Q4 2022 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. 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 infill.
<unk> 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 Exec.
<unk> chairman to provide an overview of our operating performance during the fourth quarter.
Thanks, Kevin.
Morning, everyone.
So it was 2022 on a high note. Despite the increased drumbeat of adverse economic prognostications over the last 12 months.
Also of note Q4 was our second consecutive quarter lapping a year over year pandemic related comparable period as society in labor markets transition to a more normalized paper environment.
Hi, Gary Grocers value creation remain a testament to the strength of Rcm's client first platform secular end markets and devoted employee base.
I will now reflect on progress made within each of our businesses.
In 2022 significant progress was made by RCM Healthcare Division and building school healthcare staffing.
As policymakers and educators recognize the importance of providing comprehensive health care services to students.
Many school districts nationwide significant staffing shortages further highlighting underinvestment in the nation as social infrastructure.
The pandemic brought increased focus on health and safety in schools, highlighting the need for trained healthcare professionals to care for students.
In response, many schools are working to improve their staffing, including hiring more nurses therapists and behavioral health providers.
Yeah.
A significant development in school healthcare staffing was expanding mental and behavioral health services.
There has been growing concern about students spent will help in recent years, especially considering the COVID-19 pandemic.
In cooperation with RCM subject matter experts.
Many schools recognize the need for additional mental and behavioral health support.
These districts worked with our RCM team to hire more mental behavioral health professionals, including PARP prior professionals, Rpt's ECB as counselors and social workers.
In 2022, there was a significant increase in the number of new school clients that needed the RCM to help offer their students behavioral health services.
By providing students with access to these services schools are helping to address a vital need and support the wellbeing of their students.
We believe RCM is positioned to be a critical part of their solution for many years to come.
In 2023, our Sim will continue to expand the service offerings and.
In addition, RCM is also taking proactive measures to tackle the challenge of staffing shortages.
<unk> and voluntary turnover in hospitals that long term care facilities through its comprehensive and outstanding recruitment solutions.
The demand for such services and nursing and Allied is significant as health care organizations.
Strive to provide exceptional care, while maintaining cost effective solutions.
To help its clients achieved this objective RCM is fully committed to offering world class innovative solutions.
These include but are not limited to MSP solutions international recruitment solutions and extensive recruitment initiatives.
As for Life Sciences 19 in 2022, we accelerated our transition to higher value services setting the foundation advancing our.
Our divisional identity, and enabling our team to be self sufficient.
We have begun to solidify our management team.
We have successfully placed several building blocks that will allow our divisions to further expand the relationships.
With our clients, while attracting new ones.
We created new building blocks for recruiting managed services.
HCM data governance and project management.
As we move into 2023, those foundation blocks will be put to good use.
We will take those blocks and combine them to build the next level, including our new HCM.
Service practice.
Our retained an executive search practice as well as our new assessment initiatives core life science companies.
On the engineering front.
RCM process industrial continues to deliver and confirm a strong growth trajectory.
I am proud of the evolution that this team has undergone in 2022 with new leadership and structuring the organization for scale and future growth.
The team has kept laser focus on existing customer and better relationships, while diversifying their client base and building in roads to new and emerging markets.
Performance in 2022 and focus on the future has led to several key partnerships and diverse set of end markets that will blossom into 2023 and last for many years to come.
The creativity commitment and drive of this team is contagious and United adjacent grips within RCM around common customers to provide a greater depth and our scope our services and ultimately in our value added partner.
RCM process and industrial made significant progress with our partners in 2022 commissioning several major projects across the globe, while placing others on a launch pad that will undoubtedly revolutionize the world wide impact Society Hasnt environment.
Our expertise and patented technological integration and advanced energy saving solutions.
Adding distillation of that operation materially lower carbon intensity scores and ultimately aid in addressing one of the most pressing problems of the 21st century climate change while properly matching each of our customers specific needs with optimal productivity and profitability.
The formative work performed by this team in 2022 has led to multiple shovel ready projects, which we are already seeing advanced 2023.
Through the opening of RCM thermal kinetics innovation Center and Hershey Org, we are positioned to design. It perform laboratory tests supporting our clients and bringing projects to market more efficiently.
With less risk and with the enhanced ability to demonstrate process output result beyond computer simulation.
The innovation center houses a state of the Art Test center, where customers can witness their feed material being separated and the latest installation evaporation crystallization and specialty process lab equipment.
