Q2 2023 RCM Technologies Inc Earnings Call
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Welcome to the Ara C M technologies second quarter earnings call I will now turn the call or Richard Kevin Miller, you may begin.
Good morning, and thank you for joining US This is Kevin Miller, Chief Financial Officer of RCM technologies.
I'm 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.
<unk> 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 over the call to Brian Vesey Executive Chairman to provide an overview of our Sam's operating performance during the quarter.
Thanks, Kevin.
Good morning, everyone consistent with our prior discussion after starting the year off slow due to project timing and our key clients unexpected program loss impacting first half we made the decision to maintain strides in building, what we believe to be a highly differentiated platform and the professional service at marketplace.
Our secular growth markets and strong portfolio of capabilities made the decision to ignore the perpetual drumbeat of economic prognostications, an easy one.
In fact as with any economic scare we knew we would be in position to take advantage of opportunities to further strengthen the business and enhance long term returns while others, taking a more short term approach tap the brakes.
Since we last spoke progress has been made across each of our divisions and I am excited to discuss in more detail starting with our health care Division.
Rcm's Health care Division continues to raise the bar and various aspects of the business.
Our commitment to delivering best in class staffing services and solutions has allowed us to focus on several key areas.
First and foremost our steadfast dedication to improving the delivery of behavioral health care to.
Has seen very positive outcomes and growth and new school districts nationwide.
By implementing innovative and evidence based approaches we have made significant strides in addressing that behavioral and mental health challenges facing children and their ability to learn and succeed in school.
Moreover, our effort to expand our school and health care facility clients have not only broadened our reach but also strengthened our ties with local community providers.
These initiatives have bolstered client penetration and allowed us to serve more students and patients in need making a sustainable impact.
We have also invested significantly in technology to enhance the applicant user experience and optimize operational efficiency.
This digital transformation, including the launch of our new App has paved the way for expedite expedited onboarding of service providers and an overall better candidate experience.
Moore, our reinvigorated branding strategy has solidified our position as a trusted and forward thinking healthcare staffing provider setting us apart from our competition and opening new avenues of growth.
As we look ahead, we remain committed to our pursuit of excellence and continuous improvement.
Embracing new technologies and stay tuned into emerging educational and behavioral health care trends will be pivotal in shaping our continued success.
With a strong foundation and a dedicated team.
We are confident in our ability to navigate challenges and seize new opportunities driving our business to new heights, and the ever evolving education and health care landscape.
On the life Sciences 90 fraud, we believe the division has reached a tipping point as we continue to grow our project and managed solutions business.
Just 30 months ago. The division has had less than 5% of its business in these areas in 2023, the number has grown to more than 33% in Q1 and 43% in Q2.
With a much improved revenue stream columns, a more robust margin profile.
Again, when analyzing the same sequential quarterly periods in 2023.
We improved gross margin by 500 basis points on top of over 10% revenue growth.
HCM continues to galvanize partnerships within its core clients, becoming the number one partner its flagship offering and securing a long term contract within the clients second key offerings.
Our HCM team continues to raise the bar and the rapid growth of our core clients has required increasing levels of support.
We think the success of this group is in the early engines as we continue to grow our share within a fast growing client base.
Our life Sciences practice has introduced several new service offerings, including commercial operations, a new ERP practice and a series of target assessments to help clients quickly improve quality processes and data management.
Our life Sciences practice has also secured three new managed service clients and continues to strengthen its leadership and sales personnel.
We continue to be optimistic for the remainder of 2023 and beyond.
As mentioned earlier I believe this group has reached a tipping point, where it will serve as a strategic pillar within the RCM portfolio.
Energy services closed Q2 with strong results sustained continuous growth through the first half of 2023.
The team added a significant amount of backlog in Q2 for a major contract rings and was selected to be the engineering firm for a large new substation project.
The north Eastern United States.
This win was made possible by delivering results as promised and being a trusted partner to our major utility clients year after year.
Across the globe the energy transition is driving investment in new projects to strengthen the grid for the future and RCM is proud to expand its services to support our clients and communities evolving electricity demands.
