Q3 2022 R C M Technologies Inc Earnings Call

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Talent herders proven recruitment processes can help scale, both in person and remote working environments for companies across the globe.

We are excited about the growth opportunities talent her presents to our clients and staff.

Over the near term the focus remains on the seamless integration of the talent her team.

We are integrating the recruiting groups. In addition to gaining leverage from our acquired offshore sourced sourcing staff.

And we have already identified several new opportunities through our joint sales efforts.

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

On the engineering front I'm excited to announce the Grand opening of our innovation center at thermal kinetics.

Implementation of this state of the art facility compliments, our team's existing equipment capabilities and enables our engineers to develop new processes alongside our customers.

For many process applications the ability to run a small scale version of the system yields the required empirical data to design and de risk the process successfully.

This go to market approach will be essential as we scale up initiatives across select emerging technologies in which we have the necessary expertise, including sustainable aviation fuels.

With an estimated $40 billion to $50 billion and Saf investment plan through 2025, and a further one trillion dollars required by 2040.

We believe there will be robust demand for identifying ways to scale supply cost effectively.

Our test center in house, a strategic role to play and it will be a powerful tool as we position ourselves to become the go to partner for clot clients looking to scale emerging process technologies in the future.

Pivoting to our health care services group the team continues to excel amidst the ever changing health care landscape.

The industry's issues are structural and will not be solved over the near term.

With 19 has caused many health care professionals in the U S to reconsider their plants for example in a recent survey by Mackenzie, 29% of our ends in the U S said they were likely to leave their current role in direct patient care.

Many respondents indicated they were considering leaving the workforce entirely.

The bottom line.

The U S health sector is facing a substantial talent shortfall with several studies estimate that by 2025, there may be a supply demand imbalance of 200 to 450000 nurses.

We have the expertise to help close this gap for our clients.

It will require a combination of innovation and robust execution that comes from decades of service are committed to this end market.

Thankfully these are two of our CMS healthcare's greatest attributes.

We believe our skin health care will play an important role in addressing the structural deficiency most.

Most prominently in our core education end market, where our experience and scale is unrivaled.

Our team is leveraging technology to take a more analytical data driven approach to resource allocation.

This focus has enabled us to engage with our clients more strategically by providing tailored holistic solutions. According to their needs as opposed to the non scalable practices of yesteryear that focused on placing individuals on an AD hoc basis.

We are confident this model will lead to a more more sustained value creation for our customers and a more defensible moat for RCM.

Finally, I'd like to take a minute to express appreciation to our shareholders on behalf of RCM and its employees.

I've spent nearly my entire career, helping publically traded companies realizing realize our potential.

I cannot recall, a more supportive constructively engaged group.

I know, it's a substantial portion of you our long term shareholders more than one third of which our current and prior RCN employees.

Your support is one of many latent assets at RCM.

Your commitment has allowed us to retire over 25% of the company's shares outstanding since the summer of 'twenty 'twenty, while investing heavily in the company's future.

We are committed to further rewarding your support with a scalable platform and clean balance sheet to compound value to all stakeholders for years to come.

In closing as our clients grapple with the realities of scaling their businesses and talent start increasingly technology driven world, our expanding suite of cross functional capabilities and technical expertise have physician RCM as the de facto platform of choice when searching for solutions IRA.

I remain optimistic the companies about the company's future as we have many exciting initiatives underway.

I will now turn the call back to Kevin to discuss the Q3 2022 financial results in more detail.

Thank you Brad regarding our consolidated results revenue for the third quarter was $58 2 million growing by $12 7 million on a year on year over year basis. Adjusted EBITDA. In Q3, 2022 was $4 8 million, representing an approximately $3 million increase on a year.

Over year basis, RCM generated gross profit of $17 4 million during the quarter, a 42% year over year increase turning to our health care segment. The group generated revenue of $28 million in Q3, 2022, which represents a 43% increase year over year.

The team continues to make great progress within the K 12 market and has expanded its footprint with the onboarding of several new accounts the opportunities across behavioral health and special education remain robust and the team is positioned to take advantage turning to our life Sciences and information technology segment as Brian .

<unk> mentioned the team's integration efforts regarding the talent Herner acquisition are going very well and the execution across each of the remaining practice groups has not missed a beat.

In terms of revenue, we generated $9 2 million in Q2, 2022, which is essentially flat with Q3 'twenty one.

From a profitability standpoint, the group's growth gross margin profile increased by 200 basis points as a team transitioned the business model to more leverage a well managed service contract profile.

