Q2 2021 R C M Technologies Inc Earnings Call

Good morning, and thank you for joining the RCM technologies second quarter Conference call. This is Kevin Miller, Chief Financial Officer.

Joining today.

Brad Vesey Rcm's executive Chairman 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. These matters may materially change in the future. Many of these beliefs estimates and assumptions.

Our 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.

I will now turn the call over to Brad Vesey Executive Chairman to provide an overview of our CMS operating performance during the quarter.

Thanks, Kevin.

Our second quarter results continued the strong momentum we established as we exited 2020 and entered 2021.

Across each of our divisions revenue profitability and overall business activity increased sequentially.

And many reported material improvement in year over year performance.

As discussed on our first quarter call, we are investing in human capital and infrastructure to support our next phase of growth.

But in order to truly capitalize we need to not only optimize for the RCM that exists today, but also position the company for success well into the future.

This requires direction and a clear vision.

The broader mission for RCM is simple to grow into a world class services organization.

One that utilizes an innovative approach to solve our clients' most pressing problems leverages cutting edge technology to deliver enhanced solutions and anchors to our client first culture to ensure our customers scale sustainably into the future.

But to turn this vision into reality, we must leverage and build upon the solid foundation that is now in place.

Our strong balance sheet.

The structured approach and how we plan to scale our business and.

And having the right focus.

All three are critical and each one is playing its part in helping us get closer to our broader vision.

Securing our vision requires an innovative approach to engaging with clients and this requires creative thinking.

Our balance sheet is the strongest it has been in nearly a decade and we are leveraging our financial strength to make strategic investments in our leadership team across the board.

Our vision requires us to be viewed as thought leaders in each of our end markets.

There are two key additions to the senior ranks in particular I'm excited to highlight for you today.

Starting with our executive Vice President of RCM Aerospace, Tennessee OCA.

Ciena brings over 30 years of experience in both the commercial and military aerospace markets.

Asleep Ciena was the president of a large aerospace services Company Bottler America, Inc.

Under his leadership Butler grew its modest aerospace presence to a nine figure book of business.

Ciena was instrumental in developing our strategic vision to build the company and cultivating long term relationships with numerous Oems.

I have enjoyed tracking chinas career from afar.

I'm exhilarated to have her as a member of what I believe to be an elite stable industry veterans committed to submitting rcm's position as a professional services powerhouse focused on mission critical end markets.

The second New addition to our leadership team at RCM as Peter Grossman.

Peter is joining us as senior Vice President of energy services.

Peter has deep expertise in the energy transmission market spanning over 25 years in various manners management positions at Siemens.

During his time at Siemens Peter has worked around the globe, where he led the high voltage Gis technology effort.

Theater is internationally renowned for his experience in Gis.

And that has hit the ground running helping RCN and build on its position as the authority in what is likely to be a multi decade build out of the power grid.

Having oversaw a significant turnaround of RCM interrupted by the pandemic.

Getting to round out our leadership with some of the top executives and their respective verticals is truly special demand.

Our objective is ambitious.

It is well underway and every employee of RCM is committed to working tirelessly towards our shared vision of the future.

Okay.

As stated leveraging technology is also a necessary ingredient to pause.

Certainly our vision.

Our commitment to optimizing our approach has resulted in RCM, making a range of strategic investments to revamp the company's digital architecture and technology focused solutions.

For example, our engineering groups have both revamped their digital presence and we are in the process of updating our same corporate as we speak.

This digital transformation will enable us to apply more rigor and data to our sales funnel engage our customers more efficiently and deliver higher value solutions that incorporate the latest technology.

I encourage you to visit the new Rep web presence for our engineering divisions at Www Dot RCM Engineering group Dot Com and Www Dot RCM group Dot com respectively.

Lastly.

Our vision also requires RCM to stay ahead of the curve regarding our clients' needs.

Not only does this require a client centric culture, but it also requires us to evolve from an on time and under budget mindset to one of anticipation.

Put simply.

Our future success depends upon our ability to anticipate the next wave of solutions that will help our clients scale.

But to do so.

We must be in lockstep with our customers and deeply understanding their needs, which requires focus and our commitment to focusing on the right end markets. The right clients and the right business units is a significant reason as to why we sold our Canadian power systems unit.

Given our long history in the Canadian nuclear market. It was not an easy decision, but the business was no longer strategic to the future of RCM.

So as we work to turn our strategic roadmap for RCM into reality.

We also know we can't lose sight of the day to day tactical execution and servicing our customers.

And on that front I'm encouraged with the team's second quarter performance and I want to share several highlights before Kevin dives deeper into the numbers.

First our Q2 results were strong across the board.

