R C M Technologies Inc (RCMT) 2011 Q1 法說會逐字稿

Welcome, ladies and gentlemen, to the RCM Technologies first quarter earnings. Your host for today is Leon Kopyt. Mr. Kopyt, you may begin.

Thank you very much. Good morning, and thank you for joining us for our first quarter financial results conference call and a brief business update. Joining me on today's call is Kevin Miller, our CFO. At this time, I think all participants are in a listen-mode only. Later, the operator will give you instructions for our question-and-answer session.

At this point, I'll ask Kevin to go ahead with his presentation of financial results, and then we'll return back to the comments.

Okay, good morning, everyone. 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, and these matters may change in the future. For more information on our forward-looking statements and the risks, uncertainties and other factors to which they are subject, see the periodic reports on Forms 10-K, 10-Q and 8-K that we file with the SEC, as well as our press releases that we issue from time to time.

Thank you. I will now provide the sectorial data for the first quarter of 2011.

As you've seen from the press release, our total sales for the quarter were $38,706,000, which is broken out as follows -- Information Technology $15,246,000, Engineering $16,166,000, Healthcare $7,294,000. Our blended gross margin for the quarter was 28.55% and broken out as follows -- the Information Technology 28.86%, our Engineering group 26.86%, and our Specialty Healthcare group 31.65%.

So, thank you, and I'll turn it over to Mr. Kopyt.

Thank you, Kevin. Given the historical softness that we typically experience in the first quarter, we are encouraged with the reported results. Both the gross profits and the operating income margins remained relatively firm, and all are within our expected ranges.

Since our last conference call at the end of February, there has not been any significant changes, shifts and trends in our business. The revenue visibility for the remainder of the year continues to be relatively good. What I think a reasonable expectation is is that some transient soft patches may occur from time to time, but the overall near- and long-term prognoses are favorable.

As you know, some segments of our business are dependent on and driven by the capital spending and operational improvements. We believe both of those conditions are poised to materialize during the course of this year.

With respect to the new business that we secured recently, we've booked a number of medium-sized contracts, received sizable extensions to the existing contracts, and there are two new contracts in particular which I think is worth mentioning. Specifically, they are one engagement to develop and deploy a sizable Microsoft 2010 project management service suite for a major automotive supplier. That particular contract has the potential to expand in scope and services and will last approximately 18 months, perhaps 24 months. The second one is RCM was selected to be a project manager on a cogeneration project for a major New York City utility. The project involves capturing waste gases from waste and wastewater to generate electricity. It's a leverageable and a repeatable technology that should expand our current service offerings. It has an attractive market positioning and a very desirable segment for alternative energy sources. So we are excited about these projects and others that we have received and that continue to expand our pipeline.

Thank you for listening to the results and the comments. Operator, could we open up the question-and-answer session, please?

(Operator instructions). Okay, the first question comes from [Steve Rudd] with USIT. Please go ahead.

Hi. Nice quarter, and, first, thanks for the continued hard work. I want to ask you about in particular the two new projects. Do we see that the revenues coming in off of those projects should give us, then, incremental growth over the next 12 to 18 months?

I think that's our expectation, yes.

Okay.

Well, yes. I mean, certainly those two projects in and of themselves are not going to drive significant growth. But we feel that given those two projects and several other initiatives that we have, we're cautiously optimistic that we'll see some sequential growth from Q1 as we move out into Q2, Q3 and Q4. The only thing that in our mind could really give us any hiccups is in the Engineering group. While the pipeline is outstanding, and while we're very excited about the prospects for that group over Q2, Q3 and Q4, we do have a major project that will start to wind down a little bit in Q3 and Q4 at Bruce Power. But we're reasonably confident that this engineering project and a few others that we believe we'll win will more than offset some pretty significant declines at that client in the short term. But in the Engineering, there could be some gaps, because we're typically winning some pretty big projects and they don't always start exactly when you expect them to start.

Okay. And these ones -- I mean, I take it, obviously, the co-gen is in the Engineering group?

Yes. Yes.

That's good. And so that one -- does the ramp up on that co-gen project correspond to the ramp down on the Bruce Power one?

Timings are not exactly sequential, but I think that we are reasonably comfortable with that ramp ups in some of the projects that we have in the pipeline or are beginning will --should offset whatever the revenue declines are in Bruce.

