Q3 2020 R C M Technologies Inc Earnings Call

Good morning, everyone. This is where I'd be easy executive chairman of RCM technologies.

So the RCM Technologies' third quarter earnings call.

I'm joined today.

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 the call for questions cabin Ward.

Good morning, everyone.

A 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 FCC as well as our press releases that we issue from time to time. Thanks.

<unk>.

Thanks, Kevin.

Oh results continue to be impacted by cold chain.

However.

We believe that we have responded well and we will emerge from the crisis a better company.

In May we outlined the plan what are we but surgically cut non critical SGN expenses focus heavily on utilization nation and gross margin while at the same time, we're working to maximize cash flow from operations.

We continue to be pleased with the results on all three fronts.

Before discussing our segments I want to highlight a few areas of financial performance.

We generated $6 million in cash flow from operations in the third quarter of 2020.

We generated $22.8 billion in cash flow from operations during the second and third quarters of 2020 combined.

Since the end of 2019 robust cash flow from operations has allowed us to reduce our net debt by 62% and.

$32.9 million to $12.5 million.

The $12.5 million figure is after retiring the 2.2 million dollar note payable in the third quarter.

In the second quarter, we incurred the note payable to purchase 1.8 billion.

Treasury shares at an attractive price.

Our strong cash flow allowed us to renegotiate our financial covenants in our credit line with citizens bank during a challenging economic environment.

We are pleased with the flexibility the debt reduction and revise covenants afford RCM as we move forward.

Kroger continues to have the most significant impact on our health care stopping segment.

As you know our healthcare segment has historically derive much of its revenue from school systems.

Many school systems nationwide, including most of the company school clients.

Post poor in person instruction in March.

Some have reopened partially with accommodation nation in person and virtual classes.

Well, well some rubber band entirely virtual.

The company has limited information on when and in what manner. They will fully reopened her in person Lorne.

[noise] many schools are under pressure by employee unions to reduce or eliminate and person classes.

Consistent with our previous update.

And he announced plans remain subject to rapid changes.

Our school business has shown steady improvement, we do not anticipate the full recovery until our three major school clients fully Brazil in person classes.

As many of you know our three largest school clients, our New York City, Hawaii and Chicago.

Both New York and Hawaii are operating under a hybrid model.

Paul Chicago's entirely virtual.

I will share some numbers with you for context.

Revenue from school clients in the third quarter of 2020 was $3.9 million compared to $10.4 million in 2019.

Revenue from school clients year to date in 2020 was $27 million compared to $46 million in 2019.

Revenue from school clients in the fourth quarter of 29 chain was $19.4 million.

So difficult to estimate with a high degree of precision.

It's safe to assume our school revenue for the fourth quarter of 2020 will be less than half of what was delivered on a comparable basis since 2019.

As compared to health care until the demonstrated less impact on our engineering and <unk> segments.

So neither group has seen a material reduction in current assignments due to cover that.

Folks segments have predictably seeing slowing of new business inquiries and proposals.

Visibility continues to be challenging.

Our engineering segment saw a sequential increase in revenue of $1 million in the third quarter of 2020 compared to the second quarter of 2020.

Our sequential growth is primarily from our industrial processing and energy services groups, partially offset by a decrease in commercial aerospace revenue.

We expect revenue for the fourth quarter of 2020 to be materially in line with third quarter of 2020.

We have recently won several meaningful projects in both our transmission mission and distribution and our industrial processing groups.

We have also seen a nice uptick in backlog and pipeline for our Canadian power systems group.

We are also optimistic about these three groups for 2021.

Based on current backlog and pipeline. We believe these three groups will drive consolidated engineering revenue growth in 2021.

Our I.T. group performed relatively well in the third quarter.

The sequential decline in revenue was primarily driven by continued weakness at our HCM group, which we believe is the impact of code but.

The rest of our IP group performed real reasonably well.

Across the company, we continue to make progress optimizing our SJ dollars.

