Q1 2021 R C M Technologies Inc Earnings Call

Yeah.

[music].

Good morning, and thank you for joining US This is Kevin Miller, Chief Financial Officer of RCM technologies.

And I'm joined today by Brian DZ RCM as executive Chairman.

<unk> on this call will contain forward looking statements.

<unk> and contained and the forward looking statements is based on our beliefs estimates and assumptions and information currently available to us and these matters and materially change and 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 follow with the SEC as well as our press releases that we issue from time to time.

I will now turn the call over to Brad and easy executive Chairman to provide an overview of RCM operating performance story and core.

Thanks, Kevin.

Our progress towards becoming a world class services organization continues and.

We understood early on debt to debt.

And now we have a solid foundation from which we could build years into the future.

With that and in mind, we have been laser focused on laying the internal groundwork to support the next phase of the company's life cycle.

And I am pleased to announce that our first quarter results demonstrate some of the progress we have made thus far.

Three core pillars underpin the RCM Foundation and each will help support our next phase of growth.

The first pillar with a sound balance sheet and affords us the ability to play both defense and offense.

The first.

Quarter is a great example.

With our strong operating performance during the first quarter, we not only maintained full compliance with our covenants.

But we were also able to invest and our future.

Given the continued growth we experienced sequentially.

Most of the increase and debt during the quarter was related to investments and working capital as we ramp new accounts.

This increase includes investing and human capital to ensure we would be able to support rcm's growth and the future.

The second pillar and our foundation centers on our commitment and the process great processes create the framework to generate great results that are consistent and scalable.

The key words be a consistent and scalable.

At RCM.

We're adopting a structured approach to <unk>.

Incorporate more rigor and to driving not only the overall level of debt.

Business, but how efficiently we can execute once we have won the business and our health care Division and an excellent case and point.

Despite the continued impact of COVID-19 on our school clients we.

We are still delivering outstanding results.

For reference and Q1, 2020 COVID-19 impacted only the last three weeks of the quarter.

And Q1 2021.

Many of the schools and clients, we service remain closed to in person learning for the quarter yet.

Despite this headwind.

<unk> first quarter revenue only declined by $1 million on a year over year basis, while growth sequentially by over 20%.

But most importantly, although there was a 1 million dollar headwind compared to Q1 of 2020. The division was able to grow gross profit by over $650000 over the same timeframe.

As schools reopen and students return to the classroom, where coffin RCM healthcare division has the infrastructure and processes in place to scale the business much more efficiently and the future.

The third pillar and our foundation is our focus.

There are three key elements and focus on the right and markets, where we can win.

Focus on how we deliver value to our clients and finally focus on the people delivering our results.

It's our job to put them and the best positioned to win.

Our I T Division offers a great example of how becoming much more disciplined and our focus translates into tangible results for our shareholders.

First we have refined our focus and changed our go to market strategy.

We are pivoting, primarily from staffing to manage service and solution capabilities.

During the quarter, we secured multiple engagements at several strategic accounts.

Second.

The way and that.

And how we deliver value for our clients is changing as well.

Before the pandemic over 80% of our work was delivered on site at the client's location.

And it's mitigated or dictated the resource pool RCM could draw for them.

However, today this ratio has flipped 180 degrees to only 20% being on site.

We do not see this changing anytime soon.

The benefit to RCM is that it expands our market pool and enhances how we can deliver value to our clients Tech.

And together, our renewed focus on where and how we deliver value to our clients has resulted in our I T group growing its revenue base, both year over year and sequentially during the first quarter of 2021.

More importantly, our disciplined focus has resulted in an improved margin profile as well.

For reference during the first quarter, our I T group increased gross margin by close to 120 basis points compared to the 2020 run rate.

And in absolute dollars the division generated the highest gross profit of any quarter in the last several years.

With the fundamental pillars to our foundation in place I'm confident we have the necessary infrastructure resource base and focus that will enable us to scale and support the next phase of growth for the RCM platform.

I look forward to share more about updates regarding our broader vision for RCM and the roadmap to get there and the future.

Now I will turn the call back to Kevin to discuss the Q1, 2021 and financial results in more detail.

Thank you Brad regarding our consolidated results I am pleased with our team's performance during the first quarter of 2021 revenue grew sequentially by over $3 3 million compared to Q4, 'twenty and despite having a full quarter's impact of COVID-19, and Q1 'twenty one.

Compared to only three weeks in Q1, 2020 RCM revenue base remained resilient and essentially flat on a year over year basis adjusted EBITDA in Q1 'twenty.

2021 of $1 8 million increased 194% from 060 point $6 million and the first quarter of 2020, SG&A expense decreased by $1 2 million or about 12% from $10 two.

And 2 million to 9.0.

Turning to our health care Division. Despite the continued impact of COVID-19 on our school clients current revenue of $21 1 million and the first quarter of 2021 only declined by about $1 1 million versus $22 2 million and Q1 and 2020.

