R C M Technologies Inc (RCMT) 2023 Q4 法說會逐字稿

Good morning and thank you for joining us. This is Kevin Miller, Chief Financial Officer of RCM Technologies. I am joined today by Brad Vizi, RCM's Executive Chairman, our presentation in this call will contain forward looking statements. Information contained in the forward-looking statements is based on our beliefs, estimates, 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 filed with the SEC as well as our press releases that we issue from time to time. I will now turn the call over to Brad Vizi, Executive Chairman, to provide an overview of RCM's operating performance during the quarter.

Thanks, Kevin, good morning, everyone. We finished 2023, at the high end of expectation. More important, we believe the fourth quarter demonstrates a COVID-free picture of our progress and traction against our smart growth strategy with all three businesses generating healthy EBITDA growth. Our platform of high-value capabilities in critical end markets clearly resonates.

Our ability to leverage points of collaboration amongst groups continues to gain traction whether providing facility design solutions for a key client narrow space, we're delivering technical solutions to the K-through-12 market. The synergy of the platform continues to grow as we provide increasing value to our world-class client base, further direct -- differentiating ourselves in the marketplace.

Since we last spoke, progress has been made across each of our divisions, and I'm excited to discuss in more detail starting with healthcare. As many of you are aware, we take considerable pride in our leadership in the K-through-12 end market. One of our key strategic focuses is to leverage that leadership to expand our K-through-12 client base.

In health care, caring is paramount and given our commitment to the nation's most precious assets, we believe RCM has developed an intangible asset of its own that will afford us expanding opportunity to do what we do best.

In addition to building our esteemed roster of clients nationwide, the success of our approach is evident as we effectively convert low revenue new schools into greater economic opportunities. This progression is a testament through our high performance standards and the delivery of exceptional care to students. Regarding overall business performance we are delighted to report growth across all business units.

This comprehensive expansion underscores the resilience and adaptability of our business model. We are particularly excited about the robust pipeline opportunities indicating a promising trajectory for the healthcare group.

As we move through the upcoming year, we remain steadfast in our commitment to innovation, client satisfaction and sustainable growth. We are confident that our strategic initiatives will contribute to the continued success of the healthcare division.

Now moving to life sciences data and solutions. The results of 2023 demonstrate the economic course power of our team strategy and revolves around value and solution selling. This can be seen from improvement in every financial measure revenue, GP, GP percent, NOI and NOI percent. GP percent improved by 230 basis points, while EBITDA contribution improved over 375 basis points.

Nearly $0.7 of every dollar of revenue increase from 2022 to 2023, converted to EBITDA. Managed service and turnkey software implementations led our growth. I take tremendous pride in this groups, clear commitment to operational excellence.

As we look forward toward 2024, we continue to see strong growth led by life sciences through our managed service, commercialization, data integrity and quality improvement programs. Continued strength in our HCM practice, we'll further drive results.

2023 was a year of strong performance from energy services. Revenue and profit targets were achieved exceeding the previous year's profit contribution by 66%. Energy Services successfully executed grid modernization substation projects for large utilities and OEMs in North America and Europe. These projects included engineering services for a large scale infrastructure project in the New York area that will be a critical interconnection point for delivering increasingly renewable power from offshore wind parks.

In 2023, energy services opened an office in Germany to expand its global footprint and become a preferred partner for the energy transition in Europe. Within the first year of its German operation, Energy Services was awarded two EPC projects from one of the most innovative German transmission system operators.

This TSL sent a delegation to the US to visit several projects energy services has successfully executed. The trip was concluded with the award of the second project between our two firms and commitment toward a long-term partnership. Also of note, energy services further developed its technical capabilities to offer our own proprietary digital solution for 3D BIM and visual data management applications to support utilities and enhancing their efficiencies from planning to construction and operation.

The monetization of our application is a major step in our productization effort, consistent with our strategy to position ourselves as thought leaders and strategic partners with clients broadening our competitive moat and delivering more value to client partnerships.

