Q4 2023 RCM Technologies Inc Earnings Call

Good morning, and thank you for joining US This is Kevin Miller, Chief Financial Officer of RCM technologies.

I'm joined today by Brad BZ, <unk> executive Chairman of <unk>.

<unk> in this call will contain forward looking statements information contained in the forward looking statements is based on our beliefs estimates 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 Brian.

Vesey executive chairman to provide an overview of our CMS operating performance during the quarter.

Thanks, Kevin Good morning, everyone.

We finished 2023 at the high end of expectations more.

More important we believe the fourth quarter it demonstrates a COVID-19 free picture of our progress and traction against our smart growth strategy with all three businesses generating healthy EBITDA growth.

Our platform form of high value capabilities in critical end markets clearly resonates.

Our ability to leverage points of collaboration amongst groups continues to gain traction.

Whether providing facility design solutions for our key client aerospace, we're delivering technical solutions to the K 12 market.

Synergy of the platform continues to grow as we provide increasing value to our world class client base further differentiating ourselves in the marketplace.

Since we last spoke progress has been made across each of our divisions. It I am excited to discuss it more detail starting with healthcare.

As many of you are aware, we take considerable pride in our leadership in the K through 12 and market.

One of our key strategic focus it is to leverage that leadership to expand our K through 12 client base.

And health care carrying is paramount and given our commitment to the nation's most precious assets. We believe RCM has developed a net tangible asset of its own that will afford us expanding opportunity to do what we do best.

In addition to building our steamed roster of clients nationwide.

The success of our approach is evident as we effectively convert low revenue it is schools into greater economic opportunities.

This progression is a testament to our high performance standards and the delivery of exceptional character students.

Regarding overall business performance, we are delighted to report growth across all business units. This comprehensive expansion underscores the resilience and adaptability of our business model.

We're excited about the robust pipeline of opportunities, indicating it promising trajectory for the health care group.

As we move through the upcoming year, we remain steadfast in our commitment to innovation client satisfaction and sustainable growth.

We are confident that our strategic initiatives will contribute to the continued success of the health care Division.

Now moving to life Sciences data and solutions.

The results of 2023 demonstrate the economic horsepower of our team strategy and revolves around value and solutions selling.

This can be seen from improvement in every financial measure it revenue G. P GP percent NOI and NOI per cent.

GP percent improved by 430 basis points, while EBITDA contribution improved over 375 basis points.

Nearly 70 cents of every dollar of revenue increase for 2022 to 2023 convert it to EBITDA.

Managed service and turnkey software implementations letter growth.

I take tremendous pride in this group's clear commitment to operational excellence.

As we look forward towards 2024, we continue to see strong growth led by life Sciences, where I managed service commercialization data integrity and quality improvement programs.

Continued strength in our HCM practice will further drive results.

2023 was a year of strong performance from energy services.

Revenue and profit targets were achieved exceeding the previous year's profit contribution by 66%.

Energy services successfully executed grid modernization of substation projects for large utilities and Oems in North America and Europe.

These projects included engineering services for a large scale infrastructure projects in the New York area that will be a critical interconnection point for delivering increasingly renewable power from offshore wind parks.

In 2023 energy services opened an office in Germany to expand its global footprint and becoming a preferred partner for the energy transition in Europe.

Within the first year of its German operation Energy services was awarded two EPC projects from one of the most innovated German transmission system operators.

This T S sent a delegation to the U S to visit several projects and are just services has successfully executed.

The triples conclude it with the award of the second project between our two firms and commitment toward a long term partnership.

Also of note energy services further developed its technical capabilities to offer our own proprietary digital solution for <unk> and <unk>.

Digital data management applications.

<unk> utilities and enhancing their efficiencies from planning to construction and operation.

The monetization of our application is a major step in our prioritization effort consistent with our strategy to position ourselves as thought leaders and strategic partners with clients broadening our competitive moat and delivering more value to client partnerships.

RCM thermal kinetics has several active equipment and engineering contracts for projects and zero carbon chemical manufacturing carbon capture and sustainable it in Asia fuel markets.

The project's employ a variety of technologies designed by the engineering team, including distillation evaporation crystallization technologies.

These contracts are with dynamic customers, who are growing as established leaders in their respective markets and have standardized on the RCM thermal kinetics process design and equipment supply.

The new RCM thermal kinetics testing lab has been fully utilized it 2024 due to customer tests project support and product profiling related to new equipment proposal development.

