R C M Technologies Inc (RCMT) 2009 Q1 法說會逐字稿

Ladies and Gentlemen, thank you for joining the First Quarter earnings Conference Call.

Your host today is Leon Kopyt. Mr. Kopyt, you may now begin.

Thank you good morning and welcome to our first quarter Conference Call. I am joined by two of my colleagues, Kevin Miller and Art Dell who will present their portion of the Earnings Release. We'll start with Art and then we'll continue with Kevin and open up with questions and answers after that. Thanks. Go ahead, Art.

Good morning. The following is our Safe Harbor Statement.

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 estimates used for developing pro forma financial information, the general health and direction of the market for IT and Engineering services, our intentions as to 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 outsourced IT and Engineering functions, and anticipated operating performance and financial condition.

The statements reflect 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 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 also will 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 copies of these documents to you at your request. Otherwise we encourage you to review the documents as they appear on the RCM Technologies website under Investor Relations.

Thank you. I'll now turn it over to Kevin Miller to provide the selected financial data. Kevin?

Okay, good morning, everyone. As you know, we had total sales of $48.048 million comprised of the following. Information Technology was $22.901 million our Engineering group had revenues of $14.87 million, our Commercial Services group had revenues of $10.274 million. We had a blended gross margin for all three groups for the quarter of 22.77% comprised of the following. Information Technology was 21.88%, Engineering was 20.80%, and our Commercial Services group was 27.61%. So that's the sectorial break out.

I'll turn it back to Leon.

Thank you very much, Kevin. Iris, can we open up for questions and answers, please?

Yes, sir, it will be no problem. (Operator Instructions) Our first question comes from Bill Ditullio. Please go ahead.

Good morning. Thank you for taking my question. In the release you said that saw some demand weakness in IT and Commercial Services. I was wondering if you could just give us your view for -- on the economy for the rest of the year, when do you see demand probably picking up for these two segments?

I think the honest answer to that question is we really don't know. We have not seen anything in our quarter that indicates the demand for services in those two areas are going to pick up any time soon. What we did see, however, was we had a horrible January. And historically, January is always our worst month, even when we've had great years, January is usually pretty poor. So what we saw in the quarter is a pretty significant improvement in February and March versus January. So for instance, we had average sales per day in January of about $717,000, in February we saw that up a pretty nice uptick to about $777,000 and then in March about $787,000.

Perhaps just as importantly, we saw a pretty nice uptick in the gross margins in February and March as compared to January. So January we had gross margins of 20.3% versus in the high 23s and low 24s or excuse me, mid 23s and very low 24s in March to get us our blended rate for the quarter. So we saw a nice little uptick in sales and we saw a nice uptick in margins. Part of the reason obviously the biggest reason for the uptick in margins in the second and third quarter is the fact that we had higher sales and therefore, better utilization.

I don't know that, I can't sit here today and tell you that the uptick in sales in February and March is really indicative of any improvement in the overall economy, so much that it's just an improvement over January. And in January, we had sort of a confluence of factors that contributed to such a poor January. I think one is the fact that just general economic conditions in general, general hesitation I think of companies in our industries and our clients, just general hesitation to spend money starting off in 2009.

Additionally, because of the way that we end our quarters, Christmas ended, our quarter ended on the 27th, our quarter, excuse me, the fourth quarter of last year-ended on the 27th of December and we had Christmas on a Thursday. So we had almost the whole week between Christmas and New Years fall into the first quarter of 2009. And what we saw that week was a lot of our consultants not only taking vacation like they normally do every year, but in some instances we saw clients basically sending our consultants home saying we don't want your consultants working this week. For instance our biggest client Sikorsky shut down their Company that week, so we lost our whole week of sales at Sikorsky.

So I think that what was encouraging to us is that the February and March were much better than January. And if those two months sort of the performance that we saw in those two months hold out over the balance of the year, we expect that we will be generating positive EBIT and we'll be generating positive cash flow going forward. How much better it's going to get from the first quarter is pretty hard to say at this point because we have not seen any clear and convincing evidence that the economy is coming back. So that's probably a little bit more than what you asked, but--

No, it provides great depth. So just looking at second quarter I know you say it's tough to look out the full year but just looking at second quarter should we expect top margins to be in the kind of what we saw in the February/March range as far as -- as well as revenues?

