Ladies and gentlemen, welcome to RCM Technologies Fourth Quarter Conference Call.

Good morning, everyone. This is Brad Vizi, Executive Chairman of RCM Technologies. Welcome to the RCM Technologies year-end 2020 earnings call. I'm joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin with a legal disclaimer, and then I will summarize the operating results for each of our business units before opening the call to 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. And now I’ll turn it back to Brad.

Thanks, Kevin. Our 2020 results had been heavily impacted by COVID-19. However, we have made steady financial progress in recovering from the pandemic, while repositioning the business to emerge a better company. We saw 2020 as an opportunity to strengthen RCM on multiple fronts. We believe that in all three of our segments, we are now focused on higher growth markets. Before discussing each of our segments, I want to highlight a few areas of financial performance. As most of you know, in March of 2020, all three of our business segments were significantly impacted by the pandemic. In order to return to positive consolidated EBITDA, we made significant reductions to SG&A, while remaining steadfast towards investing in our strategic plan. Despite the headwinds to profitability, we made steady progress on EBITDA with the following results. In Q2 of 2020, we generated negative EBITDA of $490,000; in seasonal Q3 of 2020, positive EBITDA of $214,000; in Q4 of 2020 EBITDA of $975,000. When comparing Q4 to Q3, we saw a sequential increase in revenue of $9.6 million. We made the strategic decision once the platform was secure to continue to invest in the future despite cosmetically inadequate results. In addition to maintaining our most strategic growth programs, we believe our ability to leverage revenue increases going forward should result in higher profitability as our core markets normalize. We generated $25 million in cash flow from operations in 2020. Debt in 2020 decreased by $22.9 million or 66% from $34.8 million at the end of 2019 to $11.9 million at the end of 2020. In a highly challenging environment, we purchased 1.8 million shares of the company at $1.20 per share. This is a good example of the type of capital discipline we pride ourselves on. As a result of excellent crisis management on behalf of the employees of RCM, we were not only able to weather the storm, but we were able to renegotiate the financial covenants on our credit line. Let's discuss our segments. The impact of COVID on our healthcare business was material. We generated $65.6 million in revenue in 2019 from our school clients, 73% of total healthcare sales. In early March 2020, most of our school clients shut their doors with no reopening in sight. Since Q1 2020, we made remarkable progress in restoring a good portion of our school revenue. After generating $19.4 million in Q4 of 2019, we saw a trough revenue of $3.8 million in Q3 of 2020 but saw this figure rebound to $10.3 million in Q4 of 2020. While we are still far from our peak, we have reached escape velocity and believe that the best days are ahead for our school business, with revenue approaching more normalized levels by Q4 of 2021. Our healthcare business is an excellent example of how the devastation of the pandemic accelerated several strategic initiatives that we believe will afford us further competitive strength in our end markets going forward. For example, during the fourth quarter, nearly half of our school business was administered remotely. Overnight, our nascent telehealth effort went from being a strategic initiative to a strategic imperative. As leaders in the school business, our ability to provide a turnkey service offering to clients, ensuring the highest standard wherever is best for the student further fortifies our position in the market. Our leadership position has not gone unnoticed. We are currently in late stages of pursuing several high potential clients. While not nearly as pronounced, we experienced a similar trajectory in our IT segment. While we generated Q1 2020 revenue of $8.7 million, we saw COVID related decreases in Q2 2020 and Q3 2020 with $7.9 million and $7.5 million respectively. From the Q3 2020 revenue trough, our business rebounded to $8.2 million, a 10% sequential increase. Like healthcare, we believe the negative impact of COVID will ultimately lead to long-term strength in our IT segment. As many of you know, growth in our IT business is driven largely by our life sciences practice. The pandemic further galvanized confidence in our strategy to continue investment in the business and accelerate planned growth initiatives as we move through 2021. Of our three core business segments, engineering continues to be most affected by the pandemic. The segment has been adversely impacted in several ways. First, our aerospace clients are primarily OEMs, serving both government and commercial sectors. Our clients have experienced dramatic declines in demand from their commercial customers. We have traditionally derived about 30% of our aerospace revenue from the commercial end market. But with that being said, aerospace is off to a fast start in 2021. In addition to several awards, we are entering a new year with an increasing pipeline. We anticipate significant sequential improvement as we move through 2021. The second major challenge was the significant budget cuts from our North American utility clients. Some are client-specific but we believe there has been pressure throughout the industry. For example, there's been a considerable diversion of funds due to storm restoration. We have also seen budget cuts due to shrinking revenue from non-payment of monthly utility bills. However, we expect a recovery as many of the state utility regulators are contemplating allowing utilities to capitalize these past due bills and future rate increases. Our industrial processing group has been the bright spot in our engineering segment. Pipeline activity is very robust. Potential projects are primarily in the $3 million to $15 million range. Due to the binary nature of awards, we are cautiously optimistic that several of these projects will be greenlighted as we move towards the second half of 2021. Despite continued overhang from COVID, we expect to see materially better results in 2021 compared to 2020. After realizing just under $1 million of a normalized EBITDA in the fourth quarter of fiscal 2020, we expect to build on this progress and grow EBITDA sequentially in the first two quarters of fiscal 2021. After our school clients return from summer vacation, we believe our fourth quarter will reflect continued strength. This concludes our prepared remarks. At this time, we'll open the call for questions.

[Operator instructions]. And I see we already have a couple in queue. So, I'll go and open up our first one, Bill Sutherland of Benchmark. Bill, Your line is now open.

