R C M Technologies Inc (RCMT) 2017 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the 2017 fourth quarter earnings conference call. Your hosts for today: President and CEO, Rocco Campanelli; and Chief Financial Officer, Kevin Miller. You may now begin.

Thank you. Good morning, everyone. This is Rocco Campanelli, President and CEO. Welcome to the RCM Technologies 2017 Fourth Quarter Earnings Call. I'm joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin with the legal disclaimer and then I will summarize the operating results for each of our operating units. Then we will open it up for questions.

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 materially change in the future. Many of these beliefs, estimates and assumptions are subject to rapid changes.

For more information on our forward-looking statements and the risks, uncertainties and other factors to which they are subject, please 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.

Thanks, Kevin. We are very pleased with our 2017 consolidated fourth quarter results. Our quarterly revenues of over $51 million are particularly respectable, since we have not exceeded $50 million in quarterly revenues since 2003.

Our gross profit of $12.8 million in the fourth quarter of 2017 is, by far, our best quarterly amount in 2017 and our best since the fourth quarter of 2015.

We are excited to head into fiscal 2018 with some strong momentum. I'll discuss each division separately.

Our Specialty Health Care staffing group again set new quarterly records with $22.1 million in revenue and $5.4 million in gross profit. Revenues and gross profit grew about 19% and 12%, respectively, in the fourth quarter of 2017 as compared to the fourth quarter of 2016.

Our health care growth was largely driven by our paraprofessional contracts with both the New York City Board of Education and the Hawaii Department of Education. We ended the 2016-2017 school year in May-June time frame with about 80 paraprofessionals with Hawaii and about 150 with New York City. At the end of 2017, we had about 170 with Hawaii and 630 with New York City. Also, our therapists with New York City tripled, going from 32 to about 100 over the same time frame.

To put that in context, our revenues with New York City in the fourth quarter of 2017 were about $7.1 million versus the fourth quarter of 2016 of about $2.7 million. Revenues for Hawaii were about $3.9 million in the fourth quarter of 2017 versus about $2.4 million in the fourth quarter of 2016.

We also saw a nice growth in our HIM business in the fourth quarter of 2017 with revenues of $1.2 million as compared to revenues in the fourth quarter of 2016 of about $700,000. We are optimistic that we will see another record year from our Specialty Health Care division in fiscal 2018 and believe our revenues will exceed $80 million. With less than $35 million in revenues as recently as 2014, the consistent annual performance of our Specialty Health Care group is commendable.

Following 3 solid quarters, our Engineering division continued to perform well in the fourth quarter of 2017. Revenues grew about 18% as compared to the fourth quarter of 2016. All 3 of our Engineering groups contributed to the revenue growth in the fourth quarter.

Our Energy Services group, which operates in the United States, Canada and now Serbia, posted revenues of $9.3 million in the fourth quarter of 2017, about 24% growth over the fourth quarter of 2016.

The highlight of our quarter was the acquisition of PSR Engineering, which will provide the foundation for an electrical engineering center of excellence in Belgrade, Serbia. PSR was established in Serbia in 2006 and specializes in the design and engineering associated with high-voltage substations, design engineering for electrical equipment and power plants, 3D modeling, testing and commissioning, site supervision and other engineering services for clients in Europe, North America, South America and the Middle East.

At the time of acquisition, PSR had a highly trained staff of approximately 30 engineers. We have been using PSR for subcontracted engineering analysis for the past 3 years with excellent results, which led us to acquire them. We are very excited about this acquisition as this will allow us to provide engineering resources that are very difficult to find in the U.S. and Canada. We are also looking at this acquisition as a platform to do more transmission and distribution work in Europe. We believe that over time, we can quadruple the number of engineers in Serbia as we win more business.

We also added a senior IT resource in Serbia just last month and plan to develop, on an expedited basis, an offshore IT offering in Serbia out of our office in Nis. Nis is the third largest city in Serbia and a university city, where engineering and IT talent are plentiful. And initial focus will be to look to offshore life sciences validation and IT software application development projects.

Our Engineering Services group opened an office in Buffalo in the third quarter of 2017. And we are very pleased with its performance as it is already accretive to the Energy Services' operating income. We are excited about Energy Services' diversification strategy to drive our services deeper into the oil and gas processing, chemical manufacturing and metals market sector.

