Bradley Vizi - Executive Chairman Kevin Miller - Chief Financial Officer

Bill Sutherland - The Benchmark Company Frank Kelly - Scopia Capital Management

Good morning ladies and gentlemen, and welcome to the RCM Technologies Second Quarter Earnings Conference Call. Your hosts today are Bradley Vizi and Kevin Miller.

Good morning, everyone. This is Brad Vizi, Executive Chairman and RCM Technologies. Welcome to the RCM Technologies 2018 second 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 our business units before opening 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 filed with the SEC, as well as our press releases that we issue from time to time.

Thanks, Kevin. We are pleased with our 2018 consolidated second quarter results. We posted our third consecutive quarter with revenue of over $50 million. Our second quarter revenue of $51.7 million was the highest quarterly revenue we've seen in at least 15 years. We are confident our fiscal 2018 revenue will exceed $200 million. We are especially pleased to see our 2018 second quarter and year-to-date adjusted EBITDA of $2.6 million and $4.8 million growth by 30% and 38% respectively over the same periods in fiscal 2017. I'll discuss each division separately. Our Specialty Health Care Staffing Group set a new quarterly record with $22.9 million revenue growing about 40% as compared to the second quarter of 2017. Gross profit grew a robust 25% as compared to last year. Our healthcare growth was largely driven by our paraprofessional contracts with both New York City Board of Education and The Hawaii Department of Education. At the end of the 2017-2018 school years, May 2018 in Hawaii and June 2018 in New York City, we had about 210 and 725 paraprofessionals on assignment in Hawaii and New York City, respectively. These numbers are quite an improvement as compared to the last school year when we had 80 paraprofessionals with Hawaii and 240 with New York. Our therapists with New York City tripled, growing from 32 to about 110 over the same timeframe. To put that in context, our revenue with New York City in the second quarter of 2018 was about $7.7 million versus $3 million in the second quarter of 2017. Revenue for Hawaii was about $4.3 million in the second quarter of 2018 versus $2.9 million in the second quarter of 2017. We will see a record year from our Specialty Health Care division in fiscal 2018 and believe our revenue will exceed $83 million. Our Engineering division consolidated revenue grew 5% as compared to the second quarter of 2017. Our Energy Services Group, which operates in the U.S., Canada and now Serbia, posted revenue of $10.4 million in the second quarter of 2018, 18% growth over the second 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, laying the foundation for an Electrical Engineering Center of Excellence in Belgrade, Serbia. We are very excited about the growth prospects of PSR and the opportunity to leverage our Serbian partners to enhance operating performance throughout RCM. PSR was established in Serbia in 2006 and specialized in the design and engineering associated with high-voltage substations, design and engineering for electrical equipment and 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. In addition to enhancing operating performance throughout RCM, PSR affords RCM a platform to leverage our TMB capabilities in Europe. We believe that over time we can grow this office to over 120 engineers from our original numbers 30. We are looking forward to continued strong performance from Energy Services throughout the year as backlog and pipeline continue to build. Our Canadian Power Systems Group, which mainly serves Bruce Power and Ontario Power Group, generated $5.8 million in revenue in the second quarter of 2018 versus $5.6 million in the second quarter of 2017. Though execution within our Canadian operations were not in line with our expectation during the first half of the year, the remediation plan put into effect during the second quarter is already delivering improved results. We anticipate an increase in activity and new project awards with both OPG and Bruce Power as a typical seasonal law of the summer concludes. Our Aerospace Group generated revenue of $5.3 million in the second quarter of 2018, down from revenue of $6 million in the second quarter of 2017, as the result of project delays in Q2. As mentioned in previous calls, we are far too reliant on small number of aerospace clients. Our primary goal in the next 12 months is to diversify and grow our client base, similar to what we've accomplished in Energy Services over the past two years. We are encouraged by the activity in our Information Technology Group. Though Mike Boyle has only joined RCM within the last 180 days, he has already made significant changes to leadership and meaningfully augmented our sales effort. While we need to continue to be patient as we are still in the early innings of recovery, we are already seeing signs of return. Both revenue and gross profit grew sequentially by about 8% and 25%, respectively as compared to first quarter of 2018. This has been a very long time since we have seen anything but sequential erosion to revenue and gross profit in this division. The two biggest contributors to this growth were our HR Solutions and Long Island Solutions groups. We expect to see sequential improvement again in the third quarter of 2018. Also noteworthy 2017 revenue includes about $500,000 in the second quarter and about $1 million in the first quarter of 2017 from our Microsoft Solutions business that was divested at the end of fiscal 2017. On a consolidated basis, we expect to continue to perform while in the second half fiscal 2018. It is important to note, however, that RCM experienced a significant seasonality during the third quarter due to summer vacations, holidays and as it pertains for Specialty Health Care segment summer school closings. This concludes our prepared remarks. At this time, we will open the call for questions.

