R C M Technologies Inc (RCMT) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for joining the RCM Technologies year end earnings conference call. Your host for today is Leon Kopyt. Mr. Kopyt, you may begin.

Thank you very much. Good morning and welcome to our call. I am joined with two of my colleagues, Kevin Miller and Art Dell, who will contribute to the presentation of the conference. We will begin with the reading of the Safe Harbor statement, and then continue with the rest of the program. 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 as 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 outsource 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 will now turn it back to Leon Kopyt for some general remarks.

Thank you, Art. I wanted to share several observations with you that I believe are helpful and insightful relating to the current market trends and developments, that are specific to both the IT and the Engineering sectors. After approximately 8.5% decline in the IT services spending last year, the current prevailing sentiment among our management can best be described as measured optimism for an increase in spending for 2010.

We have outlined in our press release the fundamental drivers that we believe should affect the projected increases in the IT sector. Specifically, they are the aging IT infrastructure, in some instances obsolete infrastructure, the beginning of a new upgrade cycle for software and tools, and lastly, a stabilization in the IT sector, not a linear recovery but stabilization of the sector. Some elements of the IT sector remain obscure and will continue to lag, especially as they relate to the adaptation of new technologies. But the infrastructure upgrades, the network security, business intelligence engagements across some of these verticals should see an upswing in demand, and should continue to drive incrementally sequential improvements in our results as the year continues to unfold. Of course, a pullback in demand is always a threat in the event new uncertainties emerge, but in our opinion it is somewhat unlikely for this to occur this year.

With respect to the engineering and healthcare groups, they should continue to enjoy greater visibility in their revenue stream, and should contribute a respectable performance this year. We are encouraged about the new prospects and opportunities in both US and the Canadian markets as the energy sector transforms and expands, while it seeks to respond to increasing demand for competitive energy supplies. With respect to the acquisitions, we continue to look at a number of candidates that can potentially add adjacent and complementary capabilities across verticals and technologies and functions that we currently provide.

I will now turn over the rest of the program to Kevin, who has some specific financial data related to the last year performance. Kevin?

Good morning everyone. As you know, our quarterly sales were $49,371,000, coming from our information technology group $22,277,000, And year end $16,564,000. Our Commercial Services was $10,531,000. Our blended gross margin for the quarter was 25.3%. Information Technology was 25.8%. Engineering was 22.8%, and our Commercial Services group was 28.1%.

Just want to point out a couple of things about the quarter. The first is that it was a 14 week quarter with 66 billing days. Normally our quarters are 13 weeks, and normally in the fourth quarter we have 62 billing days. The extra week was between Christmas and New Years, which it kind of goosed the top line but not the EBITDA line, just because of all the extra holidays, so we actually wind up with a one week increase to SG&A and diluting our gross margins. So that week I would say at best added zero EBITDA. At worst it probably added negative EBITDA for that quarter. So it really did not help the fourth quarter, other than really goosing the top line.

The good news is that we take that historically bad week, a week that historically really hits the first quarter of every year hard, and pushed that into the fourth quarter of last year, so losing that week, that heavy holiday and heavy vacation week, should help to enhance the first quarter which will be, again, a 13 week quarter, just without that poor week. We have a little bit of visibility on the first quarter. January came in pretty strong. As I said, in part because we lost that heavy holiday week. But we were encouraged with the January results.

Obviously in February we are going to lose a couple of billing days as a result of the snow, particularly in the Northeast, which as you know, is a heavy concentration of revenues for the Company. But despite the fact that we are going to get hit a little bit in February, based on what we have seen so far, we are optimistic that we will have a good first quarter. Certainly much better than the first quarter of last year, as it pertains to our EBITDA and operating income. The sales, of course will be below last year I would expect, but more importantly, our operating income and EBITDAs compared to the first quarter of last year should be substantially improved.

Another thing that I wanted to point out regarding our balance sheet is in the fourth quarter we had a negative cash flow from operations. It wasn't big, it was about $300,000. I was hopeful that we would generate cash from operations in the fourth quarter but it just didn't happen, primarily due to the fact that we had a couple of clients in the fourth quarter that were looking to enhance their balance sheet, and kind of slowed down the collections. Our collections were decent in October and November, but we were hit pretty hard in December with a lot of companies holding back payment.