Health care and engineering, all performed well during the quarter.

The team continues to execute and our commitment to the process is now turning into tangible results.

The performance of our engineering segment.

Which was a laggard coming out of the downturn is worth noting in more detail.

Engineering segment revenue for the second quarter increased 18, 5% sequentially and 26% year over year with the main driver of the group's improved performance being our energy services Division.

Also of note the group's backlog and pipeline strengthened during the first half of the year.

Consistent with our remarks on our last call, we anticipate improved performance going forward.

We are particularly excited about the activity we are seeing from one of them from some of our major utility clients on the renewables front and look forward to sharing more updates as we head into the second half of 2021 and beyond.

I'm also pleased with the profitability and cash flow generation exhibit exhibited during the quarter.

The company's adjusted EBITDA increased 27, 5% sequentially and year over year increased by $2.8 million to $2.3 million from a loss of $5 million.

We generated $15.3 million in cash flow from operations during the quarter, despite making substantive investments in working capital as revenue growth accelerated.

Our net debt now stands at $8.3 million, a 61% decrease from Q1, 2021's balance up $21.4 million.

As previously alluded substantial improvement to our balance sheet was a near term strategic imperative as it affords us the ability to be opportunistic on the capital allocation front as we transition towards an offensive mindset.

As we look to the third quarter and beyond we are closely monitoring developments related to the COVID-19 and its variants.

Despite the near term risks and outbreak poses to the business. We remain cautiously optimistic that our operational momentum will continue as we head into the second half of the year.

In closing our mission is to become a world class services organization inextricably linked to the success of our clients.

We do not shy away from that state that we embrace it.

We have laid the necessary foundation crafted division and have assembled an excellent team that will turn this vision into reality.

We remain excited about RCM as long term prospects and I look forward to sharing more updates regarding our progress in the future.

Now I will turn the call back to Kevin to discuss the Q2.2021 financial results in more detail.

Yeah.

Thank you Brad regarding our consolidated results revenue grew sequentially by over $3.3 million compared to Q1, 'twenty, one and $16.3 million year over year.

Brian mentioned adjusted EBITDA Q2, 'twenty, one was $2.3 million, an increase of 27, 5% sequentially and a $2.8 million increase year over year gross profit expanded to $1$2.3 million a 44, 3% increase from Q2 'twenty S. G.

<unk> expense increased by approximately $1 million year over year as we continued to invest in our team systems and digital footprint now.

Now turning to our health care Division the group generated $22.9 million in Q2 dollars 21, which represents an eight 5% increase sequentially on a year over year basis division's revenue increased by 115%.

Care to $10.3 million generated in Q2, 'twenty strength was broad based and the division has secured several new school contracts. We are optimistic about the group's outlook heading into the second half of the year.

Alrighty and life Sciences segment had another solid quarter with revenue and profitability up sequentially and year over year.

On revenue, we generated $9.1 million in Q2, 'twenty, one compared to $7.9 million in Q2, 'twenty and $8.9 million in Q1 'twenty. One the group continues to perform well as we expand our partnerships across select key markets and remain encouraged about the level of active.

We see from each of our practice areas heading into the second half of the year.

Lastly, turning to our engineering Division as Brad mentioned, we generated revenue of $16.9 million in Q2, 'twenty, one growing both sequentially and year over year. Our aerospace segment continues to perform well and we are pleased with the continued strength in activity, we see in your backlog and pipeline and the.

Services continues to build momentum as we enter the back half of the year and we are excited about some of the developments regarding our electric utility clients.

Finally, our process and industrial industrial unit at several Big project wins in Q2 taken together, we are optimistic about the outlook for all three business units heading into the second half of the year.

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

Okay.

To ask a question star one on your telephone keypad.

To ask a question star one on your telephone keypad.

And I will make just a couple of moments for the Q2 balance.

Okay. It looks like our first question is coming from Alex.

Alex Your line is open.

Thank you good morning, gentlemen, and nice quarter.

Couple of quick questions.

You mentioned.

A lot of confidence with regards to the backlog today any more metrics you can add to that.

Uh huh.

Alex.

We generally don't give out those.

Specific figures, so I really can't give you any specific metrics.

No other than what Brad and I discussed in terms of the.

Backlog and pipeline.

Very strong.

So much stronger than what we've seen over the last 12 months.

And as it relates to health care.

Can you talk to us a little bit about your school nurses and maybe what sort of utilization rates you're at in the quarter. How we should think about that in the second half of the year.

Well.

We typically have very high utilization rates and our health care staffing group period, the only time we have.

Utilization rates in R&M.

Mid to upper Ninety's when school is out we do have some salaried.

