Q4 2021 R C M Technologies Inc Earnings Call
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Good morning, and thank you for joining US This is Kevin Miller, Chief Financial Officer at RCM Technologies, I am joined today by 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 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 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 fourth quarter.
Thanks, Kevin.
Our fourth quarter results serve as a nice booked out into 2021.
As I reflect on our transformation plan dating back prior to the pandemic I'm proud of the team's execution.
Results speak for themselves broad based strength across each of our divisions.
Before we get into the numbers I want to reflect on the year and why we are even more optimistic about the future.
We entered 2021 with the foundational pillars in place to support Rcm's next wave of growth.
2020 was clearly a year of recovery.
We've refined our processes and focus upgraded our leadership ranks and were opportunistic in deploying capital driven by our improved balance sheet.
As a result, we entered 2021 and are positioned to capitalize on the foundation, we built and worked to 4% to five through the pandemic.
It was time to leverage the infrastructure that we had put in place.
It's a tangibly demonstrate all the progress we have made and how it translates into material bottom line results.
First our refined focus and commitment to process led to numerous improvements across our business.
Consistent fee and scalability are what we strive for and over the course of 2021, we took the next steps in getting there.
Our decision to sell Canadian power systems unit was the direct result of our desire to streamline our focus on the right end markets. The.
The right clients and the right solutions.
We believe simplifying our business will lead to greater consistency of focus.
We also took tangible steps to ensure we can scale. Our next wave of growth more productively and efficiently had been before.
We augmented our commitment to our processes with with.
With investments in new technology.
Our teams are upgrading our front end and back end systems that will translate.
RCM into driving not only more business, but doing so more profitably in the future.
For the primary phase of our modernization effort, including upgraded the company's CRM E. R M and marketing infrastructure will continue through 2022.
We are already starting to see results.
Furthermore, this process has provided further enhancement to our company culture from one that was content being more of a fast follower to one that strives to be an industry leader.
Constant innovation throughout the organization is essential to gain on the competition in today's dynamic environment.
Second our right sized balance sheet gave us the flexibility to play offense, both operationally and financially.
From an operational perspective, we leveraged this flexibility to reinvest in our people and upgrade our leadership ranks.
I've never felt more confident about the team we have assembled and believe we are positioned well to navigate the opportunities of the future.
Third.
We are clearly taking share in many of our end markets.
I do not remember a time, where we were able to displace as many incumbents as this year.
I believe the pandemic expose the deficiencies of our competition, leaving.
Leaving us in a position to capitalize as a result of significant investments made in enterprise, it's tailwind in <unk>.
Foster a culture with a maniac will focus on delivering first class solutions for our clients.
All of these efforts have translated into a step change in performance for RCM technologies.
I will share more highlights before Kevin dives deeper into the numbers.
As mentioned, our fourth quarter and 2021 results were strong across the board.
Revenue contributions from life Sciences, and information technology, healthcare and engineering, where all robust with each division demonstrating growth both on a year over year basis and sequentially.
In total our skim technologies increased revenue to $203 $9 million in 2021 of 36% increase above 2020 results.
Profitability also increased materially in 2021 with the company generating adjusted EBITDA of $11 1 million compared to $1 $1 million in 2020, and $8 $2 million in 2019.
Representing an increase of 944% and 35% respectively.
As we look to 2022 and beyond the future of RCM technologies has never been brighter.
Now I will highlight just a few secular trends that bode well for our business in the future.
The team the infrastructure and the strategic direction towards assist our clients in solving some of the most difficult problems facing society today.
Starting with the great talent shortage in many industries.
Are experiencing as of late.
This problem is one that cannot be solved overnight.
To illustrate the scale of this dilemma consider the following.
First core.
Core demographic trends are putting tremendous strain on our clients to source top talent as the baby Boomer generation drops out of the workforce.
This dynamic.
MC is compounded by the multi decade decline in birth rates seen across many developed economies and the reduction in both high skill and low scale integration.
These trends were all accelerated by the pandemic and exacerbating our labor labor shortages basically many companies today.
There just aren't many scalable solutions to backfill the declining working age population demographics spacing the workforce today.
Adding it all up here's the sobering math behind this new reality.
Since the start of the pandemic Labor force participation rate of workers, aged 55, and over has remained well below pre pandemic levels and is equated to approximately $2 million less workers today.
