Q3 2021 R C M Technologies Inc Earnings Call

Good morning, and thank you for joining US. This is Kevin Miller, Chief Financial Officer of RCM technologies, I am joined today by Brad Vesey Rcm's Executive Chairman our presentation. In this call will contain forward looking statements and 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 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 report.

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 BZ Executive Chairman to provide an overview of <unk> operating performance during the quarter.

Thanks, Kevin.

Our third quarter results demonstrate tangible progress RCM technologies has made over the past year.

Our team's commitment to the process and execution of our vision is translating into tangible results.

Compared to this point last year, the company's business momentum and financial results have shown stark improvement.

I will provide more detail regarding these improvements at any moment.

Over the past several quarters, we have discussed our steps to ensure these results continue to scale consistently.

We have honed our processes and refine our focus we.

We have strengthened our balance sheet and made the necessary investments into our people.

Since the foundation is now in place.

I've also delineated our vision of becoming a world class services organization and we remain steadfast in our commitment to ensure this becomes a reality.

That said, we understand this journey requires a detailed roadmap capable of making us taking us from where we stand today to where we want to be in the future.

The road map to becoming a world class services organization of the future requires us to embrace and help facilitate the digital transformation underway across every facet of the economy.

That requires us to revamp our digital architecture to ensure scalability.

It also requires RCM to modernize the way, we deliver solutions to our clients in the future.

They need help and accelerating their digital adoption curve and our mission is to assist them in getting there.

In essence, the winters are BW services in the future will be the ones, who aggressively product ties their solutions today.

We are already beginning to see our efforts bear fruit.

As we've mentioned in the past leveraging technology as a necessary ingredient to fulfilling our vision.

We are prioritizing a range of strategic investments to prevent the company's digital architecture.

From our back end systems to our front end business development efforts technology is augmenting our process every step of the way.

As the economy as digital transformation accelerates, we are building out our <unk> architecture to help to facilitate a digital first go to market strategy in the future.

In doing so we are beginning to capture a wealth of data that enables us to extract more data driven insights that we can integrate into our approach to the benefit of our clients.

The revamping of our digital presence as one example, but we are also carrying that with investments in building out our CRM capabilities and modernization of our ERP system. So.

The efforts to modernize how we work internally also had the additional benefit of helping our clients innovate externally.

For example, our engineering groups internal approach to project management has caught the attention of some of our largest clients.

Our customers' effort to modernize their process has led to our group's three before do you project management tools to gain traction and helping facilitate large scale projects at our Seattle, most prominent utility clients.

Another example comes from our aerospace units.

They are developing a patented solution for the technical publications group to help our clients digitize their mission critical documentation and a sustainable and scalable way.

I'll have more to share on our digital transformation efforts in the future.

In the meantime, our team continues to execute against our strategic roadmap I.

I am pleased to share that they have put in another solid performance during the third quarter.

I will provide several highlights before Kevin dives deeper into the numbers.

Our Q3 results were solid across the board.

Team did a tremendous job and in particular, our health care group performed exceptionally well during the quarter.

HCS segment for the third quarter increased 118% year over year as the demand for health care professionals for our most significant clients continues to grow.

I am also optimistic about the future as the group's momentum carries into Q4, 2021 with demands for school districts for testing and nursing personnel remaining robust.

The company's profitability was also strong for the third quarter.

The company generated adjusted EBITDA of $1.9 million during Q3, representing an increase of about 780% year over year.

We ended Q3 with a favorable net debt position of 5.1 billion, primarily as a result of proceeds from the sale of our Canadian assets.

As we enter our strongest seasonal quarter, we anticipate a material uptick in net debt towards the high end of our target range of one to two times EBITDA.

As we looked in the fourth quarter and position ourselves for 2022, we remain optimistic that our operational momentum will continue.

Okay.

In closing our mission to become a world class services organization requires us to modernize our solutions for a digital first world.

We have outlined the strategic roadmap that will help accelerate our organization and our clients digital transformation efforts currently underway.

I look forward to sharing more updates on our progress in the future.

Now I will turn the call back to Kevin to discuss the Q3 2021 financial results in more detail.

Thank you Brad regarding our consolidated results revenue grew over $13 9 million on a year over year basis or about 44% as compared to Q3 2020, while decreasing sequentially by $1 9 million after removing the impact from the Canada power systems.

Stitcher and summer school closings heavily impact our consolidated results in Q3, the sequential decline in revenue and sharply improved as compared to most years as well.