Yes, we'll also be starting a nice size project with Quebec Hydro around the time that Bruce starts to go down. In fact, it's our anticipation that a team from Bruce will just move right to Quebec Hydro if everything hits the way we expect it to. And then we do believe that there's a -- we have one big project going on at Bruce, which is going to start to wind down in the second half of the year. But we also have a nice pipeline of small projects at Bruce as well -- add ons, additional scope on the big projects. I mean, these are small, but we also have some projects on the capital side that we're bidding on. We have some interesting things going on at OPG, and in the United States, NYPA in particular, with several other utilities in the United States where we've got some exciting opportunities.

So it's our anticipation that going forward, we could see some small sequential growth in the Engineering despite the fact that the Bruce is probably going to go from -- we did about $4 million with Bruce in the first quarter. That'll be down at least 500 to -- or more in the second quarter. And then in Q3 and Q4, it'll come down -- probably wind down to about $2 million in the fourth quarter. So we'll lose some pretty significant revenues there, but in combination with this project and others, we at this time feel like, absent any major project delays, that we'll be in pretty good shape.

Okay, that's pretty encouraging. And on Healthcare, in the description there doesn't seem to be any particular big healthcare piece coming in. Is that accurate?

Well, the healthcare business really for the most part does not win big contracts. As you know, we have one big client in that group. That continues to go strong. But when you look at the rest of the clients, they're $200,000, $300,000, $400,000 on an annual basis, $500,000, and of course we have a bunch that are much smaller than that. So we're typically not winning big engagements. But what is encouraging in the Specialty Healthcare group -- and I'm talking about our healthcare staffing group, not the work that we do out of IT for healthcare companies in general, but our Specialty Healthcare staffing group. What I think is encouraging there is we're seeing some traction in our strategy to diversify that group geographically. We're on a list -- a school system in Tennessee. We got on a list. We've been working on that for about 6 months. At this point, we don't know whether we're going to put a couple bodies there, or 20 or 30, or who knows. It's just it's too early to tell. But the fact that we're on a list in Tennessee is exciting to us. And we're bidding on some other cities around the country, several in California, a school system in Chicago --

Maryland.

Maryland. So our big push in the Specialty Healthcare group this year is to get some geographic expansion, because we realize that we can only get so much growth out of New York City, which is --

And you -- yes, that's where our big contract is. But I just wanted to make sure -- I'm probably telling you the obvious. I mean, in most of these places, it's worthwhile to team with a local -- some kind of local partner who's got the political oomph to make sure we're covering all the right places.

Yes, and we do that. I mean, sometimes that makes sense, and sometimes it doesn't depending on the situation. But we believe that we have a very compelling offering when it comes to our Specialty Healthcare group. In some cases, it makes sense to co-bid, but in other cases it makes sense to go for the work yourself.

Or even -- I'm not even talking on the -- in many parts of the country, it doesn't matter how compelling your package is, it's who's going in and talking about it. So that just -- sometimes it doesn't even have to be somebody who's going to be doing the work with you, but rather just the person who does -- opens the doors and makes sure that you get a good and fair hearing on the offer.

Oh, yes, we understand that. And we do that quite a bit, particularly on the Engineering side. We often partner, not only because maybe they have good contacts, but if you bring a team together, it can cover all of the -- for instance, we don't do construction, but we often work with construction partners on the power side. But, no, we do quite a bit of that.

Yes. I mean, that's the key in all these -- it may seem like it's not, but in the school districts and in all these local, governmental and quasi-governmental entities, it's who you walk in the door with, and that person doesn't have to have half the project, they just have to be incentivized enough to make sure that --

Get a piece of it. Yes, we understand that.

Yes. Okay.

No, you're right, a local presence and relationship is important, and we understand that.

Okay, good. I wanted to just ask you, finally -- can you run through with me what -- we had an offer on the Company a while back, but put that aside. What do you call get -- Leon, let's start with you -- in the event of a sale of the Company under the -- and I had gone through this, but just if I can make sure I got it right. If you could just go through what you get if we sell the Company.

Your question refers to what? What I contractually get, or what the Company gets?

Yes, exactly. No, what you personally contractually get on the sale of the Company.

Well, as you know, I have a stock position with the Company, and all of the other compensation are well defined in the filings with the SEC, the termination benefits agreement.

Yes. So the termination benefits agreement is about, if I got it right -- and I haven't read it in a few weeks, so I apologize. But as we're doing better and better, to me the sale looks -- or I would put it a different way, the purchase of the Company looks more and more compelling. I mean, we've got quite a terrific Company here. But if I'm not mistaken, it's about $10 million flat out. I mean, you just get -- is that about right?