I wanted just to dive a little bit deeper into your -- the trends in the school business. So you have -- maybe talk about the 3 key clients to the degree to which that would be helpful.

Well, basically, I would say that right now, New York is -- New York and Hawaii are not running at full capacity but Chicago pretty much is. So it's different for different lines. I think where we've gotten hurt the most in New York is the power professionals. Because power professionals generally just don't work remotely. I mean we have a little bit of remote business there, but most of it -- the power professional business needs to be administered in school. So we really won't see that come back until probably the fourth quarter of this year. Hopefully, New York City will be at full capacity. Certainly, we believe they will. We don't know that for sure, but we believe that all kids will be in schools. As far as nursing and therapy are concerned in New York, they're both doing very, very well. If we flip over to Hawaii, it's kind of a similar situation. We're just not at full capacity for therapy, RBTs or nursing for that matter because they're just not -- every kid is not in school every day. But we're doing well, much better than we were doing in Q2 and Q3.

Right. And when you look at the pipeline of new business, would this be for the next school year? Or is it -- it will take a bit longer than that?

It's a little bit of both. So we've landed a few new school contracts with some schools that we're encouraged about. And we're doing some revenue with them right now, but we don't really think that those contracts will realize their full potential until the fourth quarter. We're always hesitant to talk about schools outside of the big 3 because we know from experience that we've won school contracts with big school districts before and then it doesn't necessarily materialize into meaningful revenue, which is why I might appear to be a little bit cagey on it, but we have won new schools contracts with about half a dozen schools -- any which -- any of which can be meaningfully additive. I mean certainly we don't expect any of them to approach the level of the big 3 schools, but they all could be decent revenue gains starting with the 2021, 2022 school year.

Okay. And then the last one on healthcare. I was wondering about how the non-education business is trending?

Well, it's trending up, for sure. We've -- what we've seen, and this shouldn't be a big surprise to anyone is an explosive demand for nursing. And we've been really increasing our nursing and also our telemedicine as well. So that has increased quite a bit. It's very difficult to find nurses right now, right? So that's a double-edged sword for us. It's good for us because a lot of people are looking for nurses, and they need help. The flip side to that is it's hard to get them. But we're seeing a nice pickup there.

I was just thinking of the commentary that I'm sure you guys have seen as well from the 2 publicly held nurse staffing companies is, it's more about the pricing and the bill rates and the pay rates?

Yes, it's a challenge for sure. But what we've been doing is we're really not seeing much of a pickup in our travel business. And as you know, we go direct to the big travel companies. So we supply to the travel companies. And we're still doing travel nursing. But the main pickup in our nursing business has not been with the travel companies. It's been with direct. And a lot of it has been influenced by COVID because we're doing a lot of COVID testing. We're doing a little bit of vaccination work. And we've been able to find the nurses. I'm not going to say it's easy because it's not. But we've been able to find them, and we've been able to get good enough margins on that work that we're excited about it. And -- so we've been doing a lot of -- we've been partnering with some companies that do COVID testing, and that's had a meaningful impact on our revenue.

Okay. Let me ask one more and then I'll get in the queue again. On engineering, the sequential decline was a bit more than -- certainly, I was thinking about -- was there just some hiccups? I mean, do you think you -- is that business probably going to come back pretty quickly to at least a $16 million run rate?

I wouldn't -- yes. I mean, I wouldn't say it's necessarily going to come back quickly, but we'll see an uptick in Q1 as compared to Q4. And what my expectation is, we'll see a little sequential pickup each quarter. A lot of it will depend on how well we realize our pipeline, particularly in our industrial group. We know we're going to see an uptick in our aerospace revenues. And then as far as our energy services, we'll see, that market is a little tough right now, but we're very optimistic that it will pick up. We're just not exactly sure -- we're not real confident on the timing of that.

Our next question will come from Alex Rygiel of B. Riley. Alex, your line is now open.

Could you provide us with a little bit more financial detail as it relates to first quarter? I know, obviously, the quarter is over, but you probably haven't finalized all of the numbers. But a little bit more guidance, the sequential improvement that you're expecting?

Yes. I mean, certainly, we expect higher EBITDA in the first quarter than in the fourth quarter. As you know, we generally don't give a lot of guidance. Obviously, we have a pretty good idea what the quarter is going to look like. But just as a precedence matter, we don't want to give guidance -- give too much guidance. But certainly, we expect some modest sequential improvement going from Q4 to Q1. Modest to maybe a little bit higher than that, but we'll just -- we'll talk to you in May.

And then as it relates to working capital needs, obviously, you're expecting revenues to ramp. So I suspect you'll have some working capital needs increase. Can you talk about that as it relates to your liquidity level?

Yes. Certainly, we expect our debt to rise from where it is -- where it ended in the fourth quarter. And as we've experienced and if you look at our balance sheet, we often have sort of quarterly things that happen that will cause our debt to rise or decrease below what I consider normalized levels. So we're expecting a pretty big uptick in our debt in the first quarter, but we still expect strong cash flow for the year, even with good cash flow, even with the rise in the revenue. Obviously, that's -- that puts -- that statement considers the revenue within some sort of range, right? If our revenue was to really scatter out, we might see more working capital needs, but that would be great. As far as liquidity, we're in good shape. We're -- we have no issues in terms of our borrowing capacity.

Alright. At this time, there are no further questions in queue. [Operator Instructions] Alright, that concludes our Q&A, it looks like.

Thank you for attending RCM's fourth quarter conference call. We look forward to our next update in May.

All right. Ladies and gentlemen, this does officially conclude your call. You may now disconnect your lines, and thank you again.