Brad mentioned adjusted EBITDA Q3, 2021 was $1 9 million an increase of about 780% year over year over 0.2 million in Q3 2020, our adjusted EBITDA in Q3, 2021 even exceeded our adjusted EBITDA in Q3 2019.

$1 1 million by about 70%.

Its profit expanded to $12 1 million or 38% increase over Q3, 2020, and a 15% increase over Q3 2019 sequentially SG&A expense increased by about 327, Okay. As we continue to invest in our team our systems and reward our employees for strong.

Our performance year to date.

Thank you our health care Division as Brad mentioned.

Group generated revenue of $19 6 million in Q3, 2021, which represents 118% increase year over year. The division's revenues seasonally decreased by $3 3 million compared to $22 9 million generated in Q, <unk>, Q2, 2021 exceeding expectations and our seasonally lowest quarter.

Every unit in health care performed well during the quarter and the demand for health care professionals can see continues to be strong.

We're optimistic about the group's Q4, 'twenty one outlook as we close out the year alright emission.

Another strong quarter with revenue and profitability, both up sequentially and year over year on revenue, we generated $9 3 million in Q3 2021 compared to $7 5 million in Q3 of 2020.

And.

$9 1 million in Q2 2021.

The group continues to perform well and we are making investments in sales and marketing to lay the groundwork for continued momentum in 2022, we expect a solid finish to close out the year in 2021 lastly, turning to our engineering Division, we generated revenue of 16.0 a million in Q3 2021.

Net of Canada power systems growing sequentially.

Sequentially and year over year.

The aerospace continues to perform well in the backlog and pipeline are shaping up well as we head into 2022 with several new client wins energy services has maintained its momentum with the unit's backlog and pipeline and continuing to improve we are optimistic about the engineering divisions outlook heading into the fourth quarter.

And into fiscal 2022. This concludes our prepared remarks at this time, we will open the call for questions.

Okay, ladies and gentlemen, if you would like to ask a question.

One on your telephone keypad again to ask a question star one on your telephone keypad.

And I'll just give it a couple of moments for the kit about.

Okay.

Our first question is coming from Bill Sutherland.

Your line is open.

Thank you.

Kevin and Brad.

Good morning.

Good morning so.

Health care.

Was a huge upside relative.

My expectations, you know given the normal.

Our quarterly seasonality.

Maybe you can talk about China.

Kind of how you Buck that trend a little more detail.

Sure.

Basically it was really just strength across all of our businesses.

The schools came back strong.

Starting in October and September and.

And non school revenue was strong we had.

A lot of.

Testing revenue.

And in various places from Covid testing.

Just the demand right now for health care professionals, which is probably not a big surprise to anyone is incredibly strong right.

And we're just seeing we're seeing strength across our entire group.

Even our H I am group had a great quarter.

Thanks, John.

Yes, the one thing I'd add to that Bill really quick as always.

I always believe that Theres, an intangible asset in health care and that we're the largest provider of health care professionals to school systems here in the U S and what happens is ultimately that synergy effectively I believe feeds on itself, especially during times of you know distress like we saw here with the pandemic. So.

We believe that we are the go to player in that space.

The largest and well ultimately.

We benefited from that.

So yeah.

Hugh you had folks coming back to school I understand the year over year here because you know.

It was a it was so disrupted last year, just as far as school attendance.

And.

But I guess big.

Big upside was the non school revenue or where you're just doing more services at the within the school contracts as well.

Yeah.

Okay.

And I think you've added several contracts year to date correct.

School, we have.

Okay, Yes.

So we have more schools straw.

Stronger participation in our core schools and our non school revenue.

Is performing very well also.

And last really across the entire group.

Yeah and then.

To what degree do you see it in your rates as far as the revenue growth as opposed to volumes.

<unk>.

Well, it's both we've seen some you know some uptick in some rates in certain instances.

Some of the rates are prescribed by contract, but there have been some instances, where we've been able to.

To get some some better rates.

In order to make sure that we are.

Get the people that they need.

Okay.

And then last.

Give us a little bit of a picture on the engineering pipeline.

I know that.

You did you you didn't expect it to be too different than second quarter this quarter.

But how do you how do you see it going forward. Thanks.

Well, we think you know we think we should see a meaningful uptick.

Going forward.

You know as you know our engineering group can be a little bit lumpy, just because we tend to to win very big contracts.

So you know.

While we May see you know a little bit of a lump in a quarter or maybe a little bit of a downturn, we expect a steady upward trend.

You know in in.

And our engineering group on a go forward basis at least for the next couple of quarters.

Yeah.