Well, it's more in the neighborhood of $6 million.

Yes, it's not --

But let me -- you've brought something up that I think needs to be addressed. We're not interested in -- obviously, as a public company, if somebody comes and makes a compelling offer to the shareholders, we need to take a strong look at that. But we're not interested in selling the Company. I mean, we feel that we can -- there's a lot that we can do here to build the business and build the value for our shareholders, so a general conversation about a sale of the Company, and if you wanted to know what Leon would get, that's fine. It's fully disclosed. It's around $6 million. But that's just not something we spend a lot of time thinking about. We're just not -- it's not something we're interested in doing.

Well, that's fine. I mean, let me just tell you from an investor's point of view. We've been accumulating shares in a --

Well, let me clarify the termination benefits agreement. The termination benefits agreement -- if I recall correctly, if I were to consent to the sale of the Company, I do not get anything. So it's only if there is a predatory takeover, a change in control.

Okay. So one of the things that, from a valuation point of view, because our goal and your goal as Management should be that the Company is fairly valued, and from an investor point of view, obviously that -- I would rather have -- I think people should be well rewarded if the Company does well, without a doubt. But if I remember right, Leon, if we sold it involuntarily or it was sold involuntarily for $4 a share or for $40 a share, your $6 million payout, that piece -- put aside the few shares that you have, or the 400,000-some-odd that you have -- that piece remains the same.

And that seems very -- a real disincentive. I mean, wouldn't we be better off, and you potentially, to take $6 million in options and ride with the rest of us? I mean, that's just a -- because when I look at the Company and say, "Should I continue buying the shares," I've got this overhang that I've a got Management that -- I wouldn't say that you should be indifferent, but the $6 million, good or bad price, is not the way the world should work. And I'd rather and I'd feel better if you had $6 million worth of options. And I think if you had that, our share price would be significantly higher, because we would say our Management is incentivized to -- really incentivized. They're not getting paid either way, whether it's good -- whether we get $4 or $40. You should -- if you had $6 million worth of options at $40, you would make a fortune with us. And at $4 you would make nothing. And I'd rather that be the case, and I think other investors would too.

I'm not saying you have to sell the Company today or tomorrow. I want it to grow, and you're doing a lot of the right things, very smart management, but the fact that you could be paid either way, good or bad, is a tremendous disincentive for us investors who are generally passive and would like to see the Company do well. I mean, would you consider restructuring that so that? And, believe me, people are not (inaudible) shares.

I think that we have historically demonstrated our allegiance to the shareholders in resisting any predatory [or portunistic] attempt of the Company, so I think our conduct and our performance is an indication of that.

Leon, that's a different question. In other words, we never really look in America to where is this person's heart. We look to where their money is, and maybe that's a shortcoming of the country and maybe it's its strength. But certainly in the capital markets, that's the strength of our system, is if you have the money on the table with everybody else, then we all ride in the same direction. If you're going to make the same, whether it's at $4 or $40, that's a problem. So as we look to how we do, you believe in the Company You work -- you guys are smart guys, obviously very smart guys. You're managing the Company well, and I believe you'd make more money -- I believe you would make more money if you took this in options. And quite frankly, if you took it in options, the share price, I am certain -- or I can't say I'm certain, because you never know what -- another oil shock. But putting all other factors aside, investors would view that extremely positively. So you could keep your compensation level at this minimum and then have this huge upside. I mean, isn't it ridiculous if you get $40 a share, you're only going to get $6 million? That's crazy. And frankly, on your growth rate, our multiple is ridiculously low. We've got the cash. This is in your interest in addition to the shareholders' interests. And what the current structure has fights against a good valuation for the Company and puts a cap on what you're making. So it's a different way of looking at it.

Well, thank you so much for your --

(Inaudible - multiple speakers.) Okay, but try to give it thought outside. I know it's different than what you've been doing, but I'd appreciate it if you'd think about it. I really think that you'll make more money this way.

Right. Thanks so much for your suggestion. I don't think we should speculate on the conference call the benefits of one versus the other, but thanks so much.

(Operator instructions). Okay, there are no further questions at this time.

All right. Thank you so much for joining us, and we'll see you at the end of the second quarter.

Ladies and gentlemen, this concludes your conference.