RCM thermal kinetics has several active equipment and engineering contracts for projects in zero-carbon, chemical manufacturing, carbon capture and sustainable asian fuel markets. The Projects employ a variety of technologies designed by the engineering team, including distillation evaporation and crystallization technologies.

These contracts are with dynamic customers who are growing as established leaders in their respective markets and have standardized on RCM thermal kinetics, process design and equipment supply. The new RCM thermal kinetics testing lab has been fully utilized in 2024 due to customer tests, project support and product profiling related to new equipment proposal development.

The test lab has added a new glass crystallization system and has fully commissioned the unit. This unit is also being used to support active crystallizer projects. Future expansion plans include a 30 gallon crystallization pilot plant. Engineering for the pilot plant crystallizer is scheduled for completion at the end of Q1.

The aerospace and defense group experienced a steady recovery in Q4 2023. Though we did add clients and headcount during the quarter. It's worth noting that our clients' outlook is more focused on 2024. Regardless, we did recognize the receipt of additional workload with existing clients and new clients to expand our model-based expertise, digital conversion, software and systems employee base in 2024.

Aerospace and defense has now become a trusted provider of a new service offering, involving, rectifying quality and production issues within the supply base of our clients. Our approach and solution has been modeled from within our management team informed by decades of industry knowledge and background data positions in Serena.

Since the supply base for many OEMs has experienced issues globally, such as parts shortages and material availability. We are in the process of deploying teams to help solve these challenges and have received interest across multiple OEMs. We continue to expand our teams within our workforce solutions, software systems and highly technical areas, especially in the air mobility sector, which has become a draw for many candidates.

I will turn the call to Kevin to discuss the Q4 2023 financial results in more detail.

Thank you, Brad. Regarding our consolidated results, consolidated gross profit for the fourth quarter grew by 5.7% from $20.5 million to $21.6 million. Adjusted EBITDA for the fourth quarter grew by 18.5% from $7.5 million to $8.9 million. Adjusted diluted EPS grew by 37.5% from $0.52 to $0.71. As for segment performance in the fourth quarter of 2023, healthcare gross profit was essentially flat.

If we remove the impact of COVID on the consolidated revenue and compared to the fourth quarter in 2022, we estimate that 2023 gross profit grew by 4.4%. However, our school revenue after normalizing for COVID grew by over 28% Q4 to Q4. Life sciences data and solutions gross profit grew by 19% in Q4 '23 compared to Q4 '22.

Largely behind the Energy Services Group, engineering gross profit grew by 8.6% in Q4 '23 compared to Q4 '22. As for fiscal 2024, we anticipate that we will see at least low double digit consolidated adjusted EBITDA growth as compared to fiscal 2023 with a similar quarterly cadence when compared to fiscal 2023.

This concludes our prepared remarks. At this time, we will open the call for questions.

Okay. (Operator Instructions)

Alex Rygiel, B. Riley.

Thank you. Good morning, gentlemen, and nice quarter and nice year.

Thank you.

First, if we could just touch on the balance sheet, a little bit obviously, DSOs spiked a little bit. There's a lot of seasonality that occurs that probably some majority of that. Can you talk about that increase and possibly the working capital improvements that you see coming in 2024?

Sure. Happy to speak about that. We ended the quarter with a little over 90 DSOs, 90.7, which is similar to Q3, which was 90.1, both of which, frankly are just much too high in terms of where we expect to be and where we believe we will be in the future. The thing that we see often with the schools is that they always pay, but sometimes we run into administrative issues that cause like a bit of a blockage in terms of getting paid, right.

And then all the sudden we get like five months of four or five months all I want. Now most of them pay pretty regularly. But every once in a while (inaudible) Our second largest healthcare client, basically for administrative purposes, did not pay us from July through December and we had about a $15 million balance at the end of the year. I expect that to be under eight by the end of this quarter and most of that money has already come in, it may even be a little bit lower we'll see.