[Operator Instructions] Our first question will be coming from Bill Sutherland. Please go ahead.

As you look ahead to this coming school year, any color you can provide as pertains to the healthcare group?

Yes, I mean, as Brad mentioned in his prepared remarks, we have significant seasonality in Q3, which isn't close to our most of our investors now. The New York school system doesn’t start until September and really doesn't get underway and fully until maybe like mid-September, same thing with Chicago. Fortunately Hawaii starts a little bit earlier -- they start early to mid August. So we have some pretty big seasonality in Q3, but as far as the new school years are concerned we are not expecting anything significantly new relative to the last school year. Certainly we are going to try and increase the number of placements at all of our schools as we do every school year. But there isn't anything coming up in the coming school year that we expect to be very different from last school year by 2017-2018.

How would you characterize the momentum right now in your other healthcare staffing emphasis?

I think it's very strong. Our healthcare group is doing very well. The only segment that isn't doing very well, frankly, is our firm group. So our firm revenues year-over-year are down a lot. So we have seen some weakness there, particularly in the markets that we serve. But other than that, I think all of our staffing units are doing well.

And then, possibly maybe a little bit color on this nice rebound initially seen in the second quarter. What proportion of revenue are the two business lines that have turned around the HR Solution and Long Island solution. And maybe just a little more color as you guys think about others rebound comes together for you nicely.

Yes, we are really excited with where we are. Right now our biggest focus frankly is on making smart investments in the business to drive gross profit in the short-term and to drive contribution margin in the long-term. So right now we're just -- Mike and his team are focused on really improving our sales team and our sales processes. We've added quite a few sales people. We've added some executive management in HR solutions and life sciences. And Mike is continuing to work with other management that he inherited that is also shown. So we are excited about the IT group and think we have a lot of headwinds and a lot of room to grow.

There was the next suggest that this -- I assume the gross margin probably had some nice utilization behind it. Was that unusual or …

It’s a little high this quarter. I wouldn’t expect that every quarter. We had a couple of projects where we had really strong utilization. But I was expecting -- frankly, it came in a little bit higher than I expected, but I did expect it to be better than Q1, so I expected to see some improvement there. So I wouldn't necessarily expect the margins that we had this quarter in Q3 and Q4, but what I think is exciting about the margins in Q2 was to chose that we have the potential to produce those margins on a regular basis depending on the mix of products and staffing. Our focus in IT, I mean the gross margins are extremely important, and we are very focused on gross margins and we are very focused on utilization, but more than that we are focused on is driving gross profit dollars. And if we have to give up a little bit at the gross margin line to drive more gross margin dollars and drive more contribution margin, then that's okay. So we are going after a lot of different business and some of the staffing opportunity that we are going after, obviously, not going to necessarily come in at the blended margins that we had in Q2. But if we were to drive a few extra million in staffing revenues, I’d say 22% that’s dilutive to our overall margins. We are okay with that sale.

Sure. And then the other side of the coin in Health Care, coming down to 22% of change, is that a mix issue? And directionally, how should we think about that going forward?

Yes, I mean, the biggest factor frankly, Bill, is firm, just to give you some color. So in Q2, we had 274K in firm. I mean, we don't do a huge amount of firm revenue as you know, but we have a pretty big impact on the gross margin. So we did 274K in Q2 of 2018 and 524K in Q2 of '17. So we are down 250K. So that accounts for a pretty big chunk of the year-over-year, Q2 '18 versus Q2 '17. The other big factor and if you sort of strip that out, you are looking at 21.3% this quarter versus 22.3% last year. So that’s about 100 basis point difference. And what is driving that frankly is we have seen some softness in the margins in our travel group so our year-over-year margins in travel nursing are down. And then a lot of the work we've been growing the New York City paraprofessional contract as Brad talked about. And those margins come in dilutive to our overall margins. And it's a big chunk of the growth. So those are two big factors sort of driving the 100-basis-point difference. And then if you look at year-over-year, Bill, we did about 795K in firm for year-to-date 2018 versus about 1.15 year-to-date 2017. So you've basically got about the same spread in what we call contract gross margin, which is we have to strip out the firm. It's about 100-basis-point difference, actually 90 basis points year-to-date versus year-to-date, and the same factors that I just discussed contributed to the year-over-year decline.

