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

William Sutherland - The Benchmark Company LLC

Ladies and gentlemen, welcome to the RCM Technologies First Quarter 2018 Earnings Conference Call. Your host for today, Rocco Campanelli, will now begin.

Good morning, everyone. This is Rocco Campanelli, President and CEO. Welcome to the RCM Technologies 2018 First Quarter Earnings Call. I am 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 the operating units. Then we will open up for questions.

Good morning. Our presentation in this call will contain forward-looking statements. The information contained in the forward-looking statements is based on our beliefs, estimates and assumptions and information currently available to us, and these matters may materially change in the future. Many of these beliefs, estimates and assumptions are subject to rapid changes. For more information on our forward-looking statements and the risks, uncertainties, and other factors to which they are subject, please see the periodic reports on Forms 10-K, 10-Q, and 8-K, that we file with the SEC, as well as our press releases that we issue from time to time. Thank you. And I'll turn it back to Rocco here.

Thanks, Kevin. We are very pleased with our 2018 consolidated first quarter results. We posted our second consecutive quarter with revenues of over $50 million. We believe that our fiscal 2018 revenues have a high probability of exceeding $200 million. We are especially pleased to see our first quarter operating and net income of $1.7 million and $1.1 million exceed first quarter 2017 by about 66% and 91%, respectively. I'll discuss each division separately. For the continuous growth award [ph], our Specialty Health Care Staffing Group again set a new quarterly record with $22.6 million in revenues, growing 22% as compared to first quarter 2017. Gross profit grew a robust 15%, as compared to last year. Our healthcare growth was largely driven by a paraprofessional's contract with both the New York City Board of Education and Hawaii Department of Education. At the end of March 2018, we had about 210 with Hawaii, and 725 with New York City. These numbers, as compared to the last school year when we had 80 paraprofessionals with Hawaii and 150 with New York, is quite an improvement. Our therapists with the New York City tripled, going from 32 to about 110 over the same timeframe. To put that in context, our revenues with New York City in the first quarter of 2018 were about $7.4 million versus the first quarter of 2017 of about $3.1 million. Revenues for Hawaii were about $4.3 million in the first quarter of 2018 versus about $2.9 million in the first quarter of 2017. We are optimistic that we will see another record year from our Specialty Health Care division in fiscal 2018 and believe our revenues will exceed $80 million. With less than $35 million in revenue as recently as 2014, the consistent annual performance of our Specialty Health Care division in my opinion has been terrific. Our Engineering division continues to do very well. Revenues and gross profit grew about 11% and 13%, as compared to the first quarter of 2017. Our Energy Services Group, which operates in the U.S., Canada and now Serbia, posted revenues of $10 million in the first quarter of 2018, about 29% growth over the first quarter of 2017. Our Serbian office contributed about $600,000 in revenue. As a reminder, we acquired PSR Engineering in Serbia in the fourth quarter of 2017, providing the foundation for an electrical engineering Center of Excellence in Belgrade, Serbia. We are extremely optimistic of the performance and growth aspects of the Serbian division. As I stated in my last call, PSR was established in Serbia in 2006, and specializes in the design and engineering associated with high-voltage substations, design engineering for electrical equipment in power plants, 3D modeling, testing and commissioning, site supervision and other engineering services for clients in Europe, North America, South America and the Middle East. We are looking at this acquisition as a platform to do more transmission and distribution work in Europe. We believe that over time we can grow this office to over 120 engineers from our original number of 30. We also fully expect to diversify our service base there to include information technology outsourcing with our newly hired IT subject matter experts. We are excited about Energy Services' diversification strategy to drive our services deeper into the oil and gas processing, chemical manufacturing, and metals market sector. Our recently opened Buffalo office generated about $310,000 in the first quarter, and is already accretive to the Energy Services EBITDA. Energy Services expects to continue their solid performance as we have a strong backlog and pipeline as we moved through fiscal 2018. Our Canadian Power Systems Group, which mainly serves Bruce Power and Ontario Power Generation, generated $5.6 million in revenue in the first quarter of 2018 versus $5.4 million in the first quarter of 2017. After a long hiatus with our OPG partner, Black & McDonald, we recently won a multimillion-dollar engineering procurement and construction project at OPG, and our Bruce Power engineering portfolio continues to expand. We expect incremental improvement in subsequent quarters. Our Aerospace Group generated revenues of $5.9 million in the first quarter of 2018, essentially flat with the first quarter of 2017. As mentioned in previous calls, our primary goal in fiscal 2018 is to diversify and grow our revenue base, similar to what we've accomplished in Energy Services. Recent wins for our Aerospace Group included two multimillion-dollar purchase orders for Lockheed Martin, one for jurisdiction classification and the second for delivery assurance. We expect incremental improvement in subsequent quarters. We are encouraged by the activity in our Information Technology Group. While we need to be patient with our new leadership, we are very excited about the potential. In the first quarter of 2018, our main focus has been adding talent. Our new SVP, Mike Boyle, has been laser-focused and successful in hiring new sales management and individual sales and recruiting contributors. We expect to see positive results in the near-term. I also just wanted to note that the first quarter 2017 revenues included about $500,000 in revenues from our Microsoft Solutions business that was sold at the end of 2017. We expect our second quarter results to be better than the first quarter, especially as we focus on improving gross margins across all three of our business units. Thank you for attending RCM's first quarter conference call. We look forward to updating you on fiscal 2018 in August. And I'd like to open it up for questions.