Finally regarding our engineering segment after adjusting for the sale of our Canada power systems office in Q3, 'twenty, one our engineering Q3, 'twenty two revenues of $20 9 million grew by 31% as compared to adjusted Q3, 'twenty, one engineering revenue of $16 million.

The performance was broad based across each of the divisions and the team is doing an excellent job of expanding into adjacent service offerings.

Average each unit's diverse skill sets as we migrate through the fourth quarter. We remain confident that we will finish the year strong and enter 2023 and stride. We are in a strong position financially to the opportunistic across each of our segments and we are excited about 2023 as our teams continue.

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

Okay.

All right, ladies and gentlemen at this time if you have a question. Please press star one on your telephone keypad again that star one on your telephone keypad.

And first up it looks like we have bill Sutherland of Benchmark Company. Your line is now open.

Hello Bill.

Hey, good morning, guys a.

Couple of questions on health care.

What was the mix between education.

And.

No.

I should have that in front of me, but I don't so.

For you as you are why you are looking for Brad I was thinking about your comment about healthcare and leveraging technology to the clients can you give us a little color on what's what's involved there.

Yeah. So the first wave of our investment is going to be focused upon driving productivity of our recruitment resources.

As you've probably read Bill I know you follow the industry pretty closely.

There is no shortage of needs out there really it's just a matter of.

Making sure we're able to connect.

Connect the dots between the resources that are out there and the needs that exist.

Inevitably, we think that driving productivity of our recruitment resources.

Don't worry a lot quite a bit of upside for us.

So bill just to answer your first question our school revenue was $16 $6 million and our non school revenue was $10 four.

And the seasonality played out about as you expected Kevin pretty much yes.

Okay. The gross margin.

Was that a mix benefit with.

It was strong.

It's a combination of things its mix it's it's.

You know Rob of robust market.

You know our robust demand.

You know it's it's.

If you sort of look out to the future I would tell you that Q3 is probably a little bit.

Now on the high side.

Compared to what we would probably expect to see in the near term but.

Not substantially higher than what we.

We expect to see.

Okay, and then I guess last Brad as you.

Look at your opportunities for capital deployment.

Do you do you rank order or is it.

Hmm.

Tell me, how you're thinking about that thanks.

Well I would normally refer to our stock response, but.

When you look at the earnings power of the business to where the stock is trading.

Probably guess.

So what is towards the top of the rank order it but you know.

Look I mean, there's oh.

Pretty judicious in our approach so far and we'll continue to do so you know.

The good news is as we have.

Multiple teams now we have a very high level of confidence in.

On our side to put capital behind.

So you know we're at a point, where there's a there isn't a shortage of opportunities for which for us to benchmark returns again to deploy capital so where ultimately it ends up whether it be in the form of.

Organic investment bolt on acquisitions or.

Share buybacks.

You know again.

This is something that we review regularly.

And can change a.

Very quickly.

But where.

In a good spot with our what we believe is a hell.

Healthy earnings power, a clean balance sheet and again, a very talented group of individuals to get behind.

Actually <unk> did you guys provide any detail on talent herder in terms of the financial impact.

We have not.

There was an 8-K filing on it.

Alright, Thanks, guys appreciate it.

Oh right definitely we have Alex Rygiel of B Riley. Your line is now open.

Alex.

Good morning, guys very nice quarter.

Follow up following up on that Helen I heard your question I did notice in the.

8-K that you paid I think around $4 million in cash from that acquisition can you talk a little bit about maybe what the revenue contribution could be.

If not maybe talk about what your traditional acquisition purchase multiples generally are targeted in a range of.

So if if if you want to talk about multiples I would say somewhere between four times and eight times is it typical range for us.

You know when we do deals if someone's getting to eight X, it's probably because they are performing really well.

Sure.

During the earn out period, so we're happy to pay eight times.

If we can because that just means that they've delivered outstanding performance.

You know we focus on companies that we think have.

Sort of a low floor in terms of performance post closing, but also.

Potentially have a some good synergies and we can really drive a lot of growth.

And in the case of Telenor is it's a really good fit for us in terms of what we're seeing in the market.

Mapping that against the outstanding team that we acquired.

And when you think about talent or can you talk a little bit about sort of the revenue growth expectations that you or opportunity that you see over the next couple of years.

And what the margin profile of that business is compared to yours.

Well the margin profile is quite high you know you're probably looking at like a 30% operating margin on that business, which is pretty typical in the <unk> space.

