R C M Technologies Inc (RCMT) 2010 Q3 法說會逐字稿

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

So we will begin with our presentation of financial statements.

Okay, first I just wanted to comment that we will likely be making some forward-looking statements in the call, and then I just want to refer everybody to our Safe Harbor statement, both in our press release and in our 10-Qs regarding forward-looking statements.

The -- so I will just read off the sectoral data here. For the quarter we had $37.489 million in total revenues. The Information Technology revenues we were $17.072 million. Engineering revenues were $15.564 million. Our Health Care Services revenue was $4.853 million. And that is on a standalone basis, which obviously does not include our light industrial and commercial staffing division, which we sold at the end of the third quarter.

The blended gross margins for the quarter were 28.34%. The gross margins for Information Technology was 27.57%, the Engineering gross margin was 27.62%, and our Specialty Health Care Services gross margins were 33.34%.

Thank you, Kevin. I will depart slightly from our normal process and preface the Q&A period with a few comments relating to the results.

I think it is obvious from my quote in the press release that we were not pleased with the revenue numbers in the Q3. We expected the IT group to perform and contribute at much a higher level given the reasonable improvement in the market conditions. As we indicated, the performance shortfall is principally sales related, and it required us to reassess the current sales weakness and institute a corrective plan that is designed to return the sales units to expected performance levels.

The question is what are the specific measures we have taken to improve the sales performance? Well first we are reassessing our account [executive] in the IT group. We have also formulated a more compelling sales message. We have improved the accuracy of our -- prospecting accuracy of the new client. We also improved the quality and increased the velocity of the sales pipeline. And we are managing our deal-closing process at a much more improved level. All this should improve the sales productivity and yield positive results within a reasonable time frame.

The design and delivery stage and services and support stage are fine. So it is clearly related to the sales performance.

The IT pipeline remains relatively weak, but RCM is a finalist among other competitors on approximately $10 million worth of business that should be awarded between now and the end of the year. Probably within the next 30 to 45 days. Conversely, the Engineering pipeline is quite robust. It is well over $200 million, with the work to be awarded with first and second quarter of next year and spread over several years. We already started a number of those contracts in the initial phases of anticipating the larger award next year. The Health Care backlog is sufficient to support the consistent revenue stream with a reasonable growth projected in 2011.

With that I will ask the operator to turnover to the Q&A period.

(Operator Instructions). Please hold while questions come into queue. There are no questions at this time.

Are you sure? Can you double-check again with anyone?

(Operator Instructions). Our first question comes from Jason Schacht with Heartland. Please go ahead.

Good morning, everybody.

Good morning, Jason.

I wondered if you can comment at all on the CDI offer. Is that offer off the table at this point?

Jason, it is our policy not to comment on some of these strategic issues. I think our position has been articulated clearly in the recent press releases and comments that we made prior to today. So I'm sorry, but I cannot comment on it.

Okay. And can you also maybe comment a little on the cash position? Did that benefit from some payroll activity maybe not coming at the end of the quarter?

There's a number of factors. We did not -- the majority of the Company is on a biweekly payroll, and we did -- and as you know, our quarters always end on a Saturday and our payrolls are always on a Friday. So in Q3 we had the benefit of the payroll ending a week before the end of the quarter, so that's about -- roughly $1.5 million in cash benefit that we won't see in the fourth quarter because our payroll ends -- we have the payroll on the last day of the quarter. So we did get a little bit of a benefit from payroll.

But there is probably two primary drivers, I think , and obviously there's a lot -- if you -- when you see the -- when you look at the cash flow statement in the press release, you can see where it is coming from, right? But I think the two primary drivers are improvement to cash collections, and then obviously having sales down in the third quarter versus the second quarter obviously also helps from a cash flow standpoint.

Our Health Care division, as I think everybody knows, has significant seasonality in the third quarter. We typically lose about $2.5 million in sales from the second quarter to the third quarter, which is purely based on seasonality and the fact that our largest Health Care client is shutdown -- virtually shutdown for July and August. It has the New York City Board of Education. So that obviously helps with the cash flow as well.

But overall, we just -- we had some -- we had a very good quarter as far as cash collections are concerned. It is unlikely that we are going to see positive cash flow in the fourth quarter due to a number of reasons, not the least of which is the payroll, which I just mentioned, and then what we have typically experienced is that a lot of our big customers in the fourth quarter are hoarding cash for their year-end balance sheets. So I would expect that we won't have great collections in the fourth quarter compared to the second and third quarters of this year. So we will probably have some -- somewhat slightly negative cash flow from operations in the fourth quarter.