We experienced another healthy sequential increase of 14% and Q1, 2021 as compared to $8 6 million in Q4 of 2020, we continue to see incremental gains in our school revenue Q1 of 2021 was $13 3 million Q.

Q4 of 2020 was $10 3 million Q3 of 2020 was $3 8 million.

Which compared to Q.

Q3 of 2019 was about $10 4 million as many of you know we have considerable seasonality in Q3, and then Q2 of 2020 was only $5 7 million non school revenue was seven 8 million and the first quarter of 2021 as compared to $4 7 million and the first quarter.

2020 are non school revenue was eight 3 million and the fourth quarter of 2020 as mentioned our I T Division had a great quarter with revenue and profitability, both up sequentially and year over here on revenue, we generated $8 9 million and the first quarter of 'twenty one.

One compared to $8 7 million and the first quarter of 2020, and $8 2 million in the fourth quarter of 2020.

Since the early <unk>.

Decrease and the third quarter of 2020, <unk> quarterly revenue run rate has increased by close to 20% and just two quarters.

Momentum is broad based for example, and our I T group. Our primary clients are beginning to see and increase in demand for their products translate into increased support, allowing us to secure more than 500, K and new business well and.

While introducing new application development techniques to this particular client. Another example is from our life Sciences practice as we reposition RCM will be addressing this.

Health and life Sciences changes in regulations are always a driver and with proposed changes and validation RCM is taking and eat voice and CSA computer systems assurance.

Other significant other significant changes include those and data protection or G. D. P. R and data integrity. We are already seeing request for these new service offerings and lastly, turning to our engineering Division.

We generated revenue of $14 5 million and the first quarter of 2021 growing both sequentially and on a year over year basis of note. This was the first quarter to exhibit year over year revenue growth. Since Q3 of 2018, we are cautiously optimistic that deferment and Prague.

<unk> related activity will turn around as we move into the second half of the year on our aerospace unit and seeing a strong backlog of work after receiving a 13 months engineering contract from a major defense prime contractor, but that brought in and the addition of over 80, new position starting in February of 'twenty or 'twenty one.

Pipeline of New engineering, and Tech pump opportunities continues to grow and we're seeing more opportunities as Oems recognize recognize the value and importance of RCM as a U S. One company and the security of the <unk>.

Provides and having your value chain onshore domestically.

In addition, RCM continues to expand its aftermarket specialty services to meet the growing demands for increased standardization and digital documentation.

Regarding our energy services unit, we continue to stay close to our customers and order to intimately understand their needs and this focus is paying off as we want a detailed design contract and received the first work release of a three plus year engineering engagement and we believe will culminate in over $8 million and revenue to build north.

America's largest underground substation.

Lastly, turning to our process and industrial unit.

Our patented process technologies and equipment fabrication and the ethanol market is supporting clients and more efficient processes and resulting in greater yields. This value proposition has resulted in us receiving several awards and the first quarter of 2021 for fuel ethanol plant upgrade projects.

Now and final contract negotiations and we expect these projects to kick off. This summer. We also have an impressive pipeline in place that can possibly turbocharged our finish to 2021 and our fiscal 2020 two.

Going forward, we look for improved performance and our engineering division and level of activity and our pipeline is improving this concludes our prepared remarks at this time, we will open the call for questions.

Yeah.

Okay.

If you would like to ask a question on star one on your telephone keypad again to ask a question sorry, one on your telephone keypad.

Okay.

Question comes from Dallas, and Southern England. Your line is open.

Thank you.

Oh, good morning, my bread and Kevin good.

Good morning, I wanted to just thanks for the details on the segments, Oh, Kevin and the Engineering group.

Are you when you when you talked about just most on on on the last part on the P&I.

Yeah.

Several awards on the ethanol upgrades types of projects.

Alright.

How should I think of or how should we think about the agra.

Aggregate impact of that in other words are these are these you know.

On size wise, just just in order of magnitude it.

It sounds like a lot of business potentially.

Yeah. Thanks for the question Bill in terms of magnitude projects could range materially on a from a several.

Several hundred thousand dollars up to multiple millions of dollars and what.

It's exciting about where we're at and that business just when you look at our pipeline and aggregate.

So and the potential is quite substantial and the downside and it's very project oriented so time it could be a challenge to gauge and however, we are at various stages of the process and multiple projects and so our confidence factor is increasing with respect to timing as we entered the second half.

Yeah.

Okay. Our next question comes on and Alex Cheadle, Alex Your line is on point.

Thank you and good morning, gentlemen, nice quarter.

Okay.

Yeah.

Kevin can you run back through what were those non school revenue numbers and our specialty health care businesses.

Yes sure hold on let me just we were at.

What's.

Seven 8 million in Q1 of 'twenty. One this this current quarter and eight three in Q4 of last year.

And we were a year over year, we were $4 $4 seven and Q1 of last year Q1 of 2020.

Yeah.

Okay, and it looks like and he has another question from Bill Sutherland.

Your line is open.

It looks like we're going to have to go one question at a time here and it's just going to follow up with engineering on the gross margin and the quarter just a little color because it came down quite significantly.