Our European footprint has been developing well through Q2 and the team is building a strong foundation to serve our growing list of utility clients.
Our focus on developing a sturdy foundation across all engineering and project management disciplines has enabled energy services to take on more large complex projects to provide our clients with complete turnkey solutions.
The second half of 2023 is expected to be consistently strong as the team continues to convert opportunities into backlog and expand our client list.
Second quarter results and our process and industrial business were again in line with plan.
Focus over the past three months was on project execution growing and strengthening relationships.
One important increase to the backlog came in the form of additional engineering for critical elements of an advanced ethanol facility to produce sustainable aviation fuel.
We had a noticeable acceleration in pipeline throughout the quarter stemming from projects with both new and established customers.
Aside from the significant revenue potential expected in 2020 for this expansion of the sales funnel is strong evidence that our growth and market diversification plans are being realized and strengthening rcm's presence in the global energy transition.
RCM thermal kinetics are key unit within process industrial continues to advance projects, while performing engineering and lab testing for future demonstration and production scale facilities.
It was rewarding to see the impact the RCM team is making to the community for the open house of our New 10000 square foot office and lab held in July .
Many members of local universities vendors clients friends and families joined us to learn from a variety of educational demonstrations.
These demonstrations in our state of the art lab highlight how our approach can provide clients with higher quality output saving time and money, while derisking projects across the many markets that we serve.
The team in company history was also featured by the local business Journal Buffalo business first.
Aerospace and defense is seeing a market recovery in the third quarter.
After a key client experienced an unexpected program loss at the end of last year, the aerospace and defense team rose to the occasion accelerating business development activity with new clients and deepening relationships with existing clients.
Thus far in 2023, the division has already added eight new clients well on the way to achieving our goal of 12 by the end of 2023.
Also of note, we have almost tripled the number of hires across our client base in the second quarter compared to the first quarter 2023.
This expansion includes new clients and defence, specifically see vessels, new vertical with customers as well as new customers.
Aerospace component part manufacturers assisting them on the production floor and within the aftermarket domain.
Expansion of existing clients and new clients with our core expertise and new arenas provides much desired depth and breadth to the organization and strongly positions us for 'twenty 'twenty four.
We have also begun to see traction on one of our largest awards from our strongest OEM quiet across the entire spectrum of engineering resources with potential opportunities spanning into 2020 six.
In addition, we have been awarded a sole source contract for one of our space clients, where we are providing support from conceptual design for aftermarket services in hybrid and flexible scenarios.
We now have a proven track record with our digital conversion expertise and methodology was in aftermarket as well as our model based definition prowess, which now expands across multiple clients throughout the United States.
With the addition of our new.
Senior Vice President.
Our aftermarket group is now touting gas factor, which broadens our reach beyond S. 1000 D publications into F 2000 M material management as 3000 Al logistics support analysis as 4000 P maintenance and S 5000 F in service data feedback.
Once the realization of the support we have provided our customers was apparent we decided it was time to market the full solution and an offering that we believe is differentiated in the marketplace.
I believe when you look back on 2023, RCM Aerospace and defense will serve as a shining example of our culture at work one of continuous improvement even in the face of adversity day in and day out and incessant focus on upgrading the quality of our business through value accretive growth.
Before turning the call to Kevin who will cover our financial results in more detail I will take a moment to touch on our progress on the capital allocation front.
During the second quarter, we repurchased over 939000 shares, bringing our year to date share repurchase to nearly 1.6 million shares.
Our clean balance sheet and high cash generating business model and dedicated culture committed to continuous improvement of our business.
<unk> allowed us to repurchase approximately 40% of the company over the last three years at an average price of $7 50 per share.
Consistent with our prior commentary taken into account normal Q3 seasonality. The business continues to strengthen as we move through the year setting up a healthy double digit earnings increase in the fourth quarter, a trajectory consistent with our long term objectives.
Now I will return the call over to Kevin to discuss the Q2 2023 financial results in more detail.