Health care professionals.

Or on the payroll during that time, but other than that we're very very high we have very few.

Health care professionals that aren't being built when they're working so utilization is just is just generally very high all the time.

And we expect that to continue into next.

Next year.

I think as we look out to next year, maybe what you're really asking is you know where where are the risks in the big risk is.

Our school is going to be 100% open.

Yeah.

We're in 2019 pre COVID-19.

And the answer to that is we were optimistic about it but we won't really know until.

Until we are alive and in school in September.

September October November.

Based upon the contracts that you have in hand today, if schools were opened a 100% what would the revenue contribution look like on a quarterly basis.

I don't know the answer to that and it's it's it's not that.

I'm trying not to answer the question because we just don't we don't really know what our revenue is going to be.

In any quarter.

Obviously, we have we have an idea on that range, but we don't really know because from school year The school year.

The school needs and each client Ken can change a fair amount.

As we sit here today, I think we're pretty confident that.

What you've seen in the second quarter, we should see in the fourth quarter, perhaps a little bit better.

But we just don't know.

This is the bottom line, we won't know until we get into the school year.

We are excited we've added about six new contracts.

Yes.

We considered none of them will be like the big three.

But you know we.

We think a lot of them have some potential but we just don't know until we get into.

Getting the needs from the schools, which often we get at the 11th hour.

And we really won't have a feel for until we get into the fourth quarter.

Thank you very much.

Our next question is coming from.

Sir your line is open.

Thanks very much.

Hey, Brad Hey, Kevin Great background.

Alright.

So on the Canadian power system divestiture, well, we see continuing ops line going forward.

You will not you mean, a discontinued is that what you mean.

This continued yeah, yeah, Yeah, no you will not.

The rules on that.

Accounting changed a few years ago, it's much more stringent in terms of what's considered considered.

Discontinuing ops.

And this is not considered discontinued ops, because it's really not material, it's not a segment of its own it's not.

Something that.

He is.

Clearly not a segment as you know, it's part of our engineering group and it's really not.

<unk> business that we are discontinuing because we still do power generation work.

In the U S. We're just not going to be doing.

Our generation work with utilities in Canada.

Kevin did you shift any assets.

Canada to the U S.

Well, we didnt shift any.

Are you do you mean sale proceeds.

No no no I'm thinking about the professionals.

Yeah, no all of the all of the employees of Canada.

Power systems went to Framatome.

So we had approximately 80.

Consultants up there most of which were full time salaries consultants, but we also had some independents that moved over to Framatome.

That's essentially what they bought people in some contracts.

Yeah.

I'm sorry.

Should we think about on a go forward basis, some impact to the engineering where they'll.

There'll be an impact of course, so just to give you some some context.

That business unit in the second quarter, which is 100% in the quarter because of the date of the sale was July 31 was $2 one was $2.1 million.

And for the six months, we did 2.9.

Okay.

So that will give you an idea of.

The revenue that we will not have on a go forward basis gotcha.

Got you.

Hum.

And then.

Brad you mentioned.

The.

Hiring.

Peter Grossman the Gis expertise can you give us a little color on that opportunity for RCM.

Yes, certainly Gis is a technology.

That's been around for decades.

The way her way ahead of its cycle in terms of its rollout.

Throughout Europe, we believe that's going to be a technology that's going to.

Expand here domestically in the U S. In addition to continuing to have opportunity in Europe, So and we think that this could be.

Sure.

A meaningful contributor to our strategic path going forward, but again I think it's a good example of where our kind of thoughtful approach to differentiating ourselves in the marketplace as being the go to players in an in certain segments of the market.

Gotcha.

So I was.

Last thing I was thinking about given the.

Positive direction at the balance sheet is how would you guys kind of describe the M&A focused right now or maybe the.

The level of pipeline activity there.

Yeah, historically, we've been opportunistic in our approach to M&A and you know generally speaking our strategy is to look for a smaller engineering companies or even.

Even itr health care for that matter that we think we can bolt on and grow materially.

As opposed to transformation transformational type transactions.

Now that being said I wouldn't rule anything out but.

Suffice to say, we certainly take a lot of pride in our disciplined approach, but as far as where we're at today.

Theres nothing that were active actively evaluating of of substance.

Okay.

That's it for me thanks again.

Thanks Bill.

Okay.

It looks like there.

Thank you.

Your question. Please press star one.

On your telephone keypad again star one on your telephone keypad.

Yes.

Yeah.

Okay.

Mccarthy with any questions.

Thank you for attending Rcm's second quarter Conference call. We look forward to our next update in November.

Yeah.

Okay.

This concludes our call you may now disconnect.