We expect the innovation center to be integral in supporting carbon reduction a net zero emission goals for rapidly rapidly evolving renewable technologies within the bio economy sustainable aviation fuel pharmaceutical heavy chemical metals and food and beverage end markets.
In summary, our sand processing industrial has the team the strategic direction, the drive and the momentum to accelerate our clients in their pursuit to conquer the most difficult air and liquid separation problems facing society today.
From carbon transformation to heavy oil scrubbing sustainable transportation fuels clean hydrogen and many related applications, our patented processes and expertise are key to facilities seeking to achieve environmental compliance and optimize operations and.
And below zero.
Continuing with engineering RCM energy services closed the year with record bookings as we become a significant player in the energy transition across the globe.
The group made investments in business development and growth strategies to get closer to our clients and bring innovative solutions to support our clients increasing demand to enhance grid resiliency grid security and the modernization of the electrical power grid.
The establishment of offices in Florida, and Puerto Rico, where a part of the strategic step to expand geographically and serve our communities in new and valuable ways.
Our sales funnel has expanded becoming more balanced as we serve new markets and sectors, our full turnkey solutions.
The high quality innovative approach and trusting relationships, we have consistently built with our clients remain paramount.
The continued growth of our long term client portfolio is a testament to the team's ability to deliver value and safe value safely and efficiently.
Being awarded seven multiyear EPC projects with one of North America's largest utility companies was extremely gratifying to see our clients' trust in our project delivery excellence through these continued partnerships.
The trajectory into 2023 remains growth and performance excellence building from a position of strength.
The energy services team is relentlessly driven by the new and evolving demands we are seeing across the world. That's Rcmp country significant player on an international stage, helping the world navigate a multi decade energy transition.
Finally, I will close with aerospace.
Aerospace substantially exceeded all financial goals and operational objectives in 2022.
These objectives were to solidify the base in the engineering and aftermarket, while adding high level engineering talent and management expertise across business development operations and recruitment.
This division has more than doubled in size and enhanced capability since mid 2021.
Our strategy continues to encompass investing in highly technical specialty management and employees to attract new customers, both within our engineering and aftermarket domains.
Our targets will continue to include other large Oems and tier one suppliers to broaden our depth within aerospace.
In 2023, our plan will also be to strengthen our engineering aftermarket groups within space and air mobility, which helps to diversify our customer base and support our expansion to include other service offerings.
Before turning the call to Kevin who will cover our financial results in more detail.
I'll take a moment to touch on our progress on the capital allocation front.
During the fourth quarter, we were able to take advantage of a perceived economic tumult and sell off in financial markets to retire over 750000 shares.
Encompassing the 10 week period between the end of the fourth quarter. In this call we were able to achieve a net share count reduction of nearly $1 2 billion shares over 10% of the company since the end of the third quarter, while maintaining abundant financial flexibility.
As mentioned on previous calls, we believe that our ability to remain nimble as we scale and react to opportunity in every aspect of the business is an attribute that will enhance the rate at which we are able to compound value over time.
Now I will turn the call back to Kevin to discuss the Q4 2022 and full year financial results in more detail.
Thanks, Brad regarding our consolidated results revenue for the fourth quarter was $70 2 million growing by $5 3 million on a year over year basis gross margin in the fourth quarter was 29, 1% versus 27, 4% improving by 174 basis points on a year.
Every year basis.
Adjusted EBITDA in the fourth quarter was 7 million versus $5 3 million growing by 32% on a year over year basis, we're especially pleased with our fourth quarter year over year gross profit growth with specialty healthcare growing by $1 9 million or 21% engineer.
Engineering growing by zero point $6 million or 12%.
Life Sciences, an equal and by 0.2 million or 6%.
As we look to 2023 and beyond we've never been more excited about our potential growth and new initiatives of course after completing a historic 2022, we realize that we have some tough quarterly comps in 2023.
We do expect to have a strong 2023, and we expect the sequential growth curve to be more typical starting slow in Q1, 'twenty three and building from there. While we are optimistic that our 2023 engineering results will be 2022, we will see lumpy results in Q1, 'twenty three due to our <unk>.
Strong pipeline, we expect a nice jump in Q2 23 and to build from there based on our current engineering backlog and pipeline, we expect our best second half in a very long time and its on a consolidated basis. We expect the first half of 2023 to look similar.
In the second half of 2022, except for Q3 seasonality in healthcare, we expect significant improvement in the second half of 2023, we're especially excited by new behavioral health initiatives and new school contracts that will kick into gear.
During the 2023 2020 for school year, starting in September of 2023.
This concludes our prepared remarks at this time, we will open the call for questions.