Our transmission and distribution engineering and testing and commissioning service area continues to expand every month. We are completing a multimillion contract to perform the testing and commissioning for a high-voltage DC facility in Canada. And our engineering work at AEP, Con Edison, FirstEnergy, Covanta and We Energies are all doing very well.

Energy Services expects to continue their solid performance with a strong backlog and pipeline as we enter into fiscal 2018.

Our Canadian Power Systems Group, which mainly services Bruce Power and Ontario Power Group -- Ontario Power Generation, slowed a bit in the fourth quarter of 2017 with $5.8 million in revenues, but still grew almost 11% as compared to the fourth quarter of 2016. Our Canadian Engineering Group's quarterly performance does have a tendency to be a bit erratic as we start and complete projects. We are also getting off to a slow start in first quarter of 2018 as we are awaiting several anticipated purchase orders. However, we do expect to see improved performance in fiscal 2018 over the $23 million in revenue generated in fiscal 2017. We are also optimistic that our recent diversification strategy to focus on commercial nuclear materials business will be successful in the near future.

Our Aerospace group generated revenues of $6.1 million in the fourth quarter of 2017, a small increase of about 2% over the fourth quarter of 2016. Historically, our 3 biggest aerospace clients have been Sikorsky, Pratt & Whitney and United Technologies Aerospace Services, with a half dozen additional other small aerospace clients we support.

In the fourth quarter of 2017, we added 2 new clients that, we believe, have the potential to become major clients over time. In 2017, we have also been working on developing an international aerospace equipment and materials procurement business that we have confidence will generate revenue in 2018. This service is a natural complement to our existing international trade compliance and jurisdiction and classification service area. Our primary goal in fiscal 2018 is to diversify and grow our revenue base, similar to what we've accomplished in Energy Services.

We are also happy that our Information Technology group revenue has stabilized in fiscal 2017. Two developments are worth noting: first, after helping us with the turnaround plan, Bob Giorgio helped us with a transition plan to permanent leadership. We would like to welcome Mike Boyle to RCM as our new Senior Vice President of Information Technology, Consulting and Solutions division. Mike is a senior executive with many years of experience in the IT staffing industry. Mike's most recent position was Chief Operating Officer of MDT Holdings, a $30 million IT staffing company. Mike has also held senior sales management positions with Spherion and Kforce. We are looking forward to much better results in fiscal 2018. And thank you, Bob Giorgio, for your welcome efforts in the transition.

The second development is that we sold our Microsoft Solutions practice for a nominal amount of cash. That group generated $1.8 million in 2017, but did not provide any contribution to operating income.

In summary, we have a strong backlog and pipeline, particularly in our Health Care and Engineering businesses and are confident that we will -- that will serve us well throughout 2018.

Thank you for attending RCM's fourth quarter conference call. We look forward to updating you on fiscal 2018 in a few months.

I'd like to open it up for questions.

(Operator Instructions) Our first question comes from Bill Sutherland.

Nice year-end. So I'm curious -- just a quick one here on the IT group. You had a little lingering impact with Puerto Rico, and I know it's not a big issue. But just kind of curious how to think about the level you are at in the quarter, almost in line with the third quarter. And looking ahead, is this kind of like the inflection point for some growth, do you think?

I don't think you're going to -- we're not expecting any sort of immediate lift off here, Bill. Certainly, we believe that -- sort of we've leveled off. Now Rocco mentioned that we sold off our Microsoft practice, which we did about $1.8 million in revenues in 2017. So you got to back that out of total revenues of $32.7 million to get to sort of a normalized number. And as you know, the second half, including Microsoft, it was around $7.8 million in Q3 and about $7.7 million in Q4. So certainly, we think that, if you sort of take the second half run rate minus the Microsoft revenues that we should see some growth in 2018 over that number. We do have a number of initiatives in place to accelerate that growth, but we also need to invest in the business quite a bit because we have a really, really good core group of people in that group that have been very successful with us, but we need to add more talent over time to really get it normal again.

Yes, Bill, both Bob, while he was here, and we'll continue to support Mike, and Mike just starting within the last month, have plans to do -- we've done some major organization changes, and we continue to plan more organization changes, and we need just a little time, and Mike needs a little time to be successful.

The impact -- moving to Engineering, the impact from PSR, how much of the quarter was that -- did that impact?

I don't have the exact numbers in front of me. But you're probably looking at somewhere around $400,000 in revenues in the fourth quarter.

Okay. So that was for the full -- were they in the full quarter? I can't remember.