The test lab has added a new glass crystallization system and is fully commissioned a unit.

This unit is also being used to support active crystallize their projects.

Future expansion plans include a 30 gallon crystallization pilot plant.

Engineering for the pilot plant crystallized or it is scheduled for completion at the end of Q1.

The aerospace and defense group experienced a steady recovery in Q4 2000 twenty's for it.

But we did add clients it head count during the quarter. It is worth noting that our clients outlook is more focused on 2024.

Regardless, we did recognize the receipt of additional workload with existing clients and new clients to expand our model based expertise digital conversion software and systems employee base in 2024.

Aerospace and defense has now become a trusted provider of a new service offering it.

Offer involving rector rectifying quality and production issues within the supply base of our clients.

Our approach and solution has been modeled from within our management team informed by decades of industry knowledge and background. They possess in this arena.

Since the supply base for many Oems has experienced issues globally, such as part shortages of material availability.

We are in the process of deploying teams to help solve these challenges and have received interest across multiple Oems.

We continued to expand our teams within our workforce solutions software systems and highly technical areas, especially in the air mobility sector, which has become a draw for many candidates.

I will turn the call it to Kevin to discuss the Q4 2023 financial results in more detail.

Thank you Brad regarding our consolidated results consolidated gross profit for the fourth quarter grew by five 7% from $20 5 million to $21 6 million.

Adjusted EBITDA for the fourth quarter grew by 18, 5% from $7 5 million to $8 9 million.

Adjusted diluted EPS grew by 37, 5% from 50 to.

71.

As for segment performance in the fourth quarter of 2023 health care gross profit was essentially flat if we remove the impact of Covid on the consolidated revenue.

And compared to the fourth quarter in 2022, we estimate that 2023 gross profit gross profit grew by four 4%. However, our school revenue after normalizing for Covid grew by over 28% Q4 to Q4.

Life Sciences data and solutions gross profit grew by 19% in Q4 23 compared to Q4 'twenty to <unk>.

Largely behind the energy services group.

Engineering gross profit grew by eight 6% in Q4 23 compared to Q4 2002.

As for fiscal 2024, we anticipate that we will see at least at least low double digit.

Solid eat it adjusted EBITDA growth as compared to fiscal 2023 with a similarly, similar quarterly payments when compared to fiscal 2023.

Okay do you like to ask a question. Please press star one on your telephone keypad to ask a question press star one on your telephone keypad.

And our first question is going to come from Alex Rigel.

Hi, Lee.

Your line is open.

Thank you good morning, gentlemen, and nice quarter and nice year.

Thank you.

Thanks Al.

First if we could just touch on the balance sheet, a little bit obviously, DSO spiked a little bit there's a lot of seasonality that occurs that probably the majority of that can you talk about that increase in and possibly the Ah.

Working capital improvements that you see coming in 2024.

Sure happy to speak about that we ended the quarter with it.

A little over 90 Dsos 97.

Which is similar to Q3, which was <unk> 91, both of which frankly.

Or just much too high in terms of.

Where do we expect to be and where we believe we will be in the future.

You know.

The thing that we see often with the schools.

Is that they always pay.

But sometimes we run into administrative issues that cause like.

A bit of a.

A blockage in terms of getting paid right and then all of a sudden.

You know like five months of four or five months all at once now most of them pay pretty regularly but every once in a while we run it issues.

Our second largest client in the second largest health care client.

Basically for administrative purposes did not pay us.

From July through December.

And we had about $15 million balance at the end of the year I expect that to be under <unk> by the end of this quarter.

And most of that money has already come in it.

They even be a little bit lower we will see so we think we've got that client back on track it Steve.

Have a great record of paying us pretty timely over the last three or four years.

So really in terms of the.

The it.

It receivables at the end of the year.

Just putting that one problem side.

Should be $63 $62 million and frankly it is a few other things that we need to work on.

The witness a little bit high that tends to be kind of cyclical depending on where we are with projects. We have a couple of newer healthcare clients that we're still getting the rhythm with in terms of the pose and getting everything approved and blah blah blah, but.

We believe it to $70 million is too high and its temporary and we're going to get it down.

The way that you should think about it frankly is we should have dsos in the below 75.

Only in the low seventies.

But it certainly should be below 75 in it.

We won't get it probably get it.