The good news is that we had strong cash flow in January, so we ended the month of January with $12.5 million in cash. I am some what hopeful that by the end of the first quarter we will continue to make some progress on getting our DSOs down, and that by the end of the first quarter we should see a cash balance north of the $12.5 million that we ended January with. So that is all I have for my prepared comments.

Thank you, Kevin. Operator, can we now be ready to begin the Q&A portion of the conference call.

(Operator Instructions). Our first question comes from Anthony Chiarenza with Key Equity Investors. Go ahead, Anthony.

Good morning.

Good morning.

Question, you recently added two members to your Board of Directors, and obviously they both had excellent experience in the utility industry. Does this indicate a greater focus on that industry, or just something that just happened that the people were available?

No, as you know, we have been involved in the utility industry for a number of years. Obviously there is a greater awareness of the growth of that industry both in the United States and Canada. We continue to look over the last several months, almost a year, to supplement our Board with Board members that would bring both some leadership and value to the Company, and certainly the energy sector remains to be one of the major sectors in RCM's revenue stream. We are very delighted to have those two individuals to be part of the Board.

Thank you. And second question, you recently announced a buyback. Can you give us an update whether you have made any purchases at this point?

We are prevented from making any purchases until we get into an open period. So we were not able to make any purchases until we announced our earnings. So as long as we are in an open window, which we will be as of Monday, then we could possibly make some purchases on Monday. And it is our intention to file what is called a 10-B, because our window actually closes the end of the day Monday, because our trading window closes 45 days, or excuse me, on the 15th of each quarter so the window will close March 15, and then it won't open again until we release earnings for the first quarter, in terms of just making open market purchases and making those decisions on a daily basis. It is our intention to file a 10-B 51, so that we can hopefully make purchases during the next quiet period. So to answer your question, we have not made any purchases yet, just because we have been prevented from doing so based on the Securities regulations.

Thank you. Can you comment a little bit more about your acquisition strategy, and what you are seeing? Are there still bargains out there, or has the recovery in the market really limited the number of opportunities at this point?

No, we continue to see some attractive opportunities both in the, primarily in the IT sectors, but sometimes in engineering as well. The multiples are below the market levels that we experienced several years ago, so I think it is a good opportunity for us. We are being very disciplined and very selective, and unless the acquisition adds supplemental or complementary capabilities in our verticals or functions or technologies, we are not pursuing it. And of course, our acquisition structure is very, provides for significant risk sharing as part of the acquisition, so it has to be the right candidate, in order to adapt that particular structure.

Okay. Thank you very much. Good luck.

Thank you.

Our next question comes from Bill Sutherland with Boenning & Scattergood. Go ahead, Bill.

Thank you. Leon, what would you say as you look across your IT practice, what is giving you the best sense of better visibility, and where you may be putting more emphasis?

Well, we are in constant communication with some of our clients, and we are looking at a pipeline, and we are looking at some of the sectors that have been neglected, not sectors but some of the functions that were neglected over the last several years, and I think with a stabilized economy and perhaps a little clearer area of uncertainties, the clients are beginning to look at upgrading the infrastructure, and looking at some of the security, network security functions that have not been done. Clearly there are a number of tools and softwares that were not upgraded over the last several years, and that is a key element of improving productivity and business functionality. So we believe that this is the year that some of the companies will begin to employ that.

So nothing specific that you are sort of circling as something to emphasize, I don't know, either vertically driven, or by type of tech, or I don't know, just going to kind of go with your portfolio as it is situated?

Yes, I think based on our inquiries and based on the pipeline review, that is our feeling.

And the pipeline is definitely showing better, showing an up tick?

Yes.

Okay. And then in technology, is it both sides, both power and non-power that are looking like they will have a better year?

You mean in Engineering?

Yes.

Yes, I think the power sector will continue to contribute as it has last year, and we also acquired new clients in the Aerospace and Defense area as well. So we are looking at both of those elements of the Engineering Group to contribute.

Okay. The only surprising trend you guys mentioned was I guess, California is just a special case, but the general staffing, being under pressure there, I know it is a tiny piece. Just surprised that there is no better trend there yet. Do you think that is going to switch, turn around in the course of the year?