So we think we've got that client back on track. They've had a great record of paying us pretty timely over the last three or four years. So really, in terms of the receivables at the end of the year, just putting that one from the side that should be $63 million, $62 million. And frankly, there's a few other things that we need to work, the web is a little bit high.

That tends to be kind of cyclical depending on where we are with projects. We have a couple of newer healthcare clients that we're still getting the rhythm with in terms of [POs] and getting everything approved and -- But we believe the 70 million is too high and it's temporary and we're going to get it down. I think the way that you should think about it, frankly, is we should have DSOs below 75, ideally in the low 70s, but it certainly should be below 75 and we won't get it probably gets to that level at the end of Q1, but will be much lower at the end of Q1. And over the next couple of quarters, we will get the DSOs down to a more acceptable level in the low sevens.

Very helpful. And then, Brad, maybe you could talk a little bit about sort of the growth outlook by segment in 2024?

Yeah Look, no, we expect all three of our segments to grow -- still a lot of time doing strategic planning here in the last 90 to 120 days. And frankly, very encouraging, pipelines are very strong and backlogs are stronger than they were last year.

That being said, we're constantly balancing growth with investment. So growth in profitability today, productive revenue with investment in the future. So on a consolidated basis, we're comfortable where we sit today with the guidance we put forward on but underneath the surface, we anticipate all three segments growing as well.

And then lastly, you've been very aggressive in your buyback through the years strategically buying stock on opportunistic dips. The market appears to be giving you one of those right now. Can you talk about your view on repurchases right now and what your authorization stands out?

Yeah. No, we certainly have authorization and there's a good chance it's going to be increasing in the near future. But with respect to overall capital allocation and you look at our share count now, we have less than 8 million shares outstanding. So we're in a high-class position where you think about that incremental share you buy right, that trade-off of liquidity because we don't want to balance on having a liquid tradable stock for our investors to enter and certainly have the option to sell at some point in the future with frankly, taking in what we view is an investment opportunity at a steep discount to intrinsic value.

So buybacks are always part of our compensate our capital allocation framework, a warrant position (inaudible) continue to be opportunistic, and we're going to do that it's being mindful with each incremental share on certainly detraction from the float and the liquidity. So but by no means are they off the table they're firmly on the table.

Very helpful. Thank you. good luck.

Bill Sutherland, Benchmark.

Hey, guys, good morning. The gross margin performance was very steady year over year, and you saw a nice pickup in the life science gross margin, are you kind of at a steady-state level as you look forward into '24? Are you expecting some improvement in any of the segments?

I would say it's probably steady state, you'll see some gyrations from quarter to quarter, obviously, especially in engineering when we do have some when project stops and starts and then bench and whatnot. But I think we're steady state. Typically we do see an increase in payroll taxes of somewhere between $1 million and $1.5 million. When you go from Q4 to Q1. So obviously, that impacts in it obviously impacts gross margin and net margins. But, that's just a seasonal saying right. But yeah, we like where the margins are and we think we can maintain those are close to them

Great. on health care, Kevin, do you have the breakout between education and (inaudible)

I should do because I know you had asked for (laughter) So let's say education was school revenue in Q4 was $29.812 million and our non school was $6.876 million

Okay. Do you have the count just in case? I don't want to make sure I know that.

Yeah, the comps quarter to quarter school revenue in 2022, Q4 was $24.644 million, and non school was $11.166 million.

So that not school, which includes HAM. I know it's that kind of a run rate now that's been steady or even lower --

No, you can definitely look at that as a steady run rate I mean, we expect that to grow from there. When you look at Q4 22, we had quite a bit of COVID revenue in there. And we also had a very big client that we've scaled back a little bit just because frankly, we don't like the way they pay. So we scaled back the number of people that work, (inaudible) to stretch out payment, good client it always pays, but we can only allocate so many dollars (inaudible) So but we've got some pretty interesting things that we're working on to outside of the schools that we think can drive that something (technical difficulty)

(multiple speakers) In capital deployment, just to look at that again, Brad are you guys, how are you thinking about where you are with debt and how you might think about the deployment for share repurchase versus maybe reducing leverage?