Yes. The effective date of that acquisition was October 1.

Okay. So there's -- but there's -- just thinking about with 30 engineers, it seems like you could -- I don't know what the rates are, but it seems like it might have more impact over this year?

Yes. And bear in mind that, that's the sales number that we're generating out of Serbia, but probably prior to us buying them, about 25% to 30% of their revenues came from RCM. So we're billing them out at a higher rate than what they're billing us, obviously, internally. So I think that the impact there is -- can be pretty significant. It's not going to happen overnight, obviously. But there is -- the guy, who runs that group for us told us he could hire 100 engineers tomorrow, if we have work for him. And the type of -- not only are the engineers very talented there and very well educated, there's -- we can get a lot of engineers over there that you just can't find here. So we're going to really look to augment a lot of our projects, we've worked on it in Serbia, so not only it will help us find resources that are scarce here, but we can also get high quality and reasonably priced labor from this acquisition. And on top of that, they have some client -- they already have some inroads into some European clients, which we're going to look to expand. And as you could imagine, a small firm like that in Serbia can only take on too big of a project in Europe. But now with a much larger company, we believe, we can win much bigger projects over time in Europe. And do -- we'll do some of the work out of Serbia, we'll do some of the work out of Canada, we'll do some of the work out of U.S. At some point, we may establish a presence somewhere in New York, we'll see somewhere else in New York.

And we are looking forward to the IT Manager that we hired, and he has been doing work in Europe for the past several years. And, I guess, we were upwards of about 3 IT staff in Serbia at this point, and we think we're going to rapidly grow as we're able to offshore cost-effective work in IT to Serbia. One of the things that we're really pleased with is that their English language capability is really outstanding. And that's one of the big issues, when you're outsourcing and interfacing between the U.S. or Canada and other countries. So we're really looking forward to making something happen in not only IT, but also in life sciences in Serbia.

And then just the healthcare number was -- the revenue number was impressive and fairly you will get the full year impact of this bigger increase in the 2 contracts. What else do you see contributing to healthcare growth or significantly in '18?

We have real high hopes for HIM, which had a real strong fourth quarter. We're continuing to look for more school contracts. We have about 17 or 18 school contracts with 3 of them being sort of the bulk of the revenues. But we continue to look at -- most of our school clients are public schools. We do have some charter schools, but we're going to look to do more work with charter schools and private schools. We're very focused on the paraprofessional market and the behavioral health, in general, in schools. So those are some areas. Our Locum Tenens business, we were really disappointed with the results in 2017. But we still really like that market and think it's a good market to be in. So that's a nice area for potential growth. So just off the top of my head, those are some of the big areas I look into. And we have other areas that we're interested in, focusing on new areas, which I'm not ready to discuss right now because we don't have any immediate plans for them. But there are some other areas as well.

Well, you've got quite a bit on the plate already. Kevin, one question I have was the -- in terms of just the P&L was the G&A was much lower percent of revenue than I've expected. Is that just -- is that a level that's got anything particular in there or...

No, there's nothing -- there's nothing. As you know, Bill, there is always going to be sort of ebbs and flows in accruals when you're trying to get them right each quarter, and we tend to sharpen them a little bit more in the fourth quarter since it's year-end. But there's nothing in there in terms of any out-of-the-ordinary reductions or any out-of-the-ordinary expenses in the fourth quarter. It's just really kind of shows the leverageability of our income statement. As you see, our gross profit growth, clearly, our SG&A will grow because we need more people to -- to put people out to work, we pay bigger commissions and we pay bonuses. But we have so many fixed costs in terms of rent, utilities, management that our income statement is just very leverageable. So if you see good growth in gross profit, a really healthy portion of that drops to the bottom.

And then finally, just talk a little bit about what's happening with your, with the tax, the tax rate, after tax reform? What's happening in Q4 and what's happening in '18?

I think -- on a GAAP basis, I think if you want to, like, assume a blended rate of about 28%, that's a pretty safe number. I know it's hard for me to see us being over that in terms of a GAAP rate. We could come in a little bit less than that. Obviously, it depends on the mix. Taxes in Serbia are about 20%. Taxes in Canada are about 26.5%. But in both jurisdictions, if we pull cash out, we pay a 5% dividend tax on that -- excuse me, in Serbia, the 20% includes the 5% dividend tax. So it's 15% for the dividend tax. And most of the money we make in Serbia we'll be pulling out, so I just look at it as 20% anyway. But I think, a 28% GAAP tax rate is a good, safe assumption for your model.