Of course we will have the Intertec sale. We'll benefit that, because we retain -- we'll offset it a little bit, because we're -- we kept those receivables. So we should get 90% of them collected in the fourth quarter. But cash flow will probably be down a little bit in the fourth quarter, but should get back on an upward trajectory in the first three quarters of next year.

Okay. Thanks, guys.

Our next question comes from Mark Marcon with RW Baird. Please go ahead. Mark Marcon: I have a couple of follow-ups. Specifically on he Health Care portion of the school, are the -- is the school business going to be impacted, or have you seen any impact from any budget or austerity measures?

We have not. We have not. I mean, all indications in the fourth quarter is we are back in business. October was consistent with prior Octobers. It is our anticipation that that is not going to have any major impact on us, and that we will continue to enjoy a lot of success there.

Mark, the services that we provide are mandatory required services for the students. So I don't think they are subject to the budgetary cuts.

Great. And can you talk a little bit -- you talked about it a little bit more, but can you give a little more color in terms of what the go forward looks like on the IT side from your perspective? Just what are the things you are doing to drive that, and kind of the near term initiatives, and how long you would expect it would take before you would actually see the results from those?

Well, as we indicated, the weakness of -- in IT is not the delivery, is not the support, it is not the service. It is clearly the sales. I have enumerated specifically four or five actions we have taken in order to improve the sales productivity. It is not an action that will result in immediate, meaning over the next 30 days in improvement. But I think it is action that will yield positive results in the first quarter of 2011. I'm optimistic that the current $10 million of pending business is -- at least we will go 50%, and that certainly will go a long way between now and the first quarter to bridge some of the weaknesses.

Some sectors remain to be stagnant -- some sectors that we serve in IT, but again, there was really no reason why we should not participate and share in some of the growth that have taken place in the IT

It seems like everybody else is experiencing pretty good growth in that space, so it is a little surprising.

I know. That's why it is disappointing to us too. I think that the measures we have taken in the sales area should definitely yield results.

And not offering it as an excuse, Mark, because we are disappointed with the sales efforts in IT, but where we have seen some pretty significant weakness is an area -- or some areas where a little it is a little bit of a struggle. As you know, life sciences is a very strong vertical for us. It has been for a very longtime and will continue to be. But we had two major, major engagements that just happen to both end in the second quarter of this year.

Additionally we are on the short end of two major mergers in the pharmaceutical space. We have been making nice in-roads with the acquirer in both of those instances, but the revenues for those two clients, which used to be our two biggest life sciences clients, are down significantly. So there is new players there that are making the buying decisions, and we're getting work there, we're just not getting it as of today at the same level that we were a year ago. But -- so we had four kind of major life sciences clients that the revenues all went in the wrong direction kind of around the same time. So it is a big challenge to replace those revenues.

The second area of where we have seen some pretty significant weakness is in our Michigan unit, where we are starting to see some signs in the state of Michigan that that economy is getting a little bit better, but that is pretty recent. And as some of our projects that were already underway around the time that the real weakness in Michigan started, as those petered down, we just didn't replace some of those engagements quick enough.

So there are some understandable circumstances in terms of where we have seen some of the erosion. We just have not been quick enough to replace the revenues. But we feel we have people in place that have been extremely successful in those positions in the past, and we have no reason to believe that with some of the tweaking that Leon talked about and some of the changes in terms of improving our sales staff that we won't see results. I think it is going to be unrealistic to expect any significant ramp-up in revenues in IT, I would say for certainly the fourth quarter and probably the first quarter of next year.

But there are a number of other areas that we are strong in that we are focused on. One example is our project management business, which has recently won some nice contracts. Our human services group is doing very well. So we have some areas in IT that are doing very well. We just need to get the life sciences really going and get our Michigan practice going, which we believe that we will do. The good news is that our October sales were pretty much flat to a little bit up from September. So we feel reasonably confident that we have kind of hit the bottom as far as our IT group is concerned. We will see in the next couple months. There are no guarantees, but we feel like absent the seasonality that you typically see in November and December, that we are kind of bottomed out from a sales standpoint and should see a slow and gradual rise there.