Which group I mean is it is it pretty good across the groups or is there I think it's pretty good across the groups you know certainly in aerospace. We've we've won some new contracts that we think.

You know should perform well, sometimes you don't know until you actually implement them, but you know what.

We're optimistic about all three groups frankly.

Great great.

And then Kevin the engineering revenue number or two Q.

How much.

And therefore, how much was Canadian power.

Are you asking for Q3 or Q2.

I'm actually.

Well Keith.

Are you restating for the comps or you're just going to keep them well, we haven't restated revenues, but I can certainly give you the revenue.

We closed the Canada sale on July and all of this will be in our Q, which will be filed by the end of today.

You have to pick up the call that's fine that's fine I'll just wait for the queue.

Okay. That's it for me guys great job on the quarter.

Thank you.

Our next question is coming from Alex Sorry, Joe.

Alex Your line is open.

Good morning. This is actually min Cho for Alex This morning, congratulations on a good quarter.

A couple of questions here.

Kevin can you just break out the percentage of healthcare revenues from schools.

Let's see.

Yeah.

In Q3.

We had about a $9 5 million of that was.

It was non school on about $10 one was from school.

Yeah.

Okay.

So in terms of the margins and I understand that it looks like you have strong momentum kind of across all of your segments here.

But are the margins pretty sustainable at these levels, assuming that the volumes kind of stay or improve from these levels.

Alright are you.

Which which grew up are you talking about.

Totally clear right now, but in general as well.

Yeah, I think the margins the margins in the short term are certainly sustainable in health care.

What's going to happen you know.

Three quarters from now a year from now it's hard it's hard to really predict that but certainly in the short term we feel like the margins are very sustainable where they are right now.

You might see some some some variation obviously, but we feel like.

Right now in this environment, we will be able to produce some strong gross margins in health care like on a go forward basis.

Excellent.

And I know that you did you were awarded some new school contracts in 2021 have you determined you know some of those staffing need going into 2022 and maybe potential.

Potential impacts to 2022 should we see a significant increase in our health care revenue just from the non school business.

We expect.

Strong revenue in Q4 and Q1.

In 2022, very strong revenue in health care.

Cross schools and non schools and frankly, we don't have any reason to believe that that debt.

After the next couple of quarters, where we have some where we have more visibility visibility.

There's no reason for us not to expect that to continue.

We're excited about that.

Revenue generating capability for our health care business for sure.

Alright.

And then just moving onto the engineering I know you talked about aerospace a lot I was just curious.

Kind of what potential impacts are from the infrastructure Bill, especially when it comes to your energy transmission distribution renewable segment can you talk a little bit about progress that you're making there and.

Any potential impact.

Yeah, No we think that there is upside.

You know both in our T&D business as well as our industrial business.

No.

Ultimately how that trickles in.

Directly from the bill to be determined, but probably more importantly, what happens is overall uplift in spend in that space. So when you have the shoring up of funds like that it provides more confidence to utilities to start to open up the spec it's with respect to their capex.

Budgets, so we've certainly seen an uptick.

Activity and working for the numbers to improve going forward.

Excellent and I know.

I know your life Sciences business has been very strong for you can you talk a little bit about the labor issues. There if you're seeing any are continuing to see them and just is this an opportunity for acquisitions to add to life Sciences services in head count here.

Yeah.

Yeah generally speaking on the acquisition front, we tend to be a little bit more opportunistic I think historically, if you look at our approach.

Small bolt ons or you know are there acquisition targets or teams of very talented individuals.

That we can add to our platform that help them build their business.

It's funny.

You know all of our businesses are very analogous to the example financial services, where you have.

A fund manager that might be throwing up 25% a year for 567 years, but he still has $50 million.

Then suddenly gets a seed from named Brett Investor 24 months later, it's at $2 billion.

I think that that dynamic in our space is very I'm very I'm very analogous and it's exciting.

As a result, we haven't had to look at any major acquisitions to grow the business.

We believe our platform brings a lot.

The table.

Both ultra for the shareholders and all the stakeholders that are see them. So the ability to grow capital efficiently is probably one of the more you know attractive features to our business model.

The second question with regard to the tightness of the labor markets.

Labor markets are tight but ultimately this is our business and this is what we do.

No.

Been around for close to about 40 years.

You know our domain knowledge is very deep in the spaces in which we operate and as you can imagine.

Have a database and a rolodex and that worked it builds up and ultimately our intangible assets.

Assets within those end markets in the form of reputation that allows you to attract clients and be able to tap into talent and a much more efficient way that can unlock value for the client.

Again in the enterprise so yeah, we're quite optimistic.