I believe as the economy recovers it will reflect that in the California region, especially in the warehousing and distribution. But for the moment we still continue to see softness.

Okay.

And I think that the southern California economy isn't necessarily going to, or probably won't recover at the same rate as the rest of the country. Obviously there are a few other pockets in the country that are having bigger problems than the country as a whole, right. So the southern California market is, I don't think has really started its recovery yet.

It is still depressed in our opinion.

We are hopeful that it can't get any worse, Bill, because we have seen that group at least we feel like it has kind of hit a bottom, so that is comforting. But in terms of expecting a quick and immediate pickup is probably unrealistic.

And as far as the first quarter, Kevin, the [SUDA] impact on you guys, is it going to have a momentary impact, or have you been able to negotiate most of that?

No, no, it always has an impact.

Particularly this year with the increase in rates.

It has a negative impact to the first quarter gross margins in any year, so it will be even worse this year obviously, so that will definitely impact our gross margins.

Plus you have an unemployment rate adjustment in many states as well.

That is what I was referencing, and whether were able to negotiate pass through?

Well, in some cases we can. In some cases, in this environment, many clients say tough, if you are not willing to eat that, I have got three or four people that would love to have this work that would be happy to eat it. So it is not that easy always to pass on, especially in this environment.

I understand. But I am sort of saying that in the, related to the comment you made that revenue will probably be down Q1 versus Q4, but profitability would be better, and I wasn't sure if you meant --?

What I said was if I compared Q1 to Q1 our profitability will be considerably better than in Q1. If you recall in Q1 of last year, we had a number of problems. If you want to compare profitability in Q1 to Q4, I am also hopeful that, I don't know if we are going to have the same kind of EBITDA in the first quarter that we had in the fourth quarter.

Okay.

And we probably won't, just because the revenues will be down. We had an extra week in the fourth quarter, and then in addition to that which is one of the things I forgot to mention, is in our IT Group we had a spike of about $1 million in revenue, due to some fixed price deliverables in that quarter. So our revenues certainly will be down some in Q1 versus Q4.

But there are a number of things in the fourth quarter, that diluted our margins from where I would have otherwise expected them to be. So net/net, and I also think we will see a little improved SG&A in the first, some slight improvements to our SG&A in the first quarter. I think we will have good EBITDA in the first quarter. If I am going to compare it to the fourth quarter, I am going to tell you that we will probably be slightly under that.

Right.

But there is the possibility that we won't be.

Okay.

It is a little early for me to sort give you an indication as to what that is going to be. If you are asking me a direct question, I am going to tell you that our EBITDA is going to be lower in the first quarter than the fourth quarter, because I would rather tell you something I am confident in.

I get it.

And then we will see what happens.

Great. That is all I need. Thanks, guys.

Thank you.

Our next question comes from Ken Majmudar with The Ridgewood Group. Go ahead, Ken.

Hi, guys, how are you?

Fine, thank you, Ken.

A couple of quick questions for you. How did the performance compare to what your budget was for the quarter and the year?

Well, we compiled our budgets at the end of 2008, and certainly had a much more optimistic view of 2009 at that time. So I don't have the exact numbers in front of me, but I can tell you that we did not meet our budgets for the fourth quarter, as compared to when we did our annual budgeting process. But heading from the second quarter and the third quarter to the fourth quarter we were some what pleased with the results.

We saw a number of improvements in the fourth quarter versus the third quarter, and as you know, the third quarter was improved over the second quarter. We are happy that we have now had three consecutive quarters, and I am talking sequential quarters as opposed to year-over-year of improvement. So we are happy about that. We expect to do a lot better, but we are happy with the fourth quarter relative to where we were coming from.

And if you look at the difference between sort of broadly the budget and what actually happened, would you say most of it was at the top line or more at the margin level, or where was the divergences greatest?

Mostly at the top line, but at the margin level at well.

Okay, great. Just to follow-up on the question about the buyback. Could you explain kind of how you going to proceed with that? I know you said you would file a 10-B-5. How are you thinking about the plan, and what you would like to get out of it?

That is something at this point we just can't discuss that. We certainly have a plan there, but it is not something that I think is in the Company's best interest to really sort of put out into the market.

