R C M Technologies Inc (RCMT) 2004 Q2 法說會逐字稿

Good morning and welcome to the RCM Technologies Incorporated second quarter earnings release conference call. At this time, all parties have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host Mr. Leon Kopyt. Sir, you may begin.

Thank you. Good morning ladies and gentlemen. I'm joined this morning by two of my colleagues, Brian Delle Donne and Stanton Remer. Kevin is on vacation this week. I think we will be able to handle his part of the presentation. Let me turn over the first part of our presentation of financials from Stanton Remer and then we will open up for question and answer period.

Good morning ladies and gentlemen. Thank you for your interest in RCM Technologies. I will just read the script for our Safe Harbor. 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. The forward-looking statements relate to matters such as estimates used for developing pro forma financial information; the general health and direction of the market for engineering and IT services; our intentions to add changes to our product offerings; our concentration on higher margin service areas; our pursuit of strategic alliances, partnerships, clients and acquisitions; the increased propensity of existing and potential clients to outsource IT and engineering functions; and anticipated operating performance and financial conditions. The statements reflects our current views with respect to future events and are subject to a variety of risks, uncertainties and assumptions relating to operations and results of operations, competitive factors, and shifts in market demand. If any of these risks or uncertainties materialize or if our underlying assumptions are incorrect, actual results may vary significantly from expected results.

The following factors will specifically affect our ability to achieve expected results. Unemployment and general economic conditions associated with the provision of information technology and engineering services and solutions, and the placement of temporary staffing personnel; our ability to attract, train and retain qualified personnel who possess the skills and experience necessary to meet the staffing requirements of our customers and future customers; our ability to achieve and manage growth and selecting suitable acquisition candidates, analyzing their businesses accurately, and integrating acquired businesses into our company; and other risks of our acquisition strategy. Many other factors will also affect our ability to achieve expected results. The other factors we consider most pertinent are referred to in the periodic reports on Forms 10-K, 10-Q, and 8-K that we file with the SEC. We will be happy to send you copies of these documents to you at your request or otherwise you can find them on our Web site, under Investor Relations. Thank you.

When we released our press release yesterday, we reported revenues for the 27 weeks ended July 3 of $86.6m; gross profit of $20.727m; SG&A at $17.3m; depreciation and amortization at $600,000; income before taxes of $2.6m; income taxes of $900,000, and net earnings of $1.7m. Earnings per share on a fully diluted basis was $0.14. For the second quarter which ended July 3, revenues were $45m; gross profit was $10.7m; income before taxes was $1.4m; income taxes was $500,000; and net earnings was $869,000 or $0.07 a share. Our balance sheet's salient features, cash at the end of July 3, actually was $2.4m accounts receivable was $38m; our working capital was $26m. Our tangible net worth was $30.7m; our total loans was $68.7m. Our working capital increased during the six-month period $2m from the beginning of January. Working capital increased $1.1m, since March 31. Our debt at the end of June was $6m, as of today it is $4.9m. Also, we did renew our line of credit with Citizens Bank and SunTrust under essentially the same terms and conditions and that loan has been extended for an additional two years to August of 2006. Our net debt as of July 3 was $1.4m. The days outstanding on AR was 82 days, which was essentially the same as it was at the end of March. Our EBIDTA at the end of July 3 was $1.8m for the second quarter and it was a $1.6m for the first quarter, total of $3.4m. Our CapEx was $58,000. We expect to have approximately $450,000 for the full year. Now I'd like to turn it over for any questions.

Thank you. The floor is now open for questions. If you do have a question, please press star one on your touchtone phone at this time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order that they are received. We do ask that while you pose your question you pick up your handset to provide optimum sound quality. Please hold while we poll for questions. Once again, if you do have a question at this time, please press star one on your touchtone phone. Our first question is coming from Mr. Bill Sutherland from Boenning & Scattergood. Sir, please pose your question.

Thanks. Good morning Stan and Leon. The segment -- so guys are going to do that this quarter.