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The overwhelming majority of this age cohort are represented by baby Boomers, who are retiring from the workforce altogether.
Hypothetically natural population growth and immigration would be able to backfill and offset these loss workers.
But in reality, both are actually contributing to the shortage.
In 2021, the U S population grew just 1%.
Its lowest rate since the nation's founding with the working age population actually declining.
As it relates to integration there are about 2 million fewer working age immigrants.
There would have been pre pandemic trends continued.
The takeaway is clear as the labor market swings from abundance to scarcity.
Losses of sourcing securing and retaining talent for organizations is becoming a strategic asset of the highest priority.
That is where we come in.
At <unk>, we have the expertise and knowhow to help our clients excel in all three sources.
One example can be found in our life Sciences and information technology groups.
Our scalable talent solutions, and helping clients and mission critical industries to meet the demands of this quickly changing and dynamic labor market.
Our teams are innovating in the delivery of these services and an RPI model that is resonating with our client base.
We handle the talent sourcing and our recruitment efforts for our clients. So they can focus on providing value added products and services to their end customers.
The wide scale adoption of the RPM model represents a five $5 billion plus.
<unk> opportunity.
It is quickly gaining scheme with in a fast changing labor market, where demand for talent is outstripping supply.
This model is a win win for RCM and our partners as it represents a more holistic solution for the client and has enabled us to establish longer duration contracts with blue chip customers across health care pharma and life Sciences.
Not only are we helping our clients address the talent shortages of today, but we are also remaining focus on cultivating the next generation of talent Tomorrow.
This process starts and ends with assisting our clients to address the unique problems facing our youth today.
As we're all aware the country's social infrastructure was already under stress leading up to the pandemic.
What that stress that's the only exacerbated as our country exits from that.
The stress has been particularly acute for our youth.
From warning loss to declines in social emotional development, the direct and indirect impacts of the pandemic has had on children across the country is now becoming clear.
Here are a few statistics that highlight the overall magnitude of the problem.
For my wording loss perspective, the average child and grades first for sex are five months behind in math and four months behind in reading.
If unaddressed he's learning gaps will compound through time as many parents and schools are reluctant to hold back the entire cohort of children.
As Sheldon struggle in the classroom.
It is no surprise this has an impact on kids, social and emotional wellbeing.
Parents across the country are concerned for their child's mental health as they are seeing increased rates of anxiety and depression.
According to surveys 35% of parents said they were very or extremely concerned about their child's mental health.
Unfortunately, we are also seeing an absolute uptick from pre pandemic rates and children's anxiety depression, social withdrawal and self isolation to the tune of 5%, 6%, 8% and 7% respectively.
Meanwhile, the capacity to assess and test children for issues related to mental and behavioral health.
Klein by approximately 6% compared to 2019.
These trends are clearly not sustainable.
That's why our health care team is leveraging their 40 plus years of experience and leading position in the education end market help solve what I believe might be one or at least talked about crises our country faces today.
The persistent development gap argued spaces as we recover from the pandemic.
We are helping parents and schools across the country on a variety of fronts to address the problems facing our youth today.
First our team has done an excellent job of keeping kids in school by scaling up their testing business by partnering with several of the largest testing companies in the country.
Second our therapy and behavioral health programs are thriving as we ensure schools and students have the necessary skilled support to help reverse the social emotional fallout, resulting from the pandemic.
Lastly, we are helping teachers in the classroom addressable, earning gaps by providing enhanced instructional and supplemental support through the expansion of our para educators and rpt's into the classroom.
Given the diversity of our solutions and capabilities, we are quickly becoming the strategic partner of choice for school districts across the country.
We facilitate students being in the classroom eight teachers and having the resources to improve students' educational outcomes and make certain districts have been necessary behavioral and supplemental support to ensure their student population thrive in the future.
Dovetailing the discussion about providing sustainable and scalable solutions for schools I also want to touch upon what we are planning, providing sustainable and scalable solutions regarding our nation's infrastructure.
Infrastructure and overall carbon footprint.
Within our engineering group, we are taking great strides to incorporate innovative solutions that can help our clients address both of these areas.
Our energy services group is playing its part as the U S embarks on a multi decade investment cycle upgrading and expanding the nation's electrical infrastructure.