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

Thanks. Hey, good morning, guys.

Hi, Bill.

So that last thing that you said, Rocco, about Q2 being better than Q1, you meant consolidated not IT, correct?

Consolidated, Bill.

Yeah, okay.

Yes. It's only one month, but our - we had a very, very small revenue uptick in April, in IT, versus March. And with the direction the IT Group has been going for the last few quarters, at least, it was encouraging to see evidence of some leveling off in the revenues. Probably, more importantly, we saw a nice uptick in gross margin in the IT group in April as compared to Q1. So we believe, it's headed in the right direction. I don't - I will be very, very surprised if we see any deterioration in revenues in Q2 as compared to Q1. Whether we're going to grow it or not from Q1 remains to be seen, but I think we'll see better gross margins in Q2 than Q1. And I'm hoping that we at least see flattish revenues and an uptick in gross profit, and that will be a really good start, if we can accomplish that in Q2.

Is there a main focus of what Ballou's trying to get this group to sell?

A couple of things. Rocco can probably talk a little bit more about that.

Yeah. Well, one of the things that he's very excited about is our HR Solutions Group. One of the things that we're seeing is some nice increases in utilization with our consultants working on ADP. And he's been traveling through the various offices at ADP and see a very positive reaction to our recent performance there, and has very high expectations from our HR Solutions Group. He's also focused on bringing in new talent in life sciences, although we've had some problems in life sciences towards the end of last year, we're optimistic that's going to grow. And reported several salespeople in IT consulting. And our Midwest - no, our Mid-Atlantic and our Northeast IT sales numbers are improving on a weekly basis. So we think that his contribution and his knowledge of the IT staffing business, it's going to go a long way in improving the results in IT.

Okay. In Engineering, the commentary about Bruce and OPG, so you've won work with Black & McDonald at OPG that would impact this year?

Yeah, it's ongoing, right. We just won it in the first quarter.

Yeah. And just so you understand, and you probably kind of assumed this, but that - the end client there is OPG.

Right, Bill. See, as we mentioned in previous calls, we have a contractor/subcontractor relationship with Black & McDonald, who has a Master Services Agreement for engineering procurement and construction work at OPG. And there were some issues in the past, that I've mentioned on past calls, that are - that have been resolved, and work is flowing again. And we are still their primary engineering, procurement subcontractor, and we see more work in the pipeline for Black & McDonald and RCM.

So - and then what was the comment on Bruce? I didn't quite get what you said there, Rocco.

Okay. So we have a Master Services Agreement at Bruce and - that we have several ongoing direct engineering contracts as well as a larger contract called a drawdown contract. And what we're seeing is added - not large work, but continuously added revenue to those contracts. So we feel that over this over they will continue to grow, and our expectation is that we will have 10% growth over the last year at Bruce.

Okay. So up from this 5.5 level that you're at right now?

Yes.

Yeah, okay. How - so you're - in Serbia your - when you got the group, it was at 30. Now how many engineers does it have now?

I think it's about 50.

Okay.

A little lower.

