R C M Technologies Inc (RCMT) 2020 Q2 法說會逐字稿

Good morning, everyone. This is Brad Vizi, Executive Chairman of RCM Technologies. Welcome to the RCM Technologies 2020 Second Quarter Earnings Call. I am 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 business units before opening it up for questions. Kevin?

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 filed with the SEC as well as our press releases that we issue from time to time. Thank you.

Thanks, Kevin. Like many companies, RCM was materially impacted by COVID-19. We lost significant revenue in the second quarter, primarily the result of abrupt school closings. However, we believe that we performed well against our COVID plan that we outlined when we last spoke in May. Broadly speaking, we outlined a plan where we would surgically cut noncritical SG&A expenses, focus heavily on utilization and gross margin, while at the same time working to maximize cash flow from operations. We are pleased with the results on all 3 fronts.

Before discussing our segments, I want to highlight a few areas of our cash flow statement and balance sheet. We generated $16.9 million in cash flow from operations in the second quarter. Robust cash flow from operations allowed us to reduce our net debt by 51% from $32.1 million to $15.7 million. We are pleased about the flexibility this debt reduction affords RCM going forward.

Our second quarter cash flow does not reflect the $7.4 million arbitration award from the first quarter. We expect to collect 100% of the award this quarter and use those proceeds to reduce debt further. RCM also purchased 1.8 million shares in the second quarter at attractive purchase price by executing a note payable for $2.2 million.

We are optimistic that we will be able to pay that note off before the coupon starts on September 1. Finally, we negotiated flexible financial covenants on our line of credit during a challenging economic environment.

COVID has had most significant impact on our health care staffing segment. As compared to initial expectations, we were somewhat surprised on 2 fronts. One, we thought our nonschool revenue would be higher due to the pandemic. And two, we thought our school revenue would be lower.

Our nonschool revenue in Q2 2020 was about $5 million versus $4.7 million in Q1 2020 and $5.6 million in Q2 2019. We initially thought to see a meaningful increase in nonschool revenue due to increased demand for nurses and doctors to treat COVID patients, a natural hedge that exists in our business. While that demand did materialize as expected, several additional headwinds impacted the industry.

Most importantly, we saw the need for services not related to COVID plummet. Though we did benefit from several COVID-related opportunities such as regional testing sites and regional alternative care sites in multiple states, gains in COVID-related services were offset.

We also anticipated that since our HIM technicians mostly work from home, we would see a nice increase in HIM. However, many of the HIM end clients have delayed projects due to COVID-influenced disruption. In fiscal 2019, our school clients generated about $66 million or 74% of our health care staffing revenue.

However, as most of you are aware, school closures were widespread by mid-March this year. The negative impact on Q1 2020 was significant, and we expect a materially worse results in Q2 2020, with very modest revenue generated from schools. We were pleasantly surprised to generate $5.7 million in revenue from our school clients in Q2 2020. This compares to $17.8 million in prepandemic Q2 2019 revenue. There remains significant uncertainty around schools for the fall. Many schools have not formally announced their plans. Those that have announced plans have made it clear that those plans are subject to rapid change. Until our country achieves some degree of normalcy around schools, it will be challenging to predict our school revenue.

One silver lining as it pertains to the business is the rapid ascent of our nascent telehealth effort. We believe that telehealth