It is probably also worth noting on the Engineering side that over the next couple quarters, we don't see any significant uptick in revenues from Engineering in the fourth and first quarter, and probably in the fourth quarter we will actually probably see a little dip there in the revenues. But I don't -- we don't really see any issues there. That's kind of just what we normally see in Engineering. As we win big projects and those projects come down, there is normally some gaps in between big projects.

Leon mentioned we have an incredibly robust pipeline in Engineering. Many, many big projects, multimillion dollar projects -- in accumulation, over $200 million -- that we feel we are in a prime position to win those contracts. Again, there is no guarantee we will win them. But we feel we are in a good position to win them. We have been successful doing the same type of work for the same clients in numerous occasions.

The risk there will be a timing as to when the projects will start. Obviously, the first risk is that we win them, but we feel confident we will win a good share of them. But the question is when are those projects going to start? Because these big engineering projects don't always start when the utility companies want them to start, for all kinds of reasons. So we are not sure -- we expect a pretty big ramp up in our Engineering revenues sometime next year. We just don't know if that's going to be Q2 or Q3 or exactly when is going to be and some of the projects we expect to win, when they are going hit.

So I'm giving you a little more information than you asked for, but I'm sure you are interested in hearing it.

Yes. So basically if things go well on the Engineering side, what level of growth do you think you will be able to attain? Say -- it sounds like by the second half of 2011 you should see these come through, right?

That's when we expect them to be awarded, so -- but -- and if we win them, and we think we will, you are looking at probably the second half. I hate to be evasive, but it is just the nature of the beast. Some of those contracts can hit in the first quarter and some of them may get delayed until the fourth quarter. Just to give you an example, one of the biggest contract that we are bidding on, we all feel confident the project is going to happen. We feel reasonably -- we feel very confident we are going to win it, but it is not financed yet. So it is a major contract that is going to be awarded in Canada. We believe it absolutely has to be done, and they'll get the financing, because they have to have the power in Canada.

But these things -- there are political forces at work, and there is a lot of things that are obviously way out of our control that can delay these projects. So to say exactly when they are going to hit, we feel like the second half of next year they should hit, but it could be sooner or it could be later in the year. We are cautiously optimistic we can win some of these projects over the next two quarters. They won't necessarily start after we win them, but we feel we have a good chance to win some decent sized projects in the fourth and first quarter. But, again, we often are told on these things that, yes, we are going to make a decision by December, and then February rolls around and the decision still isn't made yet.

Yes, that's clearly outside of your control, but eventually it will happen, and then you should see some improvement with regards to the growth that you are experiencing.

We believe that we could see -- and I'm not going to put a number on it, but we believe we could see some significant growth in our Engineering group in 2011. And again it might not be growth 2011 over 2010, because depending on when these hit, but at some point we believe we could see a significant pickup in our quarterly run rate for Engineering.

Mark, some of these projects are also staggering in phases, and the encouraging thing is we have already started in the preliminary phases of some of these contracts. Some of them are assessments, some of them are feasibility studies, or maybe a better forecasting and budgeting, but nevertheless, they are -- some of them are underway.

Great. And going back to the IT portion of the business. From your perspective, are you seeing -- it sounds like they are all this natural terminations of projects that went to their conclusion for one reason or another or because of a merger. Not necessarily because you are displaced competitively. Is that correct? And to what extent -- I'm trying to understand what extent might you be vulnerable to some of the trends that we are seeing with VMS and MSP and vendor procurement and things of that nature.

I don't think that that's our concern. I think the speed of replacing the clients and acquiring new clients is what we need to focus on. You will have a natural cycle of attrition of the clients and the projects termination, but we are not dominating the market that we have to fight for 50% share. It's a fraction of a market, so I don't think we should be affected.

Okay. And as the business comes on -- I mean, the nice thing we saw this quarter was the improvement with regards to the margins. How should we think about that?

That was one of the initiatives in 2011, is to improve our margins. I must tell you that we are right on target with improving those margins. I believe that we should continue to improve them. I'm hoping in 2011 we will be closer to a 30% on a blended margin basis. Maybe even better than that.

30%?

That's our goal.

We are talking about gross margins.

Yes.

Yes.

Great. Thanks, I'll follow back up off line. Thank you.

(Operator Instructions). I have no questions at this time.

All right, thanks very much for joining us . We will see you next year.