Time is of the essence is the effects of this aging infrastructure are becoming more pronounced. Meanwhile, many of our clients are also making the transition to renewable sources of power at the same time, which also require their own interconnection to the grid.
To give our investors and listeners a better sense of the scale required to fix our nation's electric grid.
Let's first focus on issues hampering, our existing infrastructure and the level of investment needed to fix it.
First our electrical grid is less dependable than what it once was.
Large sustained outages are becoming more common for utilities across the country.
For reference the average utility customer experience over eight hours of power interruption in 2020.
More than double the amount in 2013, when the government began tracking this data.
The second factor is the overall age of the grid itself.
According to the American Society of Civil Engineers, roughly 70% transmission and distribution lines are well into the second half of their expected 50 year life spans.
This factor also compounds the first aging infrastructure also becomes less reliable over time.
However, this is only one part of the electrical grid story.
In parallel is the ongoing transformation of our existing generation capacity for carbon heavy carbon light renewables.
Utilities accelerate this transition to renewable sources of energy. It also drives a massive spending effort for T&D interconnection investments.
And Greg.
Given the location of these renewable projects it isn't as simple as shutting down a coal fired plant and building a utility scale solar project around the existing T&D infrastructure.
Most often utilities also have to build out entirely due T&D connect infrastructure.
This new generation capacity to the existing grid.
Given the combination of the nation's aging electrical infrastructure, the underinvestment in maintaining our existing grid and the shifting of generation capacity to meet any renewable generation targets. Our clients are embarking on a massive multi decade investment cycle to meet their objectives.
For context, although our clients have been spending approximately $50 billion per year on T&D maintenance and upgrades through the years. It is still not enough.
The society of Civil Engineers estimates that utilities across the country will face a cumulative investment.
Of $208 billion by 2029 based on current spending projections.
35% of the spending gap or $73 billion is comprised of T&D spending.
Ensuring the nation's electrical grid can scale sustainably and make the seamless transition to renewables is an area, where our energy services group can deliver tremendous value.
Our world class utility clients have come to expect it and they know our team can deliver.
We look forward to helping them perform this mission critical work in the years to come.
Related to the topic of renewables. It is also worth mentioning that our engineering group's diverse capabilities are also expanding to help clients and other industries reduce the carbon footprint more proactively.
Our process and industrial carbon capture initiatives are in pilot programs with customers that aimed to repurpose, our existing patent technology and process expertise to assist our innovative partners in addressing one of the most pressing problems of the 20 <unk> century climate change.
Carbon capture alone is a two trillion dollar market opportunity and we are at the forefront as we deploy our scalable distillation and evaporation processes to help capture and recycle carbon and a more sustainable way.
I look forward to sharing more of these developments in the future.
Finally, I would like to touch upon the strides we have made within our aerospace team.
The group has done a complete 180 over very short period of time and I believe this team is capable of growing materially and strategic significance to RCM.
First now more than ever aerospace and defense in particular, the need for National defense spending is coming into focus given recent world events.
Our clients are responding to changing political.
To changing geopolitical landscape accordingly.
Our team is here to help them scale as national defense budgets increase throughout the world.
For instance, Germany recently pledged to increase its defense spending budget to over 2% of GDP in the coming years for an annual increase of 20 billion euro per annum.
To translate this policy shift into actual defense spending, Germany and its first publicly stood firm major arms purchased since the announcement stated the country plans to purchase 35 F 35 fighter Jets from the U S to Adas military modernization effort over the next several years.
This is just one example of what we believe is a wholesale shift and national defense spending from nations across the world given the recent tragic events unfolding in eastern Europe .
I am confident our aerospace team can assist our clients in meeting the challenges of tomorrow.
Whether it is through our engineering solutions or our aftermarket business. Our aerospace team is aligned to the right end markets and has well established relationships with many of the U S defense Prime contractors.
In particular, our tech publications team has been doing a tremendous job in helping one of our largest clients modernize its suite of technical documentation manuals across much of its fleet that remains in service.
We have also been creative in assisting our clients and scaling up their sustainment and aftermarket businesses are.
Our vendor on premise program has been a tremendous success and helping the largest prime contractors meet today's labor challenges and a holistic and sustainable way.
Lastly, I'm also excited to share the inroads we have made into the nascent space ecosystem.
We have landed several new client logos over the past three quarters, and we expect big things from this practice.