Sequentially. Our asked your expense has demonstrated the following trajectory.

The fourth quarter of 2019 $10.6 million in the first quarter of 2020.

$10.2 million for the second quarter of 20 $29 million.

And for the third quarter of 2000 $28.6 million.

We have gone to great efforts to reduce our SG today without impacting our long term growth plans.

Well surgically, reducing certain asked you to expenditures.

We have also made specific investments in business development.

We will continue to do both.

While we expect our SGN expense to rise again as a revenue climbs.

We believe that we have dramatically improved our operating leverage as we grow our top line.

We are very excited about our ability to drive better EBITDA margins as our revenue returns to more normal levels.

Finally, we.

We believe that we will deliver improved sequential performance in the fourth quarter of 2020 compared to the third quarter of 2020.

Despite all these headwinds.

We anticipate sequentially better results as we head into 2021.

No we do not have a clear lens to estimate the magnitude of the potential improvement.

Specialty for school clients.

We do want to reiterate a few thoughts from our last call.

We will continue to execute our Cobrand plan that we swiftly implemented early in the second quarter of 2020.

More specifically.

We'll continue to optimize the efficiency of our S.J. dollars.

We wont then focused on maximizing utilization and gross margin.

As revenue increases in the fluids <unk> in the fourth quarter, we will see our accounts receivable and net debt increase. However, we believe we can offset some of that natural growth today are through improving dsos.

In summary, we continue to face significant challenges as a result will depend on how.

However, we think we're positioned to handle these challenges and exit the pandemic stronger than me answered.

This concludes our prepared remarks at this time, we will open the call for questions.

<unk>.

Ladies and gentlemen, if youd like to ask a question. Please dial five one on your telephone keypad.

I'd like to ask a question. Please stop by one on your telephone keypad.

Hi, My first question will come from Andrew Gordon.

Hey, good morning, guys and thanks for taking my questions Uh Huh.

Congrats on now.

Navigating this difficult environment.

My biggest question for you is around the.

Well, you've called meaningful new contract wins, and I think this kind of.

Goal has been mentioned on calls for the last several quarters. So it's.

Encouraging to hear that they have been.

Finalized, but I don't know if we've ever been given very much color on it.

Relative.

Magnitude the word meaningful suggests it's meaningful so what does that how do you define that way what can you tell us.

That we don't know so far about these contract wins sure I could talk a little bit about that I mean as you generally as you know we generally don't.

Just Gus specific contract wins.

Yes. The biggest reason for that is a lot of our clients just don't want us to.

So we have to be pretty careful about you know discussing specific wins and specific projects.

Rich when we win something that we consider material.

And the.

The client allows us to announce it.

Or if we feel like we've won something that's a little bit unique and interesting and something we really want the world to know about and the client approves it.

We will sometimes announced contracts, but we're pretty careful about you know announcing tucuman right Kishore.

I guess I'm asking you to define the materiality threshold sure well I don't have a you know a concrete answer for you I can just tell you that we feel like our backlog.

Is improved over this time this year I would not say that it is.

You know a much higher than where it was last year, where I think that we're pretty excited is we have some pretty nice sized projects.

Our pipeline several that are quite large that we think have a good probability of.

Hitting next year or so and when we talk about contracts and backlog were typically talking about our engineering group, because that's where we have.

A big projects that were sometimes can take you know.

Six nine.

36 months to get it from the time, we start talking about the client to to actually closing it.

So we have some pretty nice projects heading into next year.

And we believe that the current run rate we're on right now about $15 million of quarters is where we'll be.

Early next year, but what I can tell you is that assuming you know a few of these contracts. If we think of a pretty high but probability of hitting I think we could we could start to see a much better run rate on a quarterly basis sometime next year.

You know that that's all I'm prepared to discuss at this time, you know like I really can't give you sort of exactly how much is on our pipeline and all that we have worked well and I guess.

Got it okay, I I'm trying to I understand that there are confidentiality.

Obligations you have but.

But also you know for the for your Investor base when you.