To that level at the end of Q1, but it won't be much lower at the end of Q1 and over the next couple of quarters, we will get it.

Dsos down to a more acceptable level in the low seventies.

That's very helpful. And then Brad maybe you could talk a little bit about sort of the growth outlook by segment in 2024.

Okay.

Yeah look.

We expect all three of our segments to grow it.

Yeah, <unk> spent a lot of time it was doing strategic planning.

Here in the last 90 to 120 days and frankly, it's very encouraging.

Lines are very strong and.

And backlogs are stronger than it were last year.

Now that being said you know we're constantly.

Gently balancing.

Growth with investment so our growth in profitability today it productive revenue.

With investment in the future. So you know on a consolidated basis, we're comfortable where we sit today with the guidance we put forward.

But underneath the surface but.

We anticipate all three segments growing as well.

And then lastly, you've been.

Very aggressive with your buyback through the year strategically buying stock on opportunistic dips in the market appears to be giving you one of those right now can you talk about your view on.

Repurchases right now and what your authorization stands out.

Yeah, No we certainly have authorization.

It was a good chance, it's going to be increasing.

In the near future.

But with respect to overall capital allocation and you look at our share count now we have less than 8 million shares outstanding.

So you know where it a high class position, where you think about that incremental share you buy right that tradeoff of liquidity, because we certainly want a balance you know.

Having a.

It liquid tradable stock for our investors.

Two to enter right and it certainly have the.

I have the option to sell at some point in.

In the future.

Yeah.

Frankly, taking in what we view as yeah.

An investment opportunity at a steep discount to intrinsic value.

So buybacks are always part of our our compensate or our capital allocation framework.

Yeah.

We're in a position where it continued to be opportunistic and we're going to do that.

It should be mindful with each incremental share.

You know it.

It certainly detracts from the float.

And the liquidity so but by no means are they off the table there firmly on the table.

Yeah.

Very helpful. Thank you good luck.

Yeah.

Our next question it is going to come from Bill Sutherland.

It is Mike your line is open.

Hey, guys good morning.

The gross margin performance was very steady year over year.

And you saw a nice pickup in the life science.

Gross margin.

Are you kind of it on a steady state level as you look forward into 'twenty four or are you expecting some.

In any of the segments.

Yeah.

I would say it is probably steady state.

You'll see some gyrations from quarter to quarter obviously.

Specially in engineering.

When we do have some.

Yes.

When project stops and starts and bench and whatnot.

We're steady state.

Typically we do see.

You know an increase in payroll taxes of somewhere between $1 million and $1. Five when you go from Q4 to Q1, so obviously that impacts it obviously impacts.

Margin and net margin, but that's it that's it.

Thats just a seasonal.

Right.

But yes, we like where the margins are and we think we can maintain those or it was close to zero.

Great.

On health care it.

Kevin do you have the breakout between education and all up here.

I sure do it because I know you would ask for it.

Uh huh.

So let's see.

Education was.

School revenue in Q4, it was $29 million 800.

12000.

And our non school was 6 million 876.

Okay.

Okay.

Do you do you have the comp just in case I don't know.

Make sure I know that yeah.

Yeah the comp.

Order to quarter School revenue in 2022, Q4 was 24 million $6 44, and non school was 11 million 166.

So that non school, which includes H I am I know is.

Is it kind of a run rate now that's it's been steady or even.

You can definitely look at that as it steady run rate I mean, we expect that to grow.

From there.

When you look it.

Q2 to.

Q4, 'twenty, two we had quite a bit of COVID-19 revenue in there.

And we also had a very big client.

That we scaled back a little bit just because frankly, we don't like the way that they pay.

So we scale back the number of people that were.

It is stretching out payment on.

Good good good good client that always pays but we can only allocate so many dollars too high it DSO clients right. So.

But but.

We've got some pretty interesting things that we're working on too.

Outside of the schools that we think can drive that.

A bit higher.

Okay, and then last one.

Excluding <unk>, which is one of them one of them the ones that you mentioned.

Yeah.

And it capital deployment just to look it that again.

Brad are you guys.

How are you thinking about where you are with that and how you might you.

You know think about the deployment for share repurchase versus you know.

Maybe it reducing leverage.

Yeah.

Pretty consistent with our framework.

It still are less than one turn of EBITDA of leverage.

Which is pretty efficient capital structure, and we certainly have the ability to flex up from there.

From a capacity perspective.