As a reminder, we believe the spec space ecosystem, both commercial and defense will grow into a one trillion dollars annual market opportunity over the next 10 to 15 years.
Our mission is to be the partner of choice and providing value add solutions across our engineering aftermarket service groups.
I will share more details regarding our recent successes within the space industry on future calls.
In closing, whether it's addressing the talent shortage is driven by the great resignation we're here.
Investing in our education sector.
Upgrading our country's critical infrastructure are helping tackle one of the most pressing problems of our time and climate change Rcm's broad and robust solution set enable us to play a critical role in ensuring our partners are positioned well for the years ahead.
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 Q4 2021 financial results in more detail.
Thanks, Brian regarding our consolidated results revenue grew $19 4 million sequentially over Q3 dollars 21, and $23 8 million on a year over year basis compared to Q4 'twenty after removing the impacts on mind now exiting Canada power systems group, we grew by $27 million or 70.
1% as compared to Q4 'twenty.
It is worth reiterating the broad based strength in revenue contribution as we saw from each segment.
All meaningfully grew both sales and contribution operating profit sequentially and year over year gross profit expanded to $17 8 million or 46% increase from Q3, 21, and a 66% increase from Q4 'twenty adjusted EBITDA in Q4 'twenty.
One was $5 3 million representing east.
Essentially increase of 192%.
$4 6 million or 400% increase over Q4, 'twenty adjusted EBITDA or.
Our profitability metrics, all demonstrated material improvement and illustrating the significant operating leverage we have in our model. Despite the $2 5 million year over year increase in SG&A expense driven by the hiring of new staff and rewarding our employees for strong operational performance in 2021.
Turning to our healthcare segment group generated revenue of $34 eight.
In Q4, 'twenty, one, which represents an 87% increase on a year a year over year basis, and 77% increase sequentially performance within the health care segment was broad base, our life Sciences and information Technology segment also performed well with revenue and profitability.
Both up sequentially and year over year on revenue, we generated $11 9 million in Q4, 'twenty, one compared to $8 2 million in Q4, 'twenty and $9 3 million in Q3, 'twenty, one growing 46% versus prior year's performance and 27% sequentially the level of.
Client interest in our managed service solutions remains robust as the group's leadership team continues to execute well on their transition to a stickier revenue model.
Lastly, turning to our engineering segment, we generated revenue of $18 3 million in Q4, 'twenty, one growing both sequentially and year over year after removing the impact of Canada over a kind of a power systems group our revenue in Q3, 21, and Q4 'twenty was 16 point.
Zero million and $11 $2 million, respectively, growing 14% sequentially and by 63% year over year. The division also generated material improvement in its profitability metrics demonstrating the sizable increase in contribution operating income both sequentially and on a year over year.
At the unit level, the new additions to our aerospace team have hit the ground running and have made significant inroads transforming the business in 2021, we established commercial relationships with multiple new OEM clients, including making strong inroads into the burgeoning space ecosystem.
Look forward to sharing more about their progress with you as we move through 2022.
Our energy services team also performed well the units investments and his leadership team and systems are paying dividends as the group's business pipeline and overall client activity levels continued to develop lastly, our process and industrial unit performed well in 2021, and we are very encouraged by the level of business activity that we've seen.
Thus far in 2022.
Collectively as strong as our performance was in Q4 'twenty one we equally optimistic about the future of our company. We truly believe we are building something unique and special that is set to capitalize on the long term secular growth markets up tomorrow.
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 our first question is coming from Alex <unk> from B Riley Alex Your line is now open.
Thank you congratulations on a really strong quarter and year gentlemen.
Couple of quick questions here first can you quantify the share gain in some way within our specialty healthcare segment.
Hi, Alex.
Though we can't specifically quantify the share gain but I won't say just generally speaking is we believe we've taken share in all three businesses.
With very specific displacement of incumbents so.
There is certainly a bright spot but.
I wouldn't necessarily.
Limit the statement to health care.
And just to help us to sort of think about and model. The healthcare segment sort of going forward 12 months can we use the fourth quarter as a good baseline for you.
You know lets just say sort of like a 100% of activity level, everybody is back at work or risk back at school and.
That's kind of a normalized quarter and then layer on seasonality over the next four quarters.
Here on kind of future growth or genes is that how we should think about this most recent fourth quarter is that a good baseline.