Our next question comes from [Steve Bower].

You tend to have a pretty significant deterioration in gross profit, both on a year-over-year and sequentially. What's that all about?

Well, I mean, each group is a little bit different, Steve. In terms of, if you want to look at, say Information Technology, the major driver there is just doing less -- it's a combination of less project revenue and more competition in terms of the staffing. We used to get much higher margins in the life sciences project work, a lot of the life sciences work we're doing now is staffing and it's difficult, as you know, to get gross margins in the high-20s or low-30s when you're doing staffing. So for IT, it's more of just a mix shift than anything else. If you flip to our healthcare, that's just a matter of, where a lot of our growth is coming from, is just a little bit lower gross-margin business. But our contribution margins are up, but despite the fact that our gross margins in the health care space are down. So a lot of the growth that we're getting is just not -- is not accretive to the gross margin. And as far as the Engineering is concerned, we're up a little bit year-over-year. We're about 27% for 2017. The biggest driver to -- and really Engineering -- our Engineering gross margins have always been from quarter to quarter pretty erratic, but the biggest driver there is utilization and success on fixed price contracts because we'll have years where we do fixed price contracts, where we get 50% gross margin on a fixed-price contract and then we'll have other fixed price contracts when they come in at 20% just because of the nature of fixed-price projects.

Okay.

Does that answer your question? Or...

Not fully, but that's okay. You said Engineering was 27%, but what you published was -- for fourth quarter was 25.9%.

I was -- I thought you said, year-over-year.

Year-over-year and sequentially, but so would you say 25.9% is okay, it's just part of the range...

No. 25.9% in the fourth quarter for Engineering is low. I think that those margin should be somewhere -- the 25.9% is more of an example of what I was talking about getting some quarter to quarter erraticness to the gross margins. I mean, I expect to see that every once in a while. I just don't know when it's going to happen. But I think if you look at the Engineering gross margin for the entire year of 27%, that's 26.5% to 27% is about where our business is right now. If things were steady state, in the fourth quarter, we had some utilization issues mainly in Canada that sort of brought that down about 60 to 70 basis points from where I'd like to see it. We had some quarters in 2017 in Engineering, where, particularly in, I believe, Q3 is where we really had some significant gross margins in Engineering and that was just because we had some projects that went really, really well. And we saw a nice little spike. We're at 28.45% in Q3, that's higher than what I would typically expect to see, whereas Q4 is definitely lower.

Okay. We're into -- we got about 3.5 weeks to go in the first quarter; can you give a little color as to how the quarter is going?

Well, we think our first quarter this year is going to be better than our first quarter of last year. We think we'll have a pretty solid quarter. Just keep in mind that we see a big drop -- we typically see a pretty big drop in our gross margin from Q4 to Q1 just because of the resetting of all the statutory taxes. But yes, we expect to have a good quarter, not a great quarter. But we expect to have a good quarter in Q1 and certainly expect to beat last year.

Okay. On the 28% blended tax rate, how does that compare to what you've been paying?

Well, our GAAP tax rates have been on a blended basis, they've typically been in the 40-ish range. So it's going to be much lower. But bear in mind, if you read my quote, we're not going to be paying a lot of federal taxes in -- certainly, not in 2018, unless we really knock the ball out of the park in 2018, which certainly hope we do, we probably won't pay a lot of federal taxes in 2019 either. But as you know, the GAAP tax rate versus what you're actually pay are -- can be pretty different. In our case because some of the tax write-offs that we had in 2017, we're going to enjoy some nice cash flow in 2018 and 2019 as well in terms of whatever pretax money that we make in the U.S., we should keep most of that.

Okay. That sounds good. Just one other question on your statement of income. What types of things are in change in contingent consideration?

It's just one thing, Steve. So when you buy a company, the way that -- and the accounting rules, I don't know, when they changed, I'm going to say, it was like 5 years ago. But I don't know exactly when. But you have to estimate how much you're going to pay in an earn-out. And if you estimate too high, you take it off your balance sheet as income decrease to contingent consideration, and it runs through your income statement. And if you estimate too low, which we did on couple of our -- on 2 of our engineering acquisitions, 1 in particular, we estimated way low. It runs through your income statement. So you don't touch your goodwill. And once you get your projected earn-out -- projected contingent consideration and it all runs through the income statement. Frankly, I think it's a really dumb accounting rule. In addition, they make you put it above operating income as opposed to below the operating income line. Doesn't make a lot of sense to me frankly, but that's GAAP.