So it certainly will be accretive to our margins.

But this is something.

We're small players in the Rps business to date.

But we have tremendous aspirations in terms of being a major player in that space.

We think the team that we brought on has the capability to really.

You know <unk>.

Combined with RCM resources in our sales team and everything that we bring to the table. We believe we can become a fairly prominent player in that space.

Over time.

That's great and then Brad you mentioned in the health care space and several new strategic accounts can you expand upon that a bit.

Yeah, So I would think of them as being in our core education end market.

Really as we continue to diversify that base than most.

Most importantly, as you know there are accounts that we think that you know in aggregate are certainly accretive over the near term.

Our opportunity to grow materially.

Where they are today.

So it really doesn't capture 12 initiative is really starting to gain its footing and we're really starting to build our presence throughout the country.

I would say Alex if you compare in our school business to say three or four years ago, we have tripled the number of clients easily.

Today.

And we feel like.

We have just a lot of momentum to add a lot more.

In addition to the bricks and mortar schools, we're also making some pretty good inroads with some virtual some large virtual school systems as well, which is really exciting because we can service those schools from anywhere in the country.

We're not restricted to finding a regional talent, where it where the schools are we can we can you.

You now have somebody in Idaho, providing services for virtual school system.

Sure Yeah.

So we're really excited about expanding that and we think that that portion of the business is still a little small today, but it.

From our perspective, it has a huge potential to grow really fast.

And then lastly.

The revenue in the health care business was up 42% year over year.

What dynamics are at play that would either increase or decrease that number in the fourth quarter.

In terms of the fourth fourth quarter versus the third quarter.

Quarter, this year versus fourth quarter of last year.

Sure well the major dynamic is the demand is still off the charts I mean, the demand for our services is fantastic right.

We we.

We have a lot more school clients. This.

This year than we did last year, we have deeper penetration into some of our non school clients. We've added some some new school clients.

Obviously, the transition of Covid from pandemic to endemic what will have a little bit of a headwind for the fourth quarter compared to the fourth quarter of last year.

But you know everything else is doing fantastic I mean, we're just.

We're crushing just about every area in health care.

I'd say, the only impediment to continuing to grow the health care.

And obviously, we're not just focused on the fourth quarter were focused on 2023 and 2020 for I would say the biggest headwind is obviously getting the people right. It's an incredibly competitive market to find the people.

But we are our health care.

<unk> group is just performing exceptionally well with regard to signing people for our clients, we will probably never be able to find enough right.

Because we could.

We can pretty much place every quality.

Provided that we find but they're doing they're doing a great job.

Very helpful. Thank you very much.

All right next up in queue, we have Frank Kelly, a private investor. Your line is now open.

Good morning, gentlemen.

What a great quarter.

Compliments to the entire team that pulled that together.

I haven't I have a couple of questions, one Brad Oh, well actually start out with that.

Thank you Brad for acknowledging the long term significant shareholders that are out there that are kind of hanging on and growing with the company and being patient with that.

The second I know.

We Brad you had discussed a little bit about capital expenditure and whatnot. The capital program you talked about organic investment we talked about.

Buybacks.

But what what was.

Obviously missing was the addressing of a of rewarding our shareholders with some sort of a.

Return.

Is that is that in the mix was.

Noted is missing in your.

In your response earlier.

Yeah no.

Third question Frank.

Look I mean kind of having bought back 25% of the company at this point I think you know to the extent that we do introduce a dividend one day, it's reoccurring.

And we're able to continue to grow EBITDA and shrink share count. The good news is as the dividends are likely to be much bigger when you get it so.

As long as we continue to see opportunities with the return profile that we see.

And we continue to generate extraordinary returns on capital.

I think I mentioned earlier I think we're in that 50% range at this point.

You know Frank historically in mind.

Uh huh.

Investment career anytime I found teams that we're able to put up numbers like that I wanted them to keep the capital.

And potentially add to it.

So.

Though we are pretty active with respect to retiring shares.

Yeah, a dividend in the very near future.

On the dashboard.

Look you know that could always change.

And again, we talk about it regularly.

Great Yeah, I, just noticed that I guess come December it's been five years.

Since theres been actually any direct return, obviously buybacks do it do affect the price, but an actual return to the shareholders. So if we could just.

You should keep that in mind that would be that'd be great and it sounds like youre doing that.

Kevin I guess on that on the financial side.

Looking at our SG&A.