Our financial framework perspective, we have ample dry powder to do what.

What we'd like to from a capital deployment perspective.

Yeah.

In terms of.

Potentially deleveraging and taking the balance sheet to a net cash position sometime over the next 12 months or so.

You know or potentially.

Making it more shares.

Again.

Having less than 8 million shares outstanding.

I think it gives us the opportunity to to really be thoughtful.

Looked at it a lot of different options.

So we'd be happy to take it to six absolutely.

But there's somewhere.

Somewhere around $8 million Theres, a tradeoff associated with it that.

We are mindful of it.

Awesome.

Actually let me attack tack on one more on the deployment picture are you all.

How would you characterize your M&A activity as far as.

<unk> is looking at opportunities these days.

Yes, we're always looking.

Primarily bolt ons.

We're very interested in capabilities.

Bolt on acquisitions that we think we can grow and that significant value to.

The reality is I think the platform that we have.

Built over the years I think it is pretty unique.

To the marketplace and got it.

We think we can leverage our existing client base relationships and it.

Our teams to add a lot of value.

The capabilities that we view, our unique and scalable so.

We're always looking very very selective and obviously culture is.

As a key.

A key component of that.

Brad do you guys kind of weight it kind of look it the segments equally as far as opportunities or are you more.

Emphasis on one or two of them.

I'd say it we look at them equally.

Okay.

Alright, Thanks, guys I appreciate it call it.

Alright.

It is going to come from William Duberstein Whetstone up your line is open.

Hey, guys.

Great.

Great.

Beyond the call thanks for having me on it.

It really nice performance.

I have a couple but first one housekeeping on the share count.

I think you said you had little under it.

Yeah, it like seven eight.

A million shares outstanding on the income statement you put forward the diluted share count was closer to eight point.

One it.

And I was just wondering.

If that was.

Brad Your your kind of long term incentive awards, we include it or what the discrepancy was there yes.

So it doesn't the common stock equivalents bill so when you have outstanding.

Equity grants.

Those are computed into the diluted share count right. So Brian when Bob was giving us share county, he's talking about the shares that are actually outstanding as of today, which is under $8 million.

Got it perfect. Thanks.

Now onto our it.

Some operational stuff.

Just curious the engineering.

It was the top line was a little bit down year over year, but gross margin improved a lot.

Which is probably.

The most relevant metric I know you had it.

Last year and that you expected that aerospace segment to kind of improve through the year. I was just wondering if you consider it recovered and then sort of the different puts and takes.

Between aerospace and.

Engineering with the.

With the trends.

<unk> net VW, if that's playing a factor and and then industrial if you could just.

Kind of digging more granularly to the industrial to the engineering segment.

So before Brad.

<unk> on this just just to.

Correct, you a little bit on one of it so we didn't lose it big contract.

Got it big contract yet.

<unk> by about 30%.

Which was obviously a blow but we didn't actually lose the contract we still have it.

The contract that we spoke about on an earlier call.

And I am sure Brad would love to talk about expectations in terms of revenue going forward.

Yes further further granularity on that point.

We didn't lose share in the account it was more a major end client.

Yeah.

Did it whilst the program it wasn't awarded a program that we anticipated and <unk>.

Had some head count reduction associated with that just to clarify it.

With respect to the.

The prospect for margin in engineering.

I actually think there's upside.

When you look at it.

For the year and going into the future and that's primarily going to come from aerospace I think the other two businesses have.

Have room for improvement certainly.

But it.

On the aerospace there has primarily been a staffing orientation that I think youre going to see slowly migrate to a richer mix.

Services so our.

Our outlook is net positive with respect to the margin profile of the engineering.

Great Great and then just one more quickly.

The life Sciences segment. It was clearly the star of.

2023.

I know you've been.

Transitioning to more sort of project space.

Solutions I.

Rather than.

Time, plus and then you also had the acquisition of talent harder.

In Q4 of last year. It just wondering if you.

The great performance this year, how much is organic and how much might be talent harder.

And.

And it spending.

And it or suppose were contributing.

Yeah.

Good question Bill.

We've invested heavily in that business. The last couple of years, where and it continued to do so and those investments are paying off.

Both with respect to building up the team.

As well as our capabilities and to.

Two primary drivers is it really life sciences in HCM and in nearly all of that is organic so there's not a lot of inorganic growth there.

And you know I think the other thing I'd highlight with respect to that growth.