Yeah, we've been pretty consistent with our framework. We still are less than one turn of EBITDA of leverage, which is pretty efficient capital structure. And we certainly have the ability to flex up from there and significantly from a capacity perspective. But from a financial framework perspective, we have ample dry powder to do with what we'd like to from a capital deployment perspective in terms of potentially deleveraging, taking the balance sheet to a net cash position sometime over the next 12 months or so or potentially taking in more shares.

Again, by having less than 8 million shares outstanding. I think that gives us the opportunity to really be thoughtful and looked at a lot of different options so we would be happy to take it to six absolutely, but there's yeah, somewhere around 8 million. There's a trade-off associated with it that we just are mindful of.

And actually, let me tack on one more off the deployment picture. Are you all of how would you characterize your M&A activity as far as looking at opportunities these days?

Yeah, we're always looking primarily bolt-ons. We're very interested in capabilities, bolt-on acquisitions that we think we can grow and add significant value to the reality is I think the platform that we have built over the years, I think, is pretty unique to the marketplace and we think we can leverage our existing client base relationships and our teams to add a lot of value to keep those review or unique and scalable. So always looking very selective and obviously, culture is a key component of that.

Brad, do you guys kind of ways -- kind of look at the segments equally as far as opportunities? Are you more interested emphasis on one or two of them.

I said we look at them equally.

Okay, all right. Thanks guys. Appreciate the color.

[Billy Duberstein, Stone Oak].

Hi guys, great to be on the call. Thanks for having me on and really nice performance. I have a couple, but first one housekeeping on the share count I think you said you had a little under you had like 7.8 million shares outstanding on the income statement. You put forward the diluted share count was closer to 8.1 million. And I was just wondering if that was Brad, your kind of long-term incentive awards being included or what the discrepancy was there --

But I think that does have the common stock equivalents, though. So when you have outstanding equity grants those are computed into the diluted share count, right, so Brad, when Brad was giving his share count, he is talking about the shares that are actually outstanding as of today, which is under 8 million.

Got it. Perfect. Thanks. Now on to some operational stuff on the engineering, the top line was a little bit down year over year, but gross margin improved a lot, which is probably the most relevant metric. I know you had kind of the loss of that one contracts early last year and that you expected the aerospace segment to kind of improve through the year. I was just wondering if you consider it recovered and sort of the different puts and takes on between aerospace and engineering would be with the trends net DW if that's playing a factor. And then industrial, can you just kind of dig in more granularly to the industrial to the engineering segment?

So before Brad speaks on this just correct to a little bit on one of the so we didn't lose a big contract. We had a big contract, get reduced by about 30%, which was obviously a blow, but we didn't actually lose the contract we still have them. But the contract that we spoke about on earlier calls, I'm sure, Brad, would love to talk about your expectations in terms of revenue going forward?

Yeah, further granularity on a point of , we didn't lose share in the account. That was more a major end client did lost a program or wasn't awarded a program that we anticipated had some head count reduction associated with that.

Just to clarify, with respect to the prospect for margin and engineering. I actually think there's upside when you look at it for the year and going into the future, and that's primarily going to come from aerospace. I think the other two businesses have room for improvement, certainly. But in aerospace, there's primarily been a staffing orientation that I think you're going to see slowly migrate to a richer mix of services. So our outlook is net positive with respect to margin profile engineering.

Great, great. And then just one more quickly. The Life Sciences IT segment was clearly the star of 2023, and I know you've been transitioning to more sort of projects based solutions rather than time plus. And then you also had the acquisition of talent harder in Q4 of last year. Just wondering if the great performance this year, how much is organic and how much might be talent harder and it's been this quarter or both were contributing?