Yeah, a little lower. But they're doing very well, because they're tied into our transmission and distribution work that we're doing here in the states. And they're doing quite a bit of work in Europe on their own. And one of the exciting things is that we're - an additional exciting thing is that we're really optimistic about the ability to offer IT services at very attractive rates and gross margins in Serbia for some of our U. S. clients.

Yes, I would think - I was thinking that was something that you were going to say. I mean, Doyle [ph] would market that, wouldn't he?

Yeah, Mike will be very focused on that, for sure. It's going to take a little while to build out, because we don't do that type of work right now. But certainly, we have a number of clients that we believe would be interested in those services. So we're in the process of sort of figuring out exactly what makes the most sense, so off - what services we think we can get a win or two or three as quickly as possible.

Yeah. As a matter of fact, our IT manager that we hired, after we hired - after we acquired PSR, spent the last three weeks here, working with all our operating divisions to discuss their capability. And he was actually here yesterday talking about the marketing - him and Mike were here yesterday talking about their marketing and sales plans, to roll out some of the Serbian services and then integrate them with our existing clients.

Let me just ask one more and I'll let someone else get a chance. Kevin, on the balance sheet, I noticed that ARs were up a bit more than revenue. What this...

Yeah, I mean, it was really a crazy quarter, Bill. We had a couple - we had several discreet, but fixable, issues in billing and collecting the accounts receivables. As I'm sure you can appreciate, those types of things happen every quarter. But usually, it's one thing that happens in a quarter that it's like there's one mole you got to whack. This quarter we had about six or seven of them that just popped up, that we had to deal with. To give you a couple of examples, what's driving the $6 million increase, our largest client which is Lockheed Martin which, as you know, purchased of course the aircraft. We had about 8,000 hours that we couldn't get into their system because they switched ERP systems. And this is something that impacted RCM and every other vendor that works through that system. Also at Sikorsky, we had several tech-hubs-related POs that we just couldn't get signed off on in time to collect any - collect some of that money. Those two problems at Sikorsky alone caused our receivables to jump by $1.6 million from December to - if I just sort of superimpose the December DSOs on the March DSOs, you're looking at a $1.6 million increase. Another thing that we had to deal with in the first quarter is just the enormous growth in the New York City Board of Education contract. We had 725 paras on by the end of the quarter. And you and I have discussed this before, Bill, that the New York City Board of Education billing system is just an absolute beast. It's very, very difficult to navigate. And if you don't get everything into their system absolutely perfect, you can't bill. And inevitably, there's a lot of incense [ph] needed to be tied up in terms of getting the right hours, the right minutes, the right kid. And you have to do it on a kid-by-kid basis. And there's some turnover in this type of business, so really the combination of the complexity of the billing system and the overwhelming task of putting all these people on the payroll, making sure we get the payroll right first, obviously, and then getting all the billing, it was a bit, frankly, overwhelming. And we just couldn't keep up with the volume with the staff levels that we have. So what we did is we've added three temps that are just cranking up billing right now until we get caught up. And I expect to see much better results in Q2.

Yes. That's what I figured, that this is just some variety of timing issues.

Yeah, and some other issues that we had is a couple - we had a couple of life sciences clients and a couple of energy services clients, where we had PO issues. One of our big customers is GE Alstom. They're a pain in the neck to get money out of, but they're a great client. I think our DSOs at the end of Q1 for that client were about 170. But it's great work and we get paid, and we'll get it down to a more reasonable level. And I'd take three more of them, if I could find them.

Sure. One other thing I noticed, Kevin, is the tax rate a little lower than I had in my model. Can you remind us what...

Well, there's always going to be like a mix shift with Canada and Serbia, right? So - and Serbia had a real good first quarter. Certainly, they really jumped up in terms of their contribution margin from Q4 to Q1. So that's the main thing that's driving that rate down. We're about 28% or so for the U.S. We're about 26.5% for Canada. And we're about 20% or maybe a little bit less in Serbia. So the more money that we make in Serbia, obviously, that will drive the rate down. So I think for the purposes of your model, it's probably just safe to assume 28% and you'll be in good shape. I don't know that it's going to come in quite that low in the next couple of quarters. We'll see.

Okay. Thanks, guys.

Thanks, Bill.

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

Well, thank you, everyone. We look forward to updating you in August.

Thank you, ladies and gentlemen. This concludes your call. You may disconnect at this time.