I think, I can read that for you. The revenue by sector in this second quarter was $25m in information technology, $13.5m in engineering, and $6.8m in commercial services. Gross profit in information technology in the second quarter was $6.7m, engineering was $2.8, commercial services was $1.2m or a total of $10.7m. By percentage wise, information technology 26.6%, engineering 20.8%, commercial services 17.9%, for a composite rate of 23.59%.

Okay. Thanks Stan. I don't have my gross margin model in front of me so this was where I had a variance in my model. I wonder if you could -- if you have it handy Stan, what the prior year gross margin was for the same quarter in those three groups?

Yes, I have that. Information technology was $25.8m, this is 2Q03.

No, you don't need to do revenue. It was gross margin that I had some variance.

It was 28.51% for IT, 12.42% for engineering, and 20.31% for commercial services, for a composite of $20.63%.

I'm sorry, could you repeat IT last year?

IT was 28.51%.

Okay.

I can give you these off-line, Bill.

That's fine. That's all I'm going to ask. Other than if there is any comment you all want to make about the IT gross margin that seems to be materially lower at least year-over-year, I don't have first quarter this year in front of me. Is there anything there that -- ?

It's up a little bit from the first quarter, 40 basis points.

You all didn't talk anything on a looking forward basis in the release or on this call for good ways into the third quarter and just --to get some comments from you all about your business trends and your key business points.

Bill, I think we continued to look for a flat run in the fourth quarter. The number of projects that we had in the pipelines are continuing to materialize, but not at the accelerated pace that we hoped to do it. We did receive an indication from a client in Canada that we were selected -- our consortium was selected to negotiate on a sell-through basis Canada that there are a number of things that need to happen before the project is awarded, one of which is the utilities seeks assurances from the provincial government for rates to build in going forward. The second is a no-strike pledge from the union during the duration of the project. And number three is price from the consortium, which we are presently working on. We don't believe either one of those items are difficult to overcome, but nevertheless they need to happen and the Board will not approve the project until there are assurances from the provincial government for the rate stability and no-strike pledge from the union.

More broadly, Leon, either in IT or engineering, I mean the information from other conference calls is that well few would characterize marketplace as robust there is a pick up at some level again depending on the emphasis, but you are saying flat.

Bill, this is Brian, good morning.

Good morning.

There has been a pick up on the activity side, but at the same time we are battling a pretty strong backwash of clients -- actually hiring permanent staff and actually hiring away a number of our senior consultants who have been with them for quite a period of time. And so, actually it is a bit of a positive sign that the declines have some visibility around the near term and therefore want to make some permanent additions to staff, but it has come at the expense of some of our long term high build rate people that have been working with them for a while. So, they've had an opportunity to get comfortable with capability and then when they've reached this point they were quite comfortable picking them up. We've had to go in and replace that business at the same time with the new businesses coming through. So, we are working to battle the end as we refer to it in the consulting business and manage the starts. We are pointing our compass to the places where we think that the markets are the strongest. This quarter we opened an office Puerto Rico and we opened an office in Phoenix. I think we made reference to our plan to open three offices this year and we opened St. Louis in the first quarter. All these markets are either home to or locations where -- substantial portions of our vertical markets have operations in Puerto Rico, of course, most of our pharmaceutical clients have significant operations and we are moving there to better service them. Phoenix, several of our large banking clients including -- we have Wells Fargo. A lot of the decisions on Wells Fargo are actually made in Phoenix. And so, we positioned ourselves to get closer to that account always we have the accounts that, like AG Edwards where decisions are made there and we are getting closer to -- in all those cases by the way we are national vendors and we have -- we occupy a seat on their prime vendor list and so getting closer to those locations is in anticipation of being able to stay with them as their demand grows.

Bill, it's Leon. We have also received several contracts at the end of the second quarter in July ranging from $2m to $10m. This probably will not ramp up until two or three months from now, but nevertheless there were a number of contracts that we have received in that price range. Just to add to the --

So, you could actually reference, I don't know if you've put it together, but through the backlog that's building what you are saying --

Backlog is building and some of the backlog from the first or second quarter is beginning to materialize, but not again as we accelerated the way we expected.

Leon, is it an issue of implementation schedules by the client?