Yes, I think, I mean I'm optimistic that we'll see revenues in the same range and we also pick up an extra sales day in the second quarter. The second quarter has the least amount of holidays and typically the least amount of vacation of the four quarters.

Right.

So we're cautiously optimistic that we'll see a little bit of an uptick in sales in the second quarter as opposed to the first quarter. And we should definitely see some improvement in our margins. The only caution is that we're in some very turbulent waters right now, as you know. So at any time, it's not a shock to have a project cancelled or put on hold. We have two major pharmaceutical companies that are in the process of being acquired and we saw some impact in the first quarter, a major project got put on hold that we were counting on contributing pretty significantly in the first quarter. So those are the kind of things that we're pretty nervous about obviously going forward.

Sure.

As you also may know, we have a pretty robust automotive practice. And that practice obviously is not doing well because of the, and most of our business is with sort of the automotive suppliers. But those companies are very hesitant to spend right now. So to answer your question, yes, we do expect to see improvement in the second quarter. But obviously we're nervous about the economy, particularly as it pertains to our IT, our entire Information Technology group and also our our Inter Tech group which as you know does light industrial staffing in Southern California. And the primary customers there are manufacturers and retailers and we've seen a significant decline in business there. It's still contribution margin positive, but the business is off a lot.

So if we look at it as from a possible upward momentum for second quarter and going forward what segment do you think we would see it in, would it be in Information Technology or the Engineering?

Well we've won a nice few contracts in Information Technology in the first quarter and into the second quarter but unfortunately, some of the other factors are sort of counterbalancing that some. So I'm not optimistic that we're going to see a big uptick in Information Technology sales in the second quarter, I think it would be foolish to forecast that. But I do think where there's some upside is in our Engineering group.

As you know, our Engineering group is less tied, the major verticals. We have a couple smaller verticals in manufacturing and automotive also, that are hurting pretty badly because those two segments are in Michigan and Wisconsin which are states that are really feeling the economic pinch more so than some other states. But our two major verticals which are the power systems vertical and our aeronautics vertical are not as dependent as what's going on in the overall economy. And we have a pretty nice pipeline of projects that we're bidding on, some of them which are quite sizeable. So I do believe that there is some upside there.

You may have noticed that our Engineering sales are down quite a bit in Q1 versus Q4, but they were up Q1 over Q1. And the reason they were down as compared to Q4 is because we had two major projects that we blitzed in the Fourth Quarter which was great for the fourth quarter. But in a business that tends to be a little bit lumpy, we don't just replace them like that. But, the pipeline is good. We're very happy with the pipeline in Engineering.

And these projects that you're bidding on, if they will become wins, when do you think they would be started?

Some of them could be started in late second quarter and some in third, fourth quarter and into 2010 as well. Depending on the project

Okay. Great. Just looking at the healthcare vertical with the new stimulus package that's come out there's a lot of money attributed to electronic medical records initiatives and implementing those systems. Do you feel that within commercial services you'll be able to play in that space and capture some of those dollars related to electronic medical records?

Yes, I don't think that's something that's really going to impact us in terms of the services that we're providing right now. And when I say let's separate our healthcare group from our Information Technology group, certainly on the Information Technology group there maybe some opportunities for us to play in that space. But as you know our healthcare group right now is primarily providing many different types of therapists and nurses.

That market, we believe is going to continue to be pretty strong. But that's been impacted by, it hasn't been impacted like IT and light industrial but certainly that's been impacted a little bit by the economy as well. But that group seems to be holding steady and performing quite well and especially when you consider the fact we've gotten such explosive growth out of that group over the last couple of years.

All right, okay, great. And my last question is just concerning if your cash balance increase this quarter obviously because of the settlement, can you just give us any, what are your plans for that cash?