You not only have incremental clients that we're adding but going back to our core strategy is really looking for strategic clients that we can both grow our core capability within it. So in other words take share within that client right.

It provided incremental services to deliver more value to the client and making us more important and operate it as an extension.

To the client as well as frankly be able to take advantage to it.

The advantage of it.

It was very strong client base.

That has their own growth. So really we had kind of three three bites of the Apple in that regard.

With respect to talent hurt or the contribution.

The profit contribution was de Minimis.

Yeah that was in line with our previous discussion when we did that acquisition.

Now we had.

We had anticipated that the technology market with softened quite a bit.

And we've structured the deal accordingly.

So we're actually seeing green shoots with respect to that core business and.

And profit stream.

It could contribute.

Good decent contribution in 'twenty 'twenty four.

But 2023, it was de Minimis I'll say with respect to the synergy that it provided.

That was dispersed I'd say throughout the different segments.

One of the benefits of that acquisition it was yeah.

It was never a core thesis around now.

No.

Having a beachhead and technology youre pushing hard into it.

It Silicon Valley.

It was more and with the potential to benefit from it really the top of the funnel.

<unk> and some other technologies that they had and we.

We think to some extent that youre seeing that in each of the segments and Youll continue to see that grow going forward.

Yeah.

Great.

Well, that's all it hi, thanks for thanks for the color and thanks very much for having me on guys great job.

Thank you.

Yeah.

And as a reminder, tivo like one more question. Please press star one on your telephone keypad.

Yeah.

Okay.

The next question is going to come from.

Hum.

Your line is it something.

Okay.

Good morning, gentlemen.

Good quarter good year.

And spirits, especially as it all builds have said.

That life Sciences with it north of 38, GM and growing as it is just absolutely amazing.

Just to add to the top line on that and it will be set I think we beat the nemesis.

And it shouldn't always my my pet Peeve.

But if we look at our stock value today, there is no doubt that that's what they're reading out there.

Hopefully we've got to focus on that.

Really we saw that.

I mentioned by Kevin that there was some effort being put in there with a 20 $20 million projected free flow cash from operations and 24, I think that's conservative it best but hopefully we can do that.

Can we just expanding on the capital deployment.

A lot of folks talked about deleveraging, which is nice.

High bandwidth, which is nice, but theres a risk as Brad pointed out to that.

But one thing that wasn't talked about was shareholder return cash cash shareholder return many important dividend 25 cents a quarter or something like that with the number of shares that we've got outstanding.

Is that is that on the table as well.

Okay.

Yeah.

Yeah.

It probably not this year Frank.

But again, it's we haven't taken it off the table and.

With fewer shares outstanding when we do when you do finally get that dividend, that's likely to be bigger than.

And then otherwise it would be so I appreciate your patience on that front.

Great Great. Just it doesn't look is there is there a way now that we would have well it wouldn't have where we're practically at the end of the first SKU, what maybe some flavor as to what we are what we can expect are and where we're headed for it for Q1.

Okay.

Yes, Frank.

We're hoping and planning on.

<unk>.

Growth each quarter over the prior quarter.

So.

Got it.

We'll see how the quarter it comes out, but we're we like where we are today.

Great great because they know it.

It against a call or two ago, we were quite specific on some on some percentages, even as far as drilling down to each of the segments.

On anticipated Chris.

Percentages and things like that but it.

Okay. So I guess, we're setting that we're going to have a good Q1 very comfortable Q1 is it.

Yeah, Yeah, Yeah, I think just generally speaking frankly, I mean, if you look at two.

2023, I think that's it.

Pretty indicative of a typical year as far as cadence for us.

Naturally you have.

Summer break for schools in Q3, right Q4 as it normally.

Our strongest quarter and yeah.

Naturally you know.

As you start the year in January.

Have to get work things like snow days reset of payroll taxes.

You know sometimes a program you know will get delayed a couple of weeks or a project or you know it was.

A couple of schools will open a little bit lighter than expected, but you see an acceleration through the quarter.

And ultimately through the year.

And until the school start to taper off second half of June.

So we.

We don't see anything different from from that cadence.

Great. Thank.

Thanks, gentlemen.

Okay.

Like there are any more questions in queue. So I'll turn it back over for any closing remarks.

Okay.

For attending Rcm's fourth quarter conference call, we look forward to our next update in May.

Yeah.

It does conclude your call you may now disconnect.