Mr about how business should be up across across the board.

Alright, and then my final question is for Kevin just regarding SG&A, that's as obviously.

Brian talked about your digital kind of focus going forward. It sounds like SG&A, probably stay around this level as a percentage of revenue I mean, it's definitely up over the last time over the last two quarters.

But just if you can talk about Oh, well, certainly you know where we're going to be looking to drive that down as a percentage of revenue.

On a go forward basis.

But I think you know we.

We expect a healthy uptick in revenue. So I think you should expect a healthy uptick in SG&A as well.

You know frankly, there, there's there's an and.

Really across all of our businesses, but especially health care health care he's incredibly busy.

Sourcing candidates for all of our clients and frankly, you know the more recruiters and then more recruiting infrastructure, we can hire the better.

If I could add $1 billion in recruiters tomorrow, we would and obviously, it's not that simple, but we would do it right. So.

You should expect us to continue to try and.

Drive our productivity up in SG&A as a percentage of percentage of revenue down well, while driving our SG&A up.

And in terms of just hard dollars.

Alright, and actually I have one more question just Kevin in terms of your margins in the engineering segment was that.

Just again kind of mix issues in aerospace if you can just talk a little bit to that please yeah I feel like the frankly, the the margins in our engineering space for the last couple of quarters, frankly have been has been disappointing and theres a bunch of reasons for that.

But I I, certainly expect them to improve on a go forward basis.

You know the aerospace.

Big Aerospace contract is one reason, but that's actually good because we're we're you know our operating margins on that contract or are great.

But you know we've had some other areas where we are.

<unk> had some oh no. We're we haven't managed to bench time as well as we'd like.

And a few other reasons, but.

We've got our arms around it and we expect improvement in that area.

Starting in Q4 frankly.

Okay, and when you talked about improvement you mean sequential improvement from current sequential improvement, yes, we were just under 23%.

We should see some pretty I expect to see some pretty significantly before on that.

Excellent great. Thank you that does it for me today.

Our next question is coming from Frank Kelly. Thank you. Your line is now.

Yeah, Hi, good morning.

Good morning, Kevin Good morning, Brad.

And yeah, great operational results.

Even when considering the the Canada sale adjustment real kudos out to your to your operational had bill and Mike and Mark and the engineering engineering guys.

With.

Just a just a question with the with Great you know being in a great cash position.

And having significant.

And clean a R.

And and our line of credit down to two what I guess based on total to an insignificant level.

And our business running obviously and apparently on all fours with operational momentum continuing.

Is the board considering rewarding its shareholders for hanging in there in the past few years through our through the through the thick of it all if you will.

Yeah.

Third question, Frank look generally speaking no.

We think we've probably been.

One of the more shareholder friendly microcapsule with respect to distribution of capital.

Back to shareholders on now as you know.

You noticed that you benefited from.

Many of the showrooms that have hung in there frankly have a negative cost basis.

From where they bought.

Now when you start to take into account the distributions that we're on a tax deferred basis that we made.

In addition to that as you see we have bought back a material amount.

Oh the stock are outstanding.

So as long as we can continue to improve the fundamentals of the business and operate it better and build it.

In a capital efficient manner with fewer shares outstanding.

We again, where we're quite optimistic for the outlook.

So generally speaking we're agnostic with respect to how we allocate capital whether it be acquisition buyback or a return directly to shareholders in the form of dividend.

We've done all of the above and they'll continue to be our approach.

Right do we see do we see anything specifically in the next Q.

With potentially a a reward to directly to the shareholders.

Uh huh.

That's something we discuss at least quarterly.

With the board and Kevin and I, frankly, all almost all weekly basis.

I don't think it would be reasonable to expect it.

Hey, a dividend per.

Her side also the one thing to keep in mind, Frank as you know for the first time in a long time, we're enjoying the benefits of having a clean balance sheet.

A lot of Optionality that comes with that.

So you know.

Well with respect to it.

Distribution in the form of dividend I'd say, it's unlikely over the short term.

You know, we're very much focused on opportunities to allocate capital to reward shareholders over the long term on two of the largest of which.

You were speaking with on the call. This morning.

Understood understood I appreciate that the candidate and.

It's certainly you know belies, our expectation said shareholders.

Thank you and thank you for having great great Greg for your support too.

Okay.

Okay.

It doesn't look like there.

Any more questions.

Yeah.

Okay.

Yeah.

Thank you for attending Rcm's third quarter conference call. We look forward toward next update in 2022.

Okay.

This concludes your call you may now disconnect.