Q over Q and it's not much on different for a year over year I see a 21% increase in SG&A.

Versus a revenue increase of 27%. So I just in any at least in the queue and into some degree in the year over year, the SG&A seems to be growing significantly.

Higher.

As a percentage than.

And would be expected for that kind of revenue growth.

Sure.

You you left out the EBITDA growth so when we have to throw that into the mix.

No I think I think we're just looking at a pure SG&A.

I know Theres a lot buried in there and not only that but in the older. Q. There was some higher interest numbers right for interest payments, which are run through there as well that or not.

Certainly at the same at the same number that are in the current Q. So sure well the interest down because because the debt is down but interest is not included in SG&A, but anyway. I was I was just need on you a little bit.

Yeah.

I think I can do that.

But any way no look the bottom line for US Frank is and you know as well is.

We're incredibly mindful of every dollar that we spend on SG&A.

However, I.

I will say this we when we look across our businesses.

All of them, we see incredible opportunities.

Every single business is in a market that is exploding.

So we are happy.

To continue to wisely invest.

SG&A, because we know that.

And every decision that we make obviously.

On the SG&A front is not going to turn out.

The way, we expect it too much but most of them do and most of them have.

And we need to continue to invest in SG&A frankly.

To keep growing the company.

We're not interested in being a $30 million EBITDA company for very long.

And I wanted to get this to a 100 million in EBITDA and we're not going to do that without increasing SG&A.

Simply we have to increase SG&A.

To make more money and to drive more EBITDA and to drive the stock price now we have to do it wisely, but we absolutely have to invest in SG&A.

To grow the company and I think if if if.

Look at this company historically, that's an area, where we've made some mistakes where we we've been we've been hesitant to make investments and you know and part of our performance in the past is a result of not investing in SG&A. So we're going to just to give you.

Really easily easy example to understand.

And you know this company really well, but obviously other people are listening.

We will hire every single recruiter.

Qualified recruitment that we can find period. If you can give me was 50 recruiters.

I could hire tomorrow.

Period.

And I'm not going to worry about the SG&A increase because I know it.

If I hear 50 recruiters 40 of them are going to work out really really well and we're going to get a outstanding return on this where your recruiters.

And when you look out to the investment front, we're continuing looking about how we can drive efficiencies in the business through technology, well, that's going to take short term investment to get a long term return and that's something we're going to continue to do but you know what.

But but but be aware that we are very mindful of every dollar that we spend.

Yeah, well I think certainly encouraging to hear I guess one of the concerns. They had was the growth rate of SG&A in this past quarter.

Versus the revenue growth rate because there.

I'd like to thank yes, yes, we're investing but but you know at 'twenty, one versus 'twenty 727, Rab, maybe close to 28 Rab increase in the SG&A at 21, four but you're also.

Yeah, you you really ought to be looking at it on a year to date basis, because Q3 SG&A has a lot of fixed cost in it and we have a lot of seasonal variability in the revenue and gross profit in Q3 as you know so if you're going to if you're going to go through that exercise and look at the growth in SG&A compared.

The growth in revenue you've got it you got to do it on a year over year basis.

Alright.

I've got a I might disagree.

Disagree with with both of you.

Kevin what was the operating margin increase year over year.

600 basis points 700 basis points, yes, so Frank as long as we can increase operating margin adequate anywhere near that.

Yeah, we're going to pour on SG&A.

And I think youre going to why CFO com.

Okay.

Yeah, all right because we do see to Kevin's point, 54% increase year over year on revenue and a 33% increase in our in the SG&A.

So I get and sometimes obviously you have to drill down into some specifics of the SG&A.

And what's in there, but it's something certainly that are you know as long as it's being monitored historically.

You know, we need to we need to do that.

Right.

I appreciate you know definitely I appreciate the feedback and you've always been a great thought partner on a couple of topics as being one of them try it. Thank you.

Great. Thank you gentlemen, again, great quarter and certainly.

Without the seasonality anomaly in the third quarter.

Looking at our hopefully looking at in the out absolutely outstanding.

<unk>.

Okay.

Alright, I just wanted to remind participants they can join the queue by pressing star one on your telephone keypad.

Again that star one on your telephone keypad for any questions.

At this time I'm seeing no further questions in queue.

Thank you for attending Rcm's third quarter Conference call. We look forward to our next update in 2023.

All right, ladies and gentlemen, it looks like that concludes your call. You may now disconnect your lines and thank you again for joining us today.