Refer to ongoing wins or things in your pipeline, we have to track them and.

As I recall, you know what was in your pipeline as of a couple of quarters ago is that calcium chloride plant in Michigan and then that was.

By my.

I mean, it's public record that I believe that that's all continuing to be on track.

And I don't know when I believe I believe you commented at the beginning of 21, so you're saying the $50 million quarterly run rate is something we should continue to expect into next year I guess does that include.

Benefit from your participation in the design or whatever whatever aspects you're controlling that process is that include a benefit from that because that was I believe portrayed as a large project as well yeah I get that there is a pretty large project right. Now we think it's going to be you know assuming.

Assuming it still hasn't closed which is kind of a business where in sometimes these projects take a lot longer than we think.

Leave that project is going to close.

It's about you know, maybe 6 million or so of which a good portion of that would you recognize next year, if we win it.

When I talk about a 15 million dollar run rate that's comprised of.

You know a certain amount of that is backlog projects that we book that were.

99% sure are going to finished because sometimes they do get delayed or sometimes they get stopped even when we sign a contract up.

And a portion of that is you know like a weighted probability.

That project is in our forecast for next year, but.

But if it comes in at a 100% as opposed to say you know, 80% you know that that in theory should should boost our revenue for next year, you know above where our run rate is right now.

That's helpful. Yes. So you know that that project has not closed.

We believe it has a very good chance of CLO.

Closing a bit.

Between now and hopefully maybe the end of the year or early next year, but well see that's a project we've been working on for a couple of years.

Thank you, ladies and gentlemen, if youd like to ask a question, though star one on your telephone keypad. Our next question will come from Bill Sutherland.

Good morning Bill.

Hey, Thanks, good morning, guys.

The health care front.

A couple of things can you talk about the three main customers I'm just in terms of.

How you're performing.

And ER and each you know whether it's the hybrid or all virtual sure <unk>, New York and Hawaii are both you know under hybrid models right now.

You know and it's different in different schools, even know.

There may be some sort of announced format.

When these when these schools announced or formats that sort of a general guideline, but individual schools may or may not be following that and then the other thing is that even if if if kids are able to go to school two or three days a week.

Parents have the option of having their kids go 100% virtual so if our kids are harperson virtual you how that impacts our revenue in addition to having a hybrid model right. So those two are hybrid.

And Chicago right now is fully virtual Dave.

Made some announcements if they'd like to go to a hybrid sometime in in November but we're.

We're we're pretty skeptical that that's going to happen between now and the entity here, but that's just our own speculation.

And as far as what you you guys rate are able to do in this in this situation I mean, I see that the revenues.

For the quarter were 3.9.

Like what what portion of that was just accomplished by telehealth for you all.

A pretty small percentage of that bill no.

No we're not we're not doing a ton of tele health.

We think that that could potentially be a very big.

Offering for us in the future and we're working on refining that offering and.

In fact, we recently hired a new sales person to to sell that and we've never had a dedicated tele health salesperson for so that's an area that we're clearly focused on for future growth because we think it's a good space to be in now, but we think it's going to be you know we think that spaces.

Going to have a lot of legs, even when schools are back in session five days a week, but theres.

Not even to convert can you know convert.

To some degree your current contracts you know to just watch so yes. It is but recall that you know therapy is probably about 15% of our total school business.

Roughly so you know it's it's it's the smallest of the three if I, if I put rvps and pairing the same but and our professionals in the same bucket and then if we compare that to nursing and power Slash Army Ts therapy is the smallest one but its still meaningful.

And we love that we love that work and you know and we're really really good at it.

And how are you.

No I think I lost the call now.

I know you're still on bill.

Are you talking Kevin I am can you hear me.

[laughter].

All right well I can't hear.

Huh.

<unk>.

Okay, we have no more questions at cheap.

No more questions.

Alright, Thank you for attending or assumes third quarter conference call. We look forward to our next update 2021.

This concludes your call you may now disconnect.