So, though we don't give guidance what I will say is we certainly intend on growing the health care business literally a number of initiatives and programs in place.
That not only show promise, but frankly there.
The crystallizing yeah.
As we speak so.
I wouldn't necessarily point to this past quarter.
A static run rate.
So if that answers your question without giving guidance.
No that is helpful for sure.
And then.
Is there any chance you could update us on backlog or.
You sort of maybe talk about Tao.
Bid opportunities or.
Some sort of backlog measure that you look at it internally has maybe changed over the next 12 months and how that gives you good visibility into 2022.
Yeah.
The backlog is very strong.
Now activity has picked up markedly as we referenced in prior calls and all three of our engineering businesses.
You know that is converting to backlog and and again the <unk>.
Pipeline continues to refill. So ultimately we expect good things going forward from our engineering businesses.
Thank you very much.
Okay.
Our next question is coming from Bill Sutherland with benchmark company.
Your line is now open.
Thanks, Good morning, guys a tremendous job.
So I'm curious.
About what youre seeing in terms of pricing across your three segments, and maybe I'm thinking, particularly about healthcare realizing your focus is not like the.
Please go ahead with big travel nurse businesses, but whether as you look forward.
There isn't any rate normalization that you think could be occurring.
This year.
Yeah, No that's a good question Bill.
Thank you.
<unk> been tracking the space and I think.
There is a perception that some of the elevated rates of late.
Directly the result of Covid.
But I would we think about a little bit differently.
We simply respond to the environment.
That environment continues to be tight.
So our rates have been resilient.
We anticipate continuing to be a resilience.
Now that being said we.
We will react to the market but.
But we have not seen.
Any material changes.
Okay.
And then with all the opportunities on your plate.
How how how are you thinking about your capital deployment strategy for this year.
Okay.
Yeah, you know you've followed us for a while bill.
Tend to be pretty balanced in our approach as you know yeah.
Whether it's returning capital to shareholders via share buyback or dividend.
Or.
<unk> pursuing acquisitions.
I'll say, we're getting to a point where.
Our balance sheet gives us a great deal of flexibility moving forward.
You know, particularly in light of our EBITDA trajectory.
So you know what I'll say is as we take a lot of pride in.
Our capital allocation discipline and Archrock record we're.
We're going to continue to do that and and frankly, we look forward to being in a very enviable position with respect to our ability to react to opportunities.
That we frankly haven't been.
In the recent past so.
We're agnostic we are going to allocate capital.
You know the returns are so while rewarding shareholders along the way of course.
Okay.
So growth will not.
Finish.
The recent.
Return strategy for shareholders.
We are we are comfortable with our capital structure.
Again, we will we.
We will balance flexibility of it with returning capital to shareholders as we've done historically.
Okay. Good.
Kevin just a couple of number questions.
Notice the very strong gross margins in engineering and <unk> in quarter.
Should we think about those as sustainable.
Are there any special factors.
Yeah, No I think you definitely should look at them as sustainable I mean, as you know we were going to have variability from quarter to quarter right.
That's not going to change.
But I think when you look at the range like a range of where we were in the fourth quarter I think that's a pretty good range.
Okay.
If you look at that compared to some other quarters, but you know there's nothing going on in the fourth quarter margin.
That is unsustainable or one time event.
Mhm.
And then.
Okay, and then the effective tax rate was much lower than I am.
That business is there something in the quarter.
Yeah.
There's a few things going on there, but you know.
We had some decent.
Contribution from Serbia, we had a few adjustments in there as well.
When do you see the K, you'll see that the rate rack, but.
The tax rate is probably a little bit low in 2021 compared to where we're going to see it going forward.
You know like more like maybe 28%.
28% to 28 and a half is a safe number hopefully we can we can beat that.
Through through tax planning and whatnot, but but that's probably a decent.
Okay for your model.
Okay.
Well I'll follow up with you later few details, but thanks, gentlemen, great great job.
Uh huh.
Okay.
Two questions one.
One on your telephone keypad to ask a question. Please star one on your telephone keypad.
Yeah.
Yeah.
Okay. There are no more questions in queue.
Thank you for attending <unk> fourth quarter Conference call. We look forward toward next update in May.
Ladies and gentlemen, this concludes our call and you may now disconnect.