No. It's an issue of probably someone's working piece, again I don't know whether it is market or whether internal review uncertainties, but it is not a question of commitment, it's a question of some additional staff that are necessary internally to approve and finalize some of these projects.

So, you are saying these are -- this is a sales pipeline, these are not contracts signed.

The contracts I referred to are signed contracts.

Okay. And it's those I am referencing as far as you are seeing that they are not going to move in and accelerate pace. Does that just delays implementation schedules?

No, it takes time to build up to a maximum rate of implementation. We just received them in the last couple of weeks.

About how many half dozen or --?

Four that I can recall immediately.

All right. That's helpful information, thanks.

Our next question comes from Mr. Nelson from . Sir, please pose your question.

Yes, just a couple of questions related to the balance sheet. In terms of intangible assets, I assume that in conjunction with your accounting firm you are doing a test on a quarterly basis, is that correct?

Absolutely correct. Yes. The net realizable value, recoverability of our intangible assets obviously in accordance with FAS 142.

And you don't have a lot of debt, I mean if there were requirements for a write-down I assume that wouldn't impair us financially in anyway. Is that correct?

That's correct. It would have to basically no financial impact in terms of our debt or liability.

In regard to what I gather is part of a -- in the liability section, the reserve for the court action, has there been any movement in that court action since we spoke last?

No, it has not. It still, the appeal has been filed and we are waiting for the decision from the -- we are waiting for it to be acted upon, which is sometime in January, February of '05.

It really may take that long.

Yes. We do with our own pay.

I think -- ultimately, earliest it will be in the fall, but I think realistically it will be first quarter of '05.

And then Leon, just a much bigger picture, when you talk about and these remarks about continuing to assess business strategy in order to respond, maybe it would be helpful just to kind of re-emphasize -- what are the major components of that reassessment? It's sort of gathered some of it by osmosis, but you also mentioned that it's a constantly changing market environment, so what's your current thinking about where -- I guess here is the question, what's your current thinking about where your -- what you should be reassessing or what your reassessment focus should be on?

Well, the reference I think was to the speed and volatility with which market operates. I am referencing the pricing, the competitions, the technology changes, anything that we need to do to respond to that with the ability to mobilize and deploy individuals rapidly, to scale up on certain projects, to have a collaborative effort with others that bring some accretive capability in capacity to RCM. So, those are the things I was referring to. The changes in the market, the technology, the competition and the pricing.

Specifically, has the tendency for some of your competitors to outsource using consultants abroad put us in any kind of a competitive disadvantage in that regard?

No. I think we have developed those capabilities. We can respond quickly and we have on a number of occasions. Brian, do you have anything to supplement?

Now, to that point, we have launched our Smart Shore program almost a year ago now. We have robust delivery capabilities at our disposal in Ukraine, in Poland, three centers in India, and our own dedicated facilities in Canada. And so we have been routinely throughout the past three quarters bidding projects within our distributed development model, which says 'customer if you are buying this primarily on price we can bring global pricing to bare by looking at out offshore centers'. And so I would say, probably frankly a good percentage of our project pipeline is bid with an offshore alternative in there, if not the primary bid as an alternative to the domestic development.

Okay. Thanks.

Okay. Our next question comes from Dominic from Wells Capital Management. Sir, please pose your question.

Good morning.

Good morning.

Just following on the previous comments, I was going to ask about Smart Shore, I think you answered fair amount of it, but I was just wondering, did you talk about bidding activity, are there actually there at this point?

Yes, there is. There are four projects that are in delivery phases. One just got extended and it's really -- that extension is exactly the reason that we like this model, because we are able to perfect the delivery to the client satisfaction. It gives us a very continuous and predictable revenue stream. So, in the one case I am referring to RCM as providing ongoing software testing for a large mortgage initiation company in the western region. And as they generate new products, we are in the critical role of testing it and approving it for implementation. So, it's critical to that client's business success that we expediently and perfectly respond to the task, and them extending us for another six months on this engagement is a very high grade. So, there are a number of projects in the bidding phases, a number of proposals in final evaluation, and four projects that are in the delivery phase right now through the Smart Shore model.

Great. Couple of other questions, I was wondering if you could talk a little bit about SG&A, it looks like .