Thank you Brad regarding our consolidated results revenue for the second quarter was 67.0 million flat with the first quarter of 2023 as.
As we expected the second quarter decline in health care were offset by sequential increases by engineering, and our life Sciences and information technology segments. The second quarter seasonal decline in health care revenue was entirely due to several of our significant school clients closing in May and all of our school clients closing by late June .
We will still see greater seasonal declines in Q3, while we gear up for the 2023 2024 school year starts in August and September for various school clients. We're incredibly excited about this upcoming school year I want to give some limited information on a non COVID-19 related school bus.
Yes.
In fiscal 2022, we had about 60 active school clients with 20 with 22 exceeding 100 K in revenue that compares to fiscal 2019, when we had only six clients over 100 Canadian revenue for fiscal 2023, we expect at least 75 school clients with 30 over 100 K in <unk>.
Revenue.
We saw a nice sequential uptick in engineering revenue in Q2, 'twenty three driven mainly by the increase in energy service.
<unk> services contract wins, we expect our engineering group to see sequential increases throughout the rest of 2023 as Brad discussed our life Sciences and information technology.
<unk> had a nice sequential increase as a managed service offerings continue to drive our growth.
Gross margin in the second quarter was 28.0% also flat with the first quarter.
We saw outstanding gross margin performance from our life Sciences segment at 39.4%. While this may be a high watermark, we do expect to see gross margins in the upper Thirty's going forward.
Engineering gross margin saw a small sequential uptick as revenue increase however, we expect better gross margin performance going forward. We are targeting the upper Twenty's health care gross margin performance was off in the second quarter due primarily to June school closings, a mixed shift and.
And several discrete adjustments, we also expect better gross margins in health care going forward and target the upper twenty's as well.
As we look to the second half of 2023, we expect health care to continued to experience its underlying sequential growth trend. However, due to seasonal school closings, we will see sequential top line decline in the third quarter as we do every year, we expect the fourth quarter to be our bell.
First quarter for 2023 with so many recently awarded school contracts, we are very excited to see the results.
We expect both our engineering and life Sciences, and information technology segments did you see sequential increases in the third and fourth quarters. While there is always the risk of large projects sliding to the right. We expect a substantial uptick in the fourth quarter for all three of our engineering groups.
In summary, we believe that Q3 2023 EBITDA will be similar to Q3 2022, and we are lining up for an impressive fourth quarter and a nice run rate heading into 2024 in 'twenty 'twenty four we expect to see at least double digit growth in EBITDA.
As compared to fiscal 2023. This concludes our prepared remarks at this time, we will open the call for questions.
Okay. If you would like to ask a question. Please.
Star one on your telephone keypad again to ask a question press star one on your telephone keypad.
Yeah.
And it looks like our first question is going to come from Alex Sigal with B Riley. Your line is open.
Good morning, gentlemen, very nice quarter.
Thank you good morning, Thanks, Alex.
First on the on the health care.
The health care business as it relates to the third quarter or can you help us refine what normal seasonality, what you mean by that obviously, a little bit difficult to look at that over the last.
Two three years given COVID-19.
Yeah.
We typically see a pretty pretty big decline Q2 to Q3.
<unk>.
Okay.
E.
Inexact, you know projection is difficult, especially with all the new schools that we have coming on and some of them coming on in August when they get it.
Typically.
You know.
Typically most of our schools started in the past starting in September .
Okay.
Men.
Was it really just just to give you a little finer point you know.
Certainly we'll be under 30 million you know in in Q3.
You know, it's tough to give an exact number but you know maybe 25 to 29 25 to 28.
Sort of in that range.
Well, we'll see where it comes in.
Helpful. And then your margin commentary in that segments would suggest a high twenties.
Last year, you were in the low thirties in the second half of the year.
It is the variance just sort of mix or is it something that you know we had a confluence of factors in Q2 that that I think created.
You know.
Our gross margin for health care that is not indicative of the actual margin, but I think the way that you should think about the gross margin in health care is you know we did 28.8 year to date.
And you know I think that's a pretty good number.
You know on a on a go forward basis, we're always looking to improve the margin.