Sure, as a related question to that, of course as a shareholder, we love to see returning cash to the shareholder and buying back an undervalued stock, but liquidity continues to be a concern, and I am wondering what your thoughts are on how that relates to getting better liquidity in the stock?

Well, it as bit of a Catch 22 right, because we obviously have liquidity problems, but we feel like where the stock is right, so taking stock out of the market doesn't obviously help with the liquidity issue. But we believe that it is such a compelling value, our tangible net worth, forgetting even about our net worth is $4.20 a share, and we certainly believe we should be trading at a premium to our tangible net worth. We believe that by purchasing shares, we are certainly enhancing the return on investment to our shareholders. And that essentially is the main goal of the buyback.

Right. And if I could, just a couple more questions. You guys mentioned that you are hopeful that this year there would be an improvement in the market. Are there any other levers that you can look at, and do you feel like your margins are where they should be, or is there room for improvement there?

We always think there is room for improvement in our margins. I think the way that we are going to get better margins is going to be to continue to shift our business to more value-added engagements. We are not going to get better margins in staffing. In fact, the margins if anything are going to go down in staffing. So the way that we are going to continue to enhance margins. We can do two things. Continue to transition the business, number one, and that is most important.

We can only do that so fast in terms of transitioning the business from what six or seven years ago was primarily a staffing business, to today which is much more of a consulting and solutions business. But we still have a significant component of our revenues and staffing. So that is one way. The other way that we are going to continue to hopefully improve our margins is to manage our bench better, and I think that we can do a better job in 2010 managing our bench than we did in 2009.

Is part of the answer though, to try to look at the SG&A, to see if there could be costs taken out?

I thought you were purely talking about gross margins. But if you are talking about net margins.

Net margins, yes.

Yes, I do think that we can continue to tweak our SG&A and get that down, or a better scenario would be to keep it somewhat flat with sales growth. But yes, I do believe that we can continue to improve our margins, our net margins through managing our SG&A better, yes.

Okay. And my last question is given that you have all of these various business lines, how do you think about capital allocation in each of the businesses? Which is the best business from your point of view, which is the worst, and what are your target returns on investment capital on each of the lines of business?

Ken, it is Leon. With respect to the capital allocations, I believe that continue the transformation of the IT segment into proprietary methodology and bundled solutions is priority for our capital locations, and some of the new applications in the Engineering Group as well. That will drive most of our working capital allocations. Your other question was what? What kind of returns?

No, I was asking a different question. Not in terms of, I would say that as an outside shareholder, I was curious as to when you look at the capital that you have allocated into each business line, and you analyze sort of what kind of returns you are getting for the amount of money that you have tied up in each line of business, so it is your portfolio of your businesses, which businesses do you feel like give you the best return, and kind of where are you unhappy with the returns that you are getting on certain lines of business versus others? It is more of a return on invested capital focus, rather than in terms of acquisitions to add to each of the lines of businesses.

Right. Well, I think that I am understanding your question correctly, I think that the IT segment, has probably the biggest opportunity to get a better return on the capital than we are getting right now. And we can do that a number of ways. First and foremost is to continue to transform that business unit into higher margin, higher value service offerings, and to get growth out of those business units. Our businesses, particularly on the IT side, is such that if you are getting the right margins, you shouldn't be investing capital, you should be pulling it out. So I think that is where the biggest opportunity is to get better returns. We are not getting the kind of returns in the IT segment that we believe we should be, but we do believe we are doing the right things to get it there.

Okay. Since you brought that point up, then do you feel like doing more acquisitions, given that you are not happy with where your returns in that business are is the right answer, or maybe fixing it first before doing any more would be a better way to do it?

It as combination.

It is a combination, and we are very selective as far as acquisitions. So if we are going to do an acquisition in IT, and I hope that we do this year, because I think that that is the, if you make the right acquisition that is the best way to get a return on the cash that we have, we will get a much greater return on the cash if we do a real good acquisition than buying stock back, for instance. So that is our hope. But we have to find the right acquisition candidates. I don't see them as potentially mutually exclusive events, improving our existing operations at the expense of not making an acquisition.

Okay. Thanks guys for your patience in answering my questions.

Thank you.

There are no other questions at this time.

All right, thank you very much for joining us this morning, and we will reconvene shortly. Thank you.