All right, ladies and gentlemen, if you do have any questions. Please press star one on your telephone keypad.
Again for a question. Please press star one on your telephone keypad.
Alright.
It looks like we have Bill Sutherland. Your line is now open.
Thank you Hey, good morning, Brett Kevin.
Hey, Bill.
I Wonder if I could just get a couple of numbers. One is if you could give the split in specialty health care between education clients.
And health care.
Sure, let me just get that far along.
And so while you're right.
While you are searching for that Kevin.
I'm wondering about.
You know, there's a lot going on in the health care World certainly apart from education, and I know educations.
Your biggest piece.
What are some of the tailwind and headwinds that you guys are seeing.
As you map.
Map out twenty-three in health care.
Yes, Bill I'll take that one I'd say most of the discussion has been around effectively increasing bandwidth.
As discussed in prior calls.
Recruiter productivity has been a major initiative for us.
We should see the benefits of that start to come online.
As you know.
This month and as we move through Q2, so a pretty good data points that call. It 90 days out.
On that side. In addition, we are also looking at and making significant investments ramping up our foreign program.
But most of the discussion has been.
Last couple of years, frankly, but I would describe the cadence of the activity has not changed a bit.
You know around basically meeting supply in the market.
I wouldn't describe demand.
Waning whatsoever.
And then on the MSP front, Brett is that is that a new.
The solution for you or are you just focusing more on it now.
Oh.
We have a major MSP client.
Hum.
We're working to ultimately leverage that relationship and evolve into a more robust offering and build out the portfolio. So yeah.
It's been a very successful endeavor for us.
Certainly an opportunity to expand the division further.
Okay.
Yes, so bill in the fourth quarter our school.
School revenue was about $23 8 million.
Our non school revenue was $12 million.
Okay.
Thank you.
Hum.
The only thing I noticed in the in the <unk> print to kind of stood out.
In the segments was the.
Gross margins for engineering.
And I'm, assuming that just it moves around depending on where you are with.
Project.
You know with the project.
But it was down a couple of points versus the first three quarters and then just a huge gross margin per <unk> in the fourth.
At the quarter any color there thanks sure.
You pointed out.
And Ken jump around quite a bit.
We have a lot of fixed price contracts.
We have.
Large EPC contracts so.
The margin can be pretty haphazard as you know so there's nothing really in particular to discuss their other than you should expect to see.
No.
Margins jump around a little but that's historically, what we've seen and frankly in.
In the future.
Alright.
Kept remind me when you guys divested Canadian power.
That was in July of.
21, Okay. That's out of the numbers last year, Okay, Yes, that's out of the quarterly numbers.
In both periods and then and then as far as.
As far as it is concerned.
We're just continuing.
To push to get higher margins, obviously are our P O.
Business.
Impacted the overall margins because the margins are quite high on that business as you know the gross margins.
We're probably a little bit high in Q4 in terms of where I expect to see it.
On a go forward basis, but certainly will be above what you're used to seeing for the first three quarters.
So what will be.
Q4 was a bit of a spike.
But what will be consistently beating what we've done in the past in terms of the gross margin that might take.
Great and then last one I'm just.
Impressive share repurchase going on here it says.
Probably the major.
Focus of capital allocation.
For the time being.
Yeah, I think that's a fair assessment Bill I said look I think these things tend to you know.
Paul kind of macro economic trends with respective sediments around.
Just the.
In general or nerves and you know those don't always match up with reality.
So you know I think we.
We potentially.
Can stand to benefit substantially from that and share repurchases is one way to go about it so and when you look at the map at these levels it becomes quite compelling and frankly.
Yeah makes the capital allocation decision is pretty easy.
Least over the near term cash flow.
Okay.
Thanks, guys.
Got it.
Oh right exactly with Alex Rigel, Alex Your line is now open.
Thank you good morning, gentlemen, and thank you for the directional guidance again for 2023 very helpful.
But Brian maybe you could talk a little bit about.
Maybe at the macro high end level long term growth.
<unk> patients as it relates to revenue growth.
And maybe just talk a little bit about margins long term and directionally, how they can go higher.
Yeah, No that's a fair and a comprehensive question so.
As we spoke before Alex on the revenue front.
You can book a lot of revenue in our services business, we are very focused on.
Booking quality productive revenue.
No.
Adequate margins that ultimately translate into free cash flow. So a very much returns focused in that regard, but I'll also add that you know.
Theres been a major movie the last several years to make sure.