So when you see a number there, it's good news, bad news, right?

Yes, essentially that's right. Yes.

(Operator Instructions) Our next question comes from [Anthony].

Yes, I'm curious when your New York City contract expires?

Well, we don't know for sure because it has options on it. But we have 2 more years on it. But probably more likely 4 more years on it.

Our next question comes from Frank Kelly.

Great finish with the dividend at the end of '17. And salutations to Michael and Marc over in healthcare; they're doing absolutely an outstanding job and just need to be noted. My question was previously answered is how -- what does '18 look like? And it was covered off on. But I was in the queue, so they took the call. But let's -- looking forward to a real cash-rich. Congratulations, again, on receivables coming down and if we can keep that, cash flow will be great in '18 and even '19 with these tax benefits as well. But that's all I had.

Our next question comes from [Michael].

Good report. For the purpose of clarity for the fourth quarter and the purpose of modeling going forward, we calculated about a 15% -- $0.15 non-GAAP quarter. I know you guys don't provide it in the release, but just for the sake of clarity for some potential new investors out there. Did you guys calculate that internally? And would it be in that $0.15, $0.16 non-GAAP for the fourth quarter, like we calculated here?

Yes, that's about in the range. It gets a little tricky when you start trying to normalize the taxes, frankly. And I thought about putting it in here, and I took it out for that reason just because it's -- just because we have some funky stuff going on with the taxes.

Right. But generally speaking, I mean you guys have an -- you have an estimate out, there's an analyst with an estimate out there and for clarity, I don't know something you would consider, but a non-GAAP number going forward. I know it can be -- get complicated, but it might just provide a little bit clarity for the -- to attract new investors to the story?

Well, Bill's on the call. So he hears you. So...

The other question I had is, can you talk a little bit about with the growth in the health care sector, that's a sector that's doing obviously very well for you? How does it -- does that change at all the seasonality you guys have going quarter to quarter? I know your margins go down a little bit in Q1. But can you talk a little bit about how the quarters progress and if there's any change in the seasonality pattern?

Yes, I mean, we're still getting about 60% of our revenue from schools. So we're going to continue to see big drop in revenues in Q3. So we do have some -- still have significant seasonality to the revenues. And then as far as the seasonality concerning the gross margins, there's a little bit of that as well. But there actually isn't as much in health care as some of the other ones because some of the people are a little bit lower paid, so they don't max out. There is the impact from the insurance -- from the unemployment expense, but not necessarily for social security taxes. But yes, so there is some seasonality in the gross margin and there is a pretty heavy seasonality in the revenues.

Okay. And I've one more question if I could. When you guys are dealing with -- there is not a lot of news releases here on the company in between your earnings releases. Is that a function of -- is that an internal decision? Or is it the contracts that you signed and the business deals that you signed with -- is that the companies not wanting that information to made public?

Pretty much. When we win big projects, that utilities, we -- it's more difficult for us to mention our clients' names in a press release that has RCM on top of it. So we pretty much don't issue press releases on projects for our big clients. And a few times the client will issue a press release and put our name in it. But generally, big utility clients really don't want to see their name in the press or want other people don't know how much money they're spending.

And generally, we have a philosophy here, we're going to put a press release out and make it something meaningful. And a lot of times we win contracts like especially in health care where we really don't know what that -- we win a lot of MSAs, and we really don't know what the revenues are going to be because it basically allows us to be -- have a seat at the table and bid on work, but we don't necessarily know how much work we're going to win. So we're not going to put out press releases every time we win an MSA, which is happens every month, we win MSAs. But we generally only like to put out our press releases when it's something meaningful.

Yes. I definitely know you guys are more conservative in that nature. But with the story that you have now, it looks like that the future is bright for 2018. Is there any effort internally to expand a little bit on the Investor Relations front, get the story out there and maybe do a little bit more marketing to try to attract new investors to the company?

Yes, that's definitely something we've discussed internally. So yes, that is something we're thinking about.

(Operator Instructions) There are no questions at this time.

Well, thank you, everyone, for joining our conference call, and we look forward to speaking with you in a couple of months.

Ladies and gentlemen, this concludes your conference call. You may disconnect at this time.