Last one for me, better cash quarter than first quarter. It looks like days are down like three days. Headed further…

Yes, the actual improvement, Bill, was mapped a bit because of the fact that we have a lot of -- we had a lot of our accounts that we can now hiccups in perform well in Q2 in terms of the cash collections, but our biggest client now is the Ney York City Board of Education. And they had some issues there where they just stopped thing for all the June. So we had close to $4 million in stuff that we might have gotten paid for. We would've gotten at least half of that if they didn’t stop making payments. And so far this year, we have collected 6.7 million from New York City. So we expect a very good cash quarter in Q3 as well. So hopefully better than Q2, it should be.

[Operator Instructions] Our next question will be coming from Anthony Samling [ph]. Please go ahead.

My question is to Brad. Do you still think that does this model of running three different businesses that have no relation to each other makes sense? Or should you concentrate on one particular business that makes the most sense?

I think in isolation, it's always nice to have a pure play, particularly as a public company. However, I’ll say at this scale, I think that these three businesses have performed nicely together. I think the primary synergy between them is really shared services as well as similar delivery model. So ultimately with respect to kind of our strategy going forward, I should probably stop commenting there. But to the extent that you have further thoughts certainly up into address them with respect to the fundamentals underlying business.

[Operator Instructions] We have a question coming in from Frank Kelly. Please go ahead.

Good morning gentlemen, and welcome aboard Brad in a new capacity. I wanted to touch base and I joined the call late, so maybe it might be a little overkill, but -- through redundant. The $0.5 million for transactional financial advisory fees, what was that specifically? That took a nice dent into the margins. What was that in relation to?

It wasn’t $0.5 million in total for that Frank. You've probably read the language there were several components that made up that $0.5 million. If you read the whole thing or …

Okay. So the transactional financial advisory fees, what was that in particular in relation to?

Well, it's not something I’m interested in commenting on. So we had $0.5 million total fees for transactional financial advisory fees, legal fees associated with the loss that we unfortunately have going on and search fees associated with R&D President of our IT group, so those in total made-up $0.5 million. And what I've disclosed at this point is all we are interested in this closing.

If we skip over to Engineering, for the 13 weeks year-over-year, it looks like we lost 1.7 points in gross profit, roughly 370K. Did you cover what that was in relation to? Why we had a significant downturn in the gross margin there?

I’m sorry, Frank. I missed the beginning of your question. What numbers specifically you were referring to in which group?

13 weeks Engineering, 13 weeks year-over-year.

Engineering, sure. Yes, there is really nothing going on there specific other than the fact that in the second quarter of last year, we did have some very good fixed price project margins. So we had excellent utilization in Q2 of 2017. And we had a couple of projects and in 2017 where we were in good shape in terms of estimating. As you know, sometimes when you're estimating percentage of completion and you get to the end of the job, the cost may come in not exactly as you're projecting as we are going through the project. You would like it for always to be you have overestimated the cost, which is what happened in the second quarter of last year. If you flip over to the second quarter of this year, there is not anything specific going on in this quarter that I would point to as an issue other than the fact that utilization definitely was lower than I’d like to see it, particularly in Canada. But overall, the gross margin for Q2 '18 is good but not as good as I'd like to see it, and I think we can do better.

So you anticipate some of that gross margin for the balance of the year to rise in any year?

Frank, as I’m looking into the crystal ball here, I think that the gross margin for the balance of this year in Engineering is likely to be similar to Q2. There certainly is some upside depending on how some projects go, but my best guess is it will look similar to the margins in Q2. But I do think that on a go forward basis, looking at longer term, there are a lot of opportunities for us to get our engineering gross margins up.

And lastly, great job on the cash collections from what I read. It looks like we are having a good July and August of the cash collections and bringing those DSOs down. Good work.

Yes, we should have a real strong cash collection quarter in Q3, Frank. The DSOs wind-up getting a little bit cleared in Q3 because of the way that school revenues fall because they fall towards the end of the quarter. So you wind up having the bulk of your revenues uncollected, yet, you are taking a revenue number for the full three months. So sometimes our DSOs don't look great in Q3, but what is nice about Q3 is we typically have real nice cash flow and we've already -- as I mentioned earlier, we have already collected $6.7 million from New York, and it's really headway through August. So we should have a real good cash quarter in the Q3.

[Operator Instructions] Okay, gentlemen, I do not see any more callers in queue for questions.

Thank you very much. Have a nice day everyone.

Thank you, ladies and gentlemen, for joining today's call. You all may disconnect at this time. And have a great day. Thank you.