Yes. Second quarter had 14 weeks in it compared to the 13 weeks, because we were on the retail calendar. That's why we had an odd closing date of July 3. Therefore, you had an extra week of payroll advance, so when you compare it to the first quarter essentially the difference is the extra payroll.

I don't think that I disclosed, I'd like to identify the number. The project, the total project is about CAN$2.2b to CAN$2.5b. We expect that our participation level should be equal to the one that we had on the previous project. That's our expectation at the moment.

About the pass through, will that be there?

No, the pass through will not be there since we are now part of the Consortium and therefore the construction will not be through RCM.

Great. Thank you.

Once again, if you do wish to pose a question at this time, please press star one on your touchtone phone. Once again, as a reminder, if you do wish to pose a question at this time, please press star one on your touchtone phone. We have a follow-up from Mr. Bill Sutherland from Boenning & Scattergood. Sir, go ahead.

Thanks. Brian, I was not sure -- can you give us a little bit of a sense of how much business is actually being done now in that form?

Probably, on an annualized basis, we are in the neighborhood of $5m to $6m presently being delivered and typical profile here is a pilot or a proof of concept project that's in the six figures, 200,000 or something like this just to get the relationship started and prove it out. And then we are typically looking at, hopefully multi-million dollar annual run rate that would come as a result of successful completion of other initial engagement in this model.

And at least trying to be custom programming or more of the management variety?

As I said, the biggest one right now is in testing. A couple of the ones that are near the bottom of the pipeline in terms of hopefully coming through are in platform migration and custom application development. And really, in our case, we have not been tapped to do any application management; it has more been migrating from older technology to newer platforms.

All right. You're press release for the supply chain practice in the quarter, can you give us some color on how that's moving, the size of it?

Yes, I think the most recent press release actually refers to accumulation of three fairly small projects, but ones that are quite important, because of the positioning that it provides us in terms of thought leadership around the Food Traceability. We are working -- two those engagements are in Canada and then one, the more recent one is in the United States. In Canada, we are working with Can-Trace, which is a co-operative government facilitated and private industry groups concerned about the traceability of foods through the supply chain. The second engagement is with the Canadian produce marketing association and then the third is with the US produce marketing association and again these people are concerned and want to understand the consequences of supply -- the traceability of food and supplies through the supply chain. Our working in all of these cases, is helping them with business case analysis and the whole business true to these pilots, the compelling economics of adopting a grass roots solution, the traceability can be put in place and thereby avoid the necessity for government regulated solutions being imposed and so these associations have engaged RCM to try and work with them to develop a grass roots acceptable solution, the traceability because the prospect of Federal Regulation is perspectively far more costly to them and so the work we are doing now is proving out to be the economic models that could be in place if they were to implement certain types of solutions on their own.

Well, beyond this, it sounds like a pretty discreet market opportunity, just - is that supply chain group a meaningful business line?

Yes, our supply chain group actually includes work that punches on our EOP practices. So, in the supply chain, our QAD practice is residing, our Oracle practice resides and then all the work around that data synchronization. So, yes that's a fairly robust portion of our solutions, revenues and earnings.

Okay. Great, thanks

Here we have another follow up from Nelson Obis from . Sir, please pose your question.

Yes, just a little if one of our clients hires a consultant, is there any monetary residual benefit to us?

Typically the agreements have a transfer fee, but they typically expire after six to nine months, some of the best case during the year. But as I referred to, many of these people have been on these assignments with these clients for three, four, five years, and they almost felt like permanent fixtures with the client and so it was not a big deal for them to simply convert them to a salaried employee. So, the residual is a not a monetary one, the hope is though that they continue to think of us highly in the people if they in a position to direct work, will direct it to RCM.

Okay, thanks.

Okay, once again at this time if you do wish to pose a question, please press star one on you touch-tone phone. Once again as a reminder, if you do wish to pose a question at this time, please press star one on your touch-tone phone. Gentlemen, there appear to be no further questions at this time.

Very good. Thank you, very much we'll see you at the end of the third quarter.

Thank you.

Thank you. This does conclude today's teleconference. Please disconnect your line at this time, and have a great day. Thank you.