Underwriting is really Paramount in what we do as we continue to move up the value chain.
Yeah.
Field more.
<unk> high value add solutions to our client portfolio.
We always need to be cognizant of our underwriting and our selection of business.
So from a margin perspective.
Generally speaking when you balance.
Growth and where we're at in the lifecycle of the company and where we hope to get the company.
Long term.
We shoot for a double digit operating margin.
So there's certainly upside to where we've been in the past.
But again, there's a bit of a toggle between maximizing.
Is that part of the P&L and.
The return on investments so.
I would look to something similar to what we've had this last year.
Some band around that.
But long term, we certainly think that we can enhance the margin profile of the company and I think you're already starting to see that.
Throughout the divisions for the most part.
And then as it relates to the school health care business.
Can you help us to understand.
Sure.
With the intermediate term outlook is for <unk>.
How you're driving growth as it relates to new schools, or new school systems versus greater depth inside existing systems versus pricing.
Yes.
You talked a little bit about the about the school contracts and Brad can probably talk a little bit about the pricing but.
No.
At the end of <unk> and I was looking at this yesterday at the end of 2019, we had less than 30 school customers in only three were over $300000 a year.
Today, we have well over 60 school customers and we have well over 15, there are over $300000 a year.
So when you look at the growth curve of of total clients and what we call <unk>.
The larger clients ones that are over $300000 a year or more.
That's where we're focused and we can absolutely see that kind of growth curve continue in terms of.
The number of schools and the number of schools that we have over 300000 and over $1 million.
There aren't that many.
$5 million plus schools out there, but there are there.
There are hundreds more schools that are 300000 or more.
<unk> and <unk>.
Quite a few that are potentially over $1 million.
So when you look at the school market, we believe we're the largest.
Health care provider to school market.
In the country, but we're still just capturing.
Pretty small percentage of the overall market.
And the growth is clearly there and we're just scratching the surface frankly on the behavioral health side.
Which we think is just an explosive market, it's big today and three or four years from now it's going to be 10 times of is today or in our opinion.
Yes, I think that's a key point.
Good way to kind of articulate it would be scratching the surface of the opportunity and I think.
You're going to have another meaningful leg of growth to that end market in general from behavioral health, but you know with respect to driving margins and pricing and so on.
Pricing isn't really.
Primary variable that we focus on.
You will see a mix shift.
Pending on the types of professionals, we stop and so on.
But it really is less a matter of math.
<unk>.
So are we.
We think.
Education end market has significant legs for a long time.
This is an area that's been underinvested in for a long time and people are just starting to wake up to it.
As a result of Covid and even just coming out of Covid.
To be honest with you it.
It hadn't ramped up a little bit slower than we would have anticipated, but youre really starting to see it.
Full throttle in many ways now and.
We anticipate that being reflected in our results.
As we move forward and get into the back half of this year.
And then one last question as it relates to the energy services business obviously.
This is in Puerto Rico, and Florida, it's pretty strategic given the amount of hurricane repair activity and infrastructure upgrades that has has been muted and it's going to be needed in the aerial to underground activities that are forever ongoing in Florida and other markets can you talk about sort of those new geographies.
And sort of your thoughts and growth expectations and maybe some of the customers the services you're providing in that.
This is a great question.
We're actually very excited about these initiatives.
We've been doing business in Puerto Rico for a very long time, but primarily in life Sciences front.
We are in.
Increasing significantly and energy services, there and in many ways that's a function of.
Yeah.
Technological capability and really the goodwill with major utility clients in the United States.
We've been able to leverage in Q.
No.
Increased market share in Puerto Rico, So I actually look for that to be a certainly a bright spot in the portfolio.
Going forward.
We had significant success.
Over the last call. It 90 to 120 days or so and we actually think that that's very much the beginning and it's exciting as you see the portfolio start to to grow.
Historically, if you look at the geographic concentration of the business.
Yeah.
Certainly had a stronghold in the northeast.
Throughout the East Coast now we are starting to migrate and followed demographics in a much more meaningful way down in the southeast.
South in L. A.
At West so.
It's exciting and strategic for a number of reasons.
Thank you very much.
Okay.
Oh Ryan at this time there are no further questions in queue.
Did you gentlemen, thank you for attending everyone.
Excuse me sorry.
I think were fine. So we'll go ahead and close it out here.
So thank you everyone for attending the fourth quarter call and we look forward toward next update Matt.
Okay.
All right, ladies and gentlemen that does conclude your call. You may now disconnect your lines and thank you again for joining us today.
Yeah.