Yeah a good question, Bill We we've invested heavily in that business the last couple of years and were continue to do so. And those investments are paying off on both with respect to building up the team as well as our capabilities. And the two primary drivers is really life sciences and HCM and nearly all of that is organic. So there's not a lot of inorganic growth there.

And I think the other thing I'd highlight with respect to that growth, not only have incremental clients that we're adding, but going back to our core strategy is really looking for strategic clients that we can both grow our core capability within. So in other words, take share within that client, right provide incremental services to deliver more value to the client and making us more important and operating as an extension to the client as well as frankly, be able to take advantage too the advantage of a very strong client base, that has their own growth. So really, we have three bites of the apple in that regard.

With respect to talent harder the contribution, the profit contribution was de minimus and that is in line with our previous discussion. When we did that acquisition we had anticipated that the technology market would soften quite a bit on and we've structured the deal accordingly.

So we're actually seeing green shoots with respect to that the core business and profit stream, and that could contribute some decent contribution in 2024. But 2023, it was de minimus, I'll say with respect to the synergy that it provided that was dispersed, I'd say, throughout the different segments. One of the benefits of that acquisition, it was it was never a core thesis around how having a beachhead and technology are pushing hard into Silicon Valley, it was more the potential to benefit from really the top of the funnel their process and some of the technologies that they had. And we think to some extent that you're seeing that in each of the segments and you'll continue to see that going forward.

Great, (inaudible) Thanks for the color, and thanks very much for having me on guys. Great job.

Thank you.

(Operator Instructions)

Frank Kelly (technical difficulty)

Good morning, gentlemen, and a good quarter. Good year and aspects, especially as all bills have said that life sciences with a north of 38, GM and growing is just absolutely amazing, just add add to the top line on that and will be set.

I think we beat the nemesis of AR up at and always my my pet peeve. But if we look at our stock value today. There's no doubt that's what they're reading out there. And hopefully we've got to focus on that. Really, we saw that the, I mentioned by Kevin that there is some effort being put in there with a a $20 million projected free flow cash from operations in '24. I think that's conservative at best, but hopefully we can do that.

Can we add just expanding on the capital deployment? a lot of folks talked about deleveraging, which is nice buyback, which is nice but there's a risk, as Brad pointed out to that. But one thing that wasn't talked about was shareholder return, cash, cash shareholder return in form of a dividend $0.25 a quarter, something like that with the number of shares that we've got outstanding. Is that on the table as well?

We have probably not this year, Frank. But again, it's we haven't taken it off the table and with fewer shares outstanding when we do finally get that dividend, that's likely to be bigger so than otherwise would be. So appreciate your patience on that front.

Great, great, just look, is there a way now that we would have well would have where we're practically at the end of the first two, what maybe some flavor as to what we can expect and where we're headed for Q1?

Yeah, Frank, we're hoping and planning on showing some growth each quarter over the prior quarter. So (technical difficulty) see how the quarter comes out, but we like, where we are today.

Great, great, because I know he gets a call or two ago, we were quite specific on some percentages even as far as drilling down to each of the segments on anticipated percentages some things like that, but I -- okay. So I guess we're saying that we're going to have a good Q1 or comfortable Q1 is what (inaudible)

Yeah, I think just generally speaking, Frank, I mean, if you look at 2023, I think that's pretty indicative of the typical year as far as cadence for us. Naturally you have summer break for schools in Q3, right?

Q4 is normally our strongest quarter and naturally as you start the year in January and you have to like things like snow days, reset of payroll taxes, sometimes a program will get delayed a couple of weeks or a project or couple of schools were open a little bit later than expected, but you see an acceleration through the quarter and ultimately through the year and until the school start to taper off in a second half of June. So we don't see anything different from that cadence.

Great. Thanks gentlemen.

Okay, doesn't seem like there are any more questions in queue. So I'll turn it back over for any closing remarks.

Thank you for attending RCM's Fourth Quarter conference call. We look forward to our next update in May.

Okay, this concludes your call. You may now disconnect.