We don't have any immediate plans for the cash. We continue to look at small acquisitions, but other than that we don't have any immediate plans. We think the prudent thing to do right now given this economic environment is to take a wait and see approach and be pretty conservative with that cash.

Okay, great. Great guys. Thanks for taking my questions.

Our next question comes from [Anthony Terensa]. Mr, Terensa, go ahead.

Good morning. Thank you for taking my question. I guess following up related to the cash, have you guys or the Board given some consideration to buybacks? Obviously given where the stock price is relative to the assets of the Company, book value, etc., the stock price doesn't make much sense, so what kind of options are you looking at?

This is Leon Kopyt. Yes, we are continually evaluating stock repurchase and obviously other options that's available to the Company. It is our belief that we can bring more accretion to earnings through growth and acquisitions rather than stock repurchase. And if you look historically, stock repurchases have not had a sustainable effect on supporting equity values at least in our analysis. So we feel we can deploy the cash and growth from acquisitions a lot more accretive than repurchase. But we're certainly evaluating that option as well.

And the other thing that I would add to that is there are a lot of reasons why our stock trades where it's trading. But I believe that one of the reasons is because we have such thin float and such low trading volume. I'm not sure that going out and buying a bunch of stock is probably going to potentially exacerbate that problem as opposed to helping it.

It certainly doesn't help the liquidity.

Exactly.

I think you're exactly right. The only issues though if you do buy it at these prices you're increasing book value and it's accretive to net growth and assets so it's a benefit to the shareholders.

It is, but we think we can bring greater accretion through earnings and growth as opposed to just the stock which has a tendency to temporarily rise, but it's not really a sustainable effect.

Right. No, I understand what you're saying. Do you have some plans to once things stabilize to actually go out to Wall Street to market in terms of Public Relations to try to get the information out that this is a great buying opportunity?

Yes, absolutely. As long as we have the visibility and predictability of the revenue and there's going to be some stabilization in the sectors, it is our intent is to continue to promote the Company. But as long as the economic and the business landscape is fundamentally changing and the dynamics, it's kind of difficult to have some great visibility going forward.

Sure. Last question. In terms of the challenges you see now, your challenges you would consider mostly cyclical, you don't have any strategic issues or things that are impacting the Company? In other words when the economy recovers you expect your businesses to do well again so you have cyclical problems at this point?

Yes, absolutely, and because we have a great diversity, even in the IT sector, we participate in infrastructure, network, communications, systems, applications, enterprise software, so any one of those elements of the economy that will show some recovery will obviously impact us as well.

Good. Thank you very much. Good luck.

Thanks.

(Operator Instructions) Our next question comes from [Geva Riamesy]. You may begin.

Hi. This is Geva from [GJ Investment Funds]. I want to congratulate from the CMD senior team to do first quarter profitable. I have a question. Is there any pricing pressure from existing clients on the new placements the Company is making because of the economy right now is slow, so is there any pricing pressure?

Yes, yes, there's quite a bit of it. Leon?

Yes, there's always pricing pressures and some sectors are more competitive than others. And that's why I think that we need to continue to create some intellectual property and proprietary packages that's not impacted by competitive pressures and gives us greater barriers for our competitors to cross. And therefore not impacting us as much as normal traditional commoditized services would provide.

Okay. Any new clients obtained the first quarter?

Yes, we had a number of new clients in the IT. We had a number of the Engineering clients as well. As the relationship develops obviously we'll get more entrenched and more involved in their infrastructure and activities, but it's early to tell the contributions that it will make.

Okay, and because of the economy is slow, is there any workforce reduction that's happening right now in the first quarter? Or it looks like the economy may come back end of the year, so you're not planning any workforce reduction or something like that? What is your position on the Company right now?

Well, Geva, we are continually looking at revenue and cost balances to make sure that they are properly adjusted. So in some ports of the Company we need to make some reductions in order to reflect lower revenues.

Okay. I'm good.

Thank you.

Thank you.

There are no more questions at this time.

All right thank you very much for joining us and we'll see you at the end of the Second Quarter. Bye-bye.