Yeah.

Yeah, Bill and that's primarily a function of mix as Kevin alluded to on our prepared remarks, we had a very material contract and the size and started to ramp up and the first quarter and will continue to ramp and the second.

And the contribution margin and as attractive of the business, but that day.

The gross margin.

And as dilutive on a consolidated basis.

Kevin you want to add to that.

Yeah, no, it's lower than our normal margins, but it's it's a sizeable contract that we won that was competitively bid. The important thing is it's very accretive to our contribution margin just to and.

Unfortunately dilutive to our gross margin, but it's a fantastic contract to add we're really excited about it.

Other than that you know.

And Theres, just the normal gyrations that you see from quarter to quarter.

Utilization is probably off a little bit and Q1.

In terms of where we'd like to see it. So those are the two factors.

But we expect to see some improvement on the gross margin going forward.

Yeah.

Okay.

I mean, my questions that you'd like to ask a question Paul storyline.

And Alex <unk> your.

Your line is open.

Thank you Kevin can you quantify what the year over year revenue decline was in the school business and in a normal operating environment, we expect all that to come back.

Sure well.

And just give you the school revenues.

You have them.

The school revenues and the first quarter of this year with $13 3 million.

And the fourth quarter of last year, they were 10 three.

If you look at the first quarter of last year, we were at $17 five and if you look at the fourth quarter.

2019, we were at 19.4.

So the fourth quarter of 2019 was our highest school revenue point.

When we were really peaking before we were impacted by COVID-19 and in Q1.

As you remain call May recall on early March of last year, all the schools shut down so in the first quarter of last year. I think we would have been we would have we would have beaten the fourth quarter of 2019, if it was not for COVID-19.

In terms of what the expectation should be.

Going forward.

I think.

You know if you.

Assume the same number of school days, which we don't have and Q2, we probably will be up and Q2.

But we do lose the month of June and Hawaii.

Because day close at the end of May and then they pick up again and.

Early August so in terms of school revenue in Q2.

Probably be somewhere around where we are in Q1 give or take a little bit.

And then as far as looking into Q4, which I'm sure and you're interested in it it's hard for us to really say.

Whether because we just don't know.

If the schools are going to be back to every Kid in school every day, but certainly we expect to continue to see significant progress and in the school revenue in Q4.

And we just don't know, how it's going to compare to sort of Q4s over the past at this point.

Yeah.

Okay, and those southern and when did your line is now open again.

Yeah.

Following up on that discussion on the schools Kevin.

Right.

If I could just interrupt you for a second if the operators listening.

Okay for these guys to ask multiple questions on on one run here.

So we don't we don't need to cut them off after one question. Please. Thank you. Okay go ahead bill.

Actually I think I just have one or two at this point.

Just just go for it.

[laughter], so the and.

Anything that is material developing and your pipeline for school expansions or additions as you look ahead.

Yeah.

We have a lot developing we've won several new contracts, you know, whether theyre going to be material or not remains to be seen.

We've won.

About probably half a dozen new school contracts that are starting you know either.

And of this year, which if you get into a school towards the end of the school year, you're typically not typically not adding a lot.

And you're sort of gearing up for the next school year.

But we've added about a half a dozen new schools.

In various states, but I can't tell you yet if theyre going to be material. You know certainly we don't expect them to be anywhere near the big three.

But you know on aggregate they could make an impact.

And and the reason why I hesitate to tell you. This is we often don't just don't know until we get in there and start trying to please people and and get orders, we've won contracts and that past with Big school districts. They just didn't turn out to be big contracts. So you know, we're we're we're always a little hesitant.

And to say Oh, well.

This particular stay on is going to be a big contracts and we just don't know, but we are excited that one the number of contracts that we've won I can tell you that we have not had it into a new school year with the number of new contracts debt that we've won this year.

And hopefully they'll turn out very well.

Great and and.

These.

And a typical positions on where more pure professionals.

They're they're they're across the board therapist.

None of them are pure power professionals, but we've won some nursing we've won some therapy.

Nursing and therapy, nothing and the pure power professional area right.

But we we like to win some of those as well.

Okay, and then last I just noticed you know.

The notice, but yeah, SG&A improved a lot and wondering.

Yes.

And what's behind that or what's sustainable.

Well, we we expect to grow the SG&A, just because we want to continue to invest and in sales and and hopefully you know as the as the year hopefully improves and you know we'll need to accrue more for for incentive compensation as well.

So what what's driving it is just that are hyper focused on getting.

Efficiency from our labor.

We made a lot of cuts last year.

And we brought some of that expense back, but we just haven't brought all of it back.

But what we do.

Continues we do expect to continue to invest so that we can continue to grow the top line and growth gross profit dollars, but we will remain.

Vigilant and focused and efficient.

Got it okay. That's it for me.

Thanks.

Okay and.

And that's like things on my questions and Mccann.

Yeah.

Thank you for attending our since first quarter conference call and we look forward to our next update in August.

Yeah.

Hi, everyone.

This concludes our call you may now disconnect.