The thing that.
Theres, a fair amount of uncertainty around health care just because.
You know, we have a lot of new contracts.
And we never know exactly how they're going to really start with a lot of these new schools, but certainly I think the 28, 8%.
<unk> is a pretty good range you know.
I would be surprised if our margins in Q3 and Q4 are in the 28% to 29% area and hopefully we're pushing up towards the top of that.
That's great. Thank you very much.
Our next question is going to come from Bill Sutherland with benchmark. Your line is open.
Thank you Hey, guys great work.
Two things on specialty health care, Kevin can you just tell me or tell us I'm sorry the.
The Ah.
The revenue in the quarter from school clients.
Hold on.
I need to grab that it'll actually don't have that open you have another question.
You kind of when.
When you're running through the.
Clients this year last year and those over 100000.
I didn't quite get.
Last year was 60 clients in comedy over 100000.
We had over we had about 2012, we had 2022 over 100 K.
And that could be looked at and when we only had about six.
Any nicely okay. Yeah, So and you know obviously 2019 is that a pre COVID-19.
And and you know the business has changed quite a bit since 2019 as we've added so many new.
School clients.
Are you finding that the deals that you're winning and schools are.
Broader in terms of the roles and the just the.
It sounds like it given the sources Yeah. You know every school is different bill frankly, sometimes when we went to school, it's just nursing, sometimes when when we win a school, it's just behavioral health.
But we you know usually we're entering with one service, but oftentimes.
The next school year, we get to introduce a second so it's it's different from there's so many nuances to the different school systems. It is hard to give you a sort of a blanket answer but usually when we enter into a school. It's one service.
We often get to expand the following year to another service.
Got it.
And in life Science.
When you're seeing this nice expansion in gross margin.
And I assume it's tied to the expansion of Lifesize.
Is that is that just pricing or is that something about.
You know how you can optimally.
Optimally run theirs.
Those pieces of business.
Yeah.
Good question Bill not pricing at all actually in fact, its primarily mix driven.
This is these wheels were set in motion about three years ago.
As you know when you looked at the life Sciences and it business. It was primarily a staffing business.
And we made the strategic decision to move more towards a solutions and managed service based model.
And naturally that comes with a higher <unk>.
Margin profile.
And you know can be stickier as well as you continue to deliver more value to clients, so and as part of that progression naturally your team evolves right. So.
We saw this throughout different parts of the portfolio, obviously outside of Whitestone, Orange life Sciences, and I T.
And I think this is the point in the lifecycle, where they're at where the business is kind of hit a tipping point and I personally think that a lot of that is talent driven naturally.
You wouldn't necessarily have the same set of folks focused on staffing that you would on solutions and managed services and so which gives me further confidence in the dynamic and the drivers. There is as we continue to fortify the team and build it out.
So that's that's one area of in one part of the portfolio that we expect exciting things going forward.
Roughly where are you as.
Go ahead, Kevin I was just going to give you the school stuff, but if you have some more questions on life Sciences go ahead.
I was just I was curious kind of where you've gotten managed services as a percent of revenue.
Ballpark.
Okay.
Yeah. So when you look at solutions and managed services were little under half at this point.
Over half Okay little.
A little under half.
Cylinder up up from roughly 5%.
Okay.
Yeah. So the school the school revenue in Q2 of 2023 was $26 5 million.
And we are just a shade over $9 million for non school.
He said 22, you meant this year to me.
I meant this year Q2 was 23, sorry about that yes.
26.
Roughly 75% of our business you know in Q2 was.
So it's pretty consistent with Q1, okay I.
I guess you saw in your non school business kind of the same.
Transit.
The pure plays in that side.
<unk> were reported.
Yeah, I think I think it pretty much lines up you know, where you know where we expect to see growth there going forward, though.
You know, we we had a little bit of a sequential decline, but that was really.
Almost entirely driven by one client that was with scaling back.
You know some of their some of their expenses.
So you know I I.
We've got plenty of room to grow our non school business.
Okay.
Last one on deployment I guess, you're going to just going to continue.
With this very successful past you've had as opposed to anything.
Related to a dividend, a special dividend or tender or anything that.
It might be outside of that.
That tap would've been on.
Our all avenues are open bill all avenues, but you know we think the stock is trading at a very attractive price and let me let me see if.
When I look at my screen real fast year yeah.
Yeah, 16, 49, you know that that kind of makes the decision pretty easy.
Okay got it thanks, a lot Chris.
Sure.
Okay.
And as a reminder, if you would like to ask a question. Please press star one on your telephone keypad to ask a question press star one on your telephone keypad.
Okay.
Our next question is going to come from Frank Kelly Your line is open.
Hello.
Hi, Kevin Hi, Brad how are you guys.
Hi, Brian .
Good good life science in I T Q striking almost 40% I think that has to go up that has to go marked pretty hard and that's great.
And hopefully the you know the other sectors will will come in come in line as well as we add value. One question. If we can shift over to the to the balance sheet.
I'm looking at at gross they are can you shed some light as to why we had.
32% increase in a R over to Q.
And.
Obviously cash is king and it also drives over to the P&L on the interest cost can you help us help me understand or help us understand what what is and obviously, what's not happening in a R.
Sure sure well are you now to be really Frank with you Frank the a or is just too high in Q2.
There's a whole there's theirs.
I'm sure you can appreciate there is not one reason for it there's a couple.
But what the D and we look at Dsos as opposed to a you know as.
Those two to the dollar amount, but you know you get to the same conclusion, which is the dsos in Q2 or just high.
And we'll bring them.
No.
So I expect the dsos to come down.
And as you know Q3 is a seasonal seasonally low quarter for us. So we should see a pretty nice decline in Q3.
In in the receivable dollars.
And I expect dsos to be much better in Q4 as well, obviously you know depending on where revenue is coming in Q4, and we may or may not see a decrease in in in a R. But I'm confident we will see a decrease in the dsos in Q4.
I'm glad you asked about cash flow, because obviously, we're pretty well despite the poor performance in our trade receivables in Q4.
You know we did see really good cash flow in in Q2 and for the year, we're at $16 5 million.
For cash flow from from up from operating activities.
So we're pretty happy with the overall cash flow, but we can do better with with the receivables and we will.
Yeah.
Great. Yeah, I, just you know we're looking at borrowings and then.
<unk> down interest and things like that it just sure.
An opportunity that where we're not really you know capitalizing but I'm sure you guys, Sir where are we at Dsos at Q Q1 versus Q2.
You know I don't have the exact numbers in front of me, Frank, but but there are too high.
So they're just they're they need to come down.
But but.
And they will as I said and you know I think the more important takeaway is that.
You know as I mentioned in the press release, we expect to see really nice cash flow.
In the second half of this year, particularly in Q3.
Okay great.
And just to be too.
Obviously, we're always looking to drive or get down right and drive interest loss down.
But you know we're pretty proud.
Proud of and happy with where our debt is right now.
Relative to all the shares that we purchased.
And you know, but we can do a better job with the receivables and if our debt goes up you know and our balance sheet looks good and if our debt's gone up because we're buying shares we're happy to pay that interest.
Yeah.
Two other data points I'd just throw in there Frank is obviously after the close of the quarter.
Collections have been good so far.
But also in addition to that setting our capital allocation decisions aside.
Or execute on the share repurchase front you know fast forward. The next couple of quarters now I would anticipate that levels being relatively modest if if if if and how.
We have debt at all you know as we as we move into the fourth so.
We felt pretty good about where the balance sheets at but you know the point you highlight is very relevant and salt.
Great No I appreciate it understood and.
I see a few where we're heading in and that sounds like a very good direction.
That's all right.
Thank you Brian .
And one more if you would like to ask a question. Please press star one.
Okay.
Okay doesn't look like there are any more questions in queue. So I will turn it back over to you for any closing remarks.
Thanks, operator, thank you for attending Rcm's second quarter Conference call. We look forward to our next update in November .
This concludes our call you may now disconnect.