our recent involvement in the distributed energy and micro grid markets. As I mentioned in our previous calls, we have focused our resources on the bankable emerging technology of fuel cells to provide clean power generation solutions to commercial and industrial clients as well as utility demand reduction on transmission circuits. RCM anticipates capitalizing on this high-growth market through our recent engineering and EPC Master Service Agreement contract award with a fuel cell -- with a major fuel cell manufacturer located in the northeast, and a highly probable contract leading to full-scale fuel cell deployment for a major global financial services entity. I hope to announce this project in the coming months. Energy Services expects to continue the solid performance in the fourth quarter. And we have a strong backlog and pipeline heading into fiscal 2018. Following a relatively flat first half of 2017, our Aerospace Group's third quarter revenues grew about 15% over 2016. We recently reorganized Aerospace to better focus our resources on adding new services and business development at new clients. They added a new senior manager from a large OEM that will focus all his efforts on this new client and this business development. We also restructured our existing senior managers such that there is clear delineation between the managers that are focused on maintaining and developing existing clients and those externally focused. Our backlog and pipeline remains strong in our Aerospace group. Our Health Care division, which experienced a significant seasonality in the third quarter due to summer school closings, set new third quarter records for both revenue and gross profit, growing both over 2016 by approximately 19% and 13%, respectively. Much more importantly, we got off to a very strong start with our new 2017, '18 school contracts. At the end of September 2017, we had about 1,300 power professionals, nurses and therapists working in 19 school districts, with New York City, Hawaii and Chicago being by far the greatest of our client's school districts as compared to about 720 school employees at the end of the third quarter 2016. This division did an excellent job, placing 1,300 staff within a 16-week period as the new school year began. There is a lot to be excited about in our Health Care division as we look to completing the fourth quarter and fiscal 2018. We think we have a very strong shot at exceeding $20 million of revenue in Q4. Absent any surprises, we have nice built-in growth for fiscal 2018. Our Information Technology group continues to struggle. As a result, in early Q4 of '17, we initiated a short-term reorganization plan. We remain committed to this business and have retained Robert Giorgio to act as interim Senior Vice President of IT C&S to assist us with putting a recovery and growth plan in place. Bob Giorgio is a seasoned operating and sales executive, with many years of experience in growing and turning around businesses in life sciences, IT and engineering services sectors. We look forward to reporting on our progress on future calls. Our IT group has an office in Puerto Rico that mainly provides life sciences, IT and engineering staff. Hurricane Maria has had a major impact to our operations in Puerto Rico. I'm very happy to report that all of our employees and contractors are safe, and none were injured. But as you can imagine, many of their lives have been turned upside down. My heartfelt sympathies go out to all the people in Puerto Rico impacted by Maria. We don't know yet how long it will take for our Puerto Rico office to recover, but we don't believe it will happen quickly. We posted about $1.1 million in revenue in both Q1 and Q2 of 2017. Our revenues only dropped by a little over $100,000 in Q3 of '17, but so far in Q4 '17, we are billing at about 40% of our former performance. We remain committed to Puerto Rico and will make the best of the situation while supporting our valuable employees as best we can. Our revenues in Puerto Rico will be down significantly in Q4 and probably for some time in 2018. Additionally, we may experience bench time that we have not historically had due to lower utilization. Thank you for attending RCM's third quarter conference call. We look forward to finishing fiscal 2017 on a high note, and updating you on fiscal 2018 in a few months. I'll open it up for questions.

[Operator Instructions] Our first question comes from Bill Sutherland from The Benchmark Company.

So did I hear you correctly? Remarkably, you placed 1,300 pairs, and that's almost a double from a year ago?

Well, that 1,300 number is -- it includes all of our Health Care staff. We can't really be -- don't be misled by the pure numbers because first of all, as I think you know, some of our Health Care professionals work 10 hours, some work 40 hours, some work 25 hours. And that's just sort of a snapshot sort of one day, September 30 versus September 30. Also a lot of the new ads for power, and they're coming in at much lower bill rates. So if you don't want to draw any conclusion that we're going to double our school revenues because we're not. But the point is, that we're going to see some pretty significant growth particularly, in New York City, but also in Hawaii as we add more power there as well. So we're going to see some nice growth, which we believe the fourth quarter revenue, as Rocco mentioned, will be over 20 million. And we think we have a very good chance of being over 20 million. And hopefully, that will sort of be the new normal, obviously, accounting for seasonality in all of our third quarter's going forward. But that should be the new normal in terms of our revenue base on a go-forward basis.

And so, like Kevin said, the 1,300 he said Health Care it's only -- the 1,300 was only Health Care for our schools program.

No, no. I understand that. I just...

And we placed them in a six week period. So it was a pretty crazy six weeks these guys had. But all those people...

Some of them were returning nurses and therapists, but there was quite a few that were in due and had to be recruited and certified, and directed to the various schools that they were going to work in.

Now given the selling cycle for these contracts on the big ones, are you lining up a couple to try to win for next school year?

Of course. We're always with the new schools. There aren't a lot of schools out there quite frankly, that just spend like Chicago, Hawaii and New York City do. They are a few. But we're constantly looking for new schools. The other 16 schools, on a cumulative basis, they contribute less revenue, but none of them are -- I wouldn't consider any -- that any of them are significant clients yet. But I think the largest one is Philadelphia and we have about 15 professionals in the Philadelphia school district. And that's a large school district, but they just don't hire as many temporary workers as some of the other school systems do.

You're right. Right. So just using 20 million as a number, what proportion of that number is education at this point?

I don't have an exact number for you Bill, but I would say, around 50%.

60%? Okay.

Yes, about 50%.

And then, it's been kind of a mixed bag from a couple of your larger health care staff income is, although they're talking about better order rates going forward. What are you guys seeing in that part of the business?

In terms of order rates in the schools?

No, no. The other, the 40% that's non-education?

We're seeing an impact from that for sure. I think probably the biggest problem is just the uncertainty. So I think we're seeing a lot of our hospital clients are just afraid to -- they're afraid to make commitments and they're just sort of tightening their belts. We're definitely seeing that in the Travel. In fact, in the Travel Nursing business. So yes. We're definitely seeing an impact from that. Outside of Travel, I don't think it's a significant impact, but it's definitely impacting us.

Okay. This new office in Buffalo for Engineering, so that would be within Energy Services, correct?

Correct.

Okay. And it's de novo. You're not going in. There's not an operator out there that you're bringing in?

I'm sorry, Bill?

You're not acquiring a little business, right? Or you're just...

No, no, no. We hired 4 people and they are all at least fully utilized or partially utilized, so that's step one and then we'll see what step two is. We're going to try and build the business as quickly as possible without taking any significant risks. But it's a new avenue of growth for us. So we're really excited to get into a completely different industry.

Right. We're always focused on diversifying our services and clients. And this brings us into a completing different industry. We could utilize our resources in our other offices to support the Buffalo area. And we feel pretty strongly that this could potentially be a growth industry sector for us.

But did you like end up with a couple of pieces of business? And that kind of actually focused on this area and then you've...

The people that we hired, Bill walked into the business, was walking the door. Those are the best -- they're the best people to hire.

If you look at the Power System business, it sounds like it's building a little faster than we even had initially expected at this point or is it kind of all finally falling into place? And how do you characterize it?

Well, what we've start -- we started slowly with new clients. And as we delivered product, what generally happens in our business is, once you start with a new client and you go through a probationary period to see that you're going to deliver a quality product on time, on schedule and on budget, there is a tremendous amount of budget with our existing clients to spend especially in transmission and distribution. And we're benefiting from delivery of good product. The example I use was with AEP. AEP is becoming -- quickly becoming one of our best clients. And that is mainly due to -- over the past 6 months, they want -- we had several purchase orders that we delivered that went very well and that continues to happen. And the same thing has happened at Con Edison and Covanta and Exelon. So our transmission and distribution business are companies that mainly focused on power generation for a really long time. And the transmission and distribution business is only a couple of years old. And it's starting to come into its own.

Do you -- you had a really nice gross margin in the quarter. I see you were at 29% in the prior quarter last year. Is it -- would you say it's kind of something where you bounce between 27% and 26% and 29% or...

Yes. Yes, that's a good range. I mean, Engineering had a really fantastic margin quarter. We had great utilization through all three groups. And we also had a couple of nice fixed price contracts that worked how you want them to work. And so I wouldn't necessarily say the Q3 Engineering margins, I'd like to see those kind of margins every quarter. But I certainly don't anticipate it.

Yes. And as you know, Bill, our utilization is been really strong over the past couple of months. And our gross margins are directly impacted by a very small increases in utilization.

Good to see the attention being put on IT with Giorgio. Are you expecting him to kind of -- is the board, I should say, expecting him to provide a kind of road map as early as 2018 or do you think it takes longer?

He is pretty focused. He is committed to doing this as long as it takes to get it on solid footing. But long-term, we'll look to find someone very senior and very good to replace him. But in the interim, we think he's really good for this position. You know Bob, so you know how much experience he has. So we're very happy to have him on board.

But you think, I mean, what are reasonable expectations for him to make a difference? Do you think in -- and do you think it will take a significant amount of...

It's not going to be quick. No, it's not going to be quick. Ask us that question again when we talk in late February, we'll give you better answer.

[Operator Instructions] Our next question comes from John Zaro from BCM.

Can you just talk about where you are to on -- you've done a good job, sort of continuing this whole receivables thing and cleaning everything up and the balance sheet looks better. You paid down some of the debt, can you just talk about that a little bit?

Sure. I mean, I assume you're wanting to know about capital allocation?

Yes.

Yes. Well, as we mentioned on our last call, when we get to the end of November, the board will make a decision on what we're going to do. We do have some payments in the fourth quarter to make -- some earn out payments to make, about a $1.5 million. And we are also looking very seriously at a small acquisition and I think we're going to close in the fourth quarter. It hasn't closed yet. It's not a big acquisition, although we do think it's -- has a lot of -- a huge amount of potential. That's going to be about another $1 million out the door in Q4. And then as we kind of see what the fourth quarter looks like in terms of how much receivable growth and because our receivables are definitely going to go up in the fourth quarter because we're going to see a little jump in our quarterly revenues. So when we get sort of to the end of November, early December, we'll make a final decision on that. But as we told you in the past, John, that the board is very, very focused on capital allocation and very interested in maximizing returns to shareholders and doing whatever makes sense. So we will very seriously look at a year-end dividend. I know that's something you're very interested in. And I can tell you that, that is something that the board will very seriously look at in terms of the dividend. And absent any changes between now and the end of November, I think there is a pretty good chance we'll issue some sort of dividend.

Great. And from the technology standpoint, I think it's great that you brought this guy in. Is his -- I mean, his charge, as you say, he is moving rapidly. Is he potentially even going to set up a list of things that -- the things you should do with the business? Or is it more just...

He is already doing that. He started doing that, right. The good news is, he has recognize the fact that we have some really good people working in the group. We have some real serious strength. And he is immediately seeing what Rocco and I see, that we have some good people. We just need some changes in terms of some leadership and a better leadership, and a little bit better focus on certain areas where we can grow and capitalize. And we're going to need to add some people as well to grow it.

If that business has changed so much in the last -- as you and I have discussed in the last 5 years?

It changes rapidly. It's...

It's not as great of a source as it used to be.

No, but there's plenty of business out there. So it's not a small -- it's not a shrinking industry. It's more -- it becomes more and more difficult and more and more competitive. But we feel good about the business and we feel good about the people that we have. And we just need to make some -- to make a few changes and bring in some -- we've brought in some key areas. And we think there's a really good nucleus here.

And then one last thing, is the -- I mean, as you said, you've done a lot in power gen and transmission and distribution has really taken off. Congratulations. Is this new area, starting with the one in upstate New York, is it more driven by some of these clients or is it just more of the what's going on in that industry?

Actually, it's driven by the client. But when we forge into a different industry, we try to grab an encore client, where you get some real credibility on deliverable product that you could leverage to other clients in the same industry. And you talk about the process, the chemical and the manufacturing industries, in general, would bring a diversification to our organization. But we also mentioned the work that we're focused on in renewables with fuel cells. And we feel strongly that, that's going to bring a good diversified growth area for us as well. So in both of those areas, we see promise within both the short and intermediate term.

And some of it is coming from these utilities themselves or some of the...

No. You don't -- believe it or not, with the fuel cell business, our end client is really not a utility. As I mentioned in the call, we're currently working with a financial institution that wants to play fuel cells throughout the country, and have a micro grid or a distributed power system that they have control over. And we think we're going to get a very sizable job in the immediate future, which we -- which our strategy is to leverage those jobs into many more jobs.

[Operator Instructions] Our next question comes from Frank Kelly. Please go ahead.

I just have a couple of questions. One, as we go back to Health Care, I'm looking at both the revenues, these guys, they've just been steady, progressive, additive performers on the revenue line for a couple of years now. And I think that those guys should be commended because they work really, really hard and they're doing a lot of heavy lifting. But one thing I noticed, if you look at the gross profit, both for the quarter-over-quarter and year-over-year, the gross profit seems to have dropped in over a point and then the year-over-year, and over a 1.5. Is there a reason why the revenue, the stuff we're feeding up on the top is not coming through on the gross profit line? I mean, is there margin just out there in that...

There is not really one reason for the drop in the gross margin side. There's a few. If you look at the 39 weeks versus the 39 weeks, we have $500,000 less in perm revenues. And as you know, 100% of that drops the gross profit. It's very profitable, obviously, but the costs are in SG&A that go against that. So that has a pretty dramatic -- in fact, it did impact Q3 as much as it did the first half the year because we only had about $20,000 decline in perm from Q3 to Q3. And as you know, the perm can be pretty haphazardly. We have a good client last year. A big single client that gave us a few dozen orders. So we had a big spike in the first half of the perm last year, which was wonderful at the time. But then it got back down to a more normalized revenue levels. In addition to that, what we've seen in this year versus last year, is we'd seen a little bit of a decline in our travel, our nursing margins. The net margins are still great in that business. We love the business. But the gross margins have come down. And that's mostly just due to competitive factors. The nurses are in hot demand and if you want to put them to work, you've got to pay them, and you've got to negotiate pay rates. And you have a lot of leverage over pay rates. Our HIN margins have come down a little bit. They're still fantastic. They're still north of 30%. But they used to be on the 40s when we first started that business and they've come down. And that's not so much a factor of any sort of competition. As we try to grow that business, you just can't keep selling the margin. You can't keep flowing business in the 40s. There is only so much of that business out there. And then lastly, what also affect us in the third quarter is we added a whole bunch of new powers that have never worked for us. So there are employment tax expenses or starting from 0. So unfortunately, we won't see those people reset until maybe June of -- until like September of next year when they are coming back for the '18, '19 year. Because as you know, they will reset again in January. So we added a whole bunch of powers in September that didn't -- they had lower margins than they would normally have in September. So there's a host of factors Frank. As we -- and I think if you look at our gross margins compared to a lot of our competition, if you look at somebody -- if you look at our -- you exclude perm from the equation. You look at our gross margin versus lot of other health care staffing companies, it's very, very attractive even at the lower number. So I don't see that our gross margins, unless our perm jumps back up, which is always possible. But that's a bit haphazard where those revenues come in. And we're actually driving a lot more perm. We're probably not going to see the kind of gross margins that we're seeing in 2016. The gross margins that you're seeing now are probably more of a normalized gross margin. And as we continue to grow the top line, we'll continue to drive a lot to contribution margin. Again, a lot of information but hopefully I answered your question.

Yes, and the thing that actually escaped my memory was the perms. The perms are exactly that, a permanent placement dropped straight to the bottom. And that's something that may be becomes a focus because that's exactly what it does.

It is a focus. It is a focus of ours, but it's something I've never seen a dedicated perm company that doesn't have sort of a jagged line when you look at the revenues. You get hot for a while. But it's a focus of ours, and if you know any good perm recruiters, send them our way.

Great. Congratulations on the turnaround of at least the management side of the IT. I think we're looking to -- with a senior guy like that. Giorgio, you're going to see some turnaround there. And I think that's well needed. And I'm glad it's -- but one thing on the balance sheet. If you go over the balance sheet, it looks like we're really in good shape as we slide into the middle of the fourth quarter. And if you were to pose it as a probability, a dividend return to the shareholders, which is key to the Board of Directors, do you see above $52 coming out like we've seen in the fair?

Yes. I would say the probability of that is 0. But we will do our due diligence on it. And do what we think is best for the shareholders and the company.

[Operator Instructions] There are no further questions at this time.

Thank you, everyone. We look forward to updating you again in February. Thanks for your participation.

Ladies and gentlemen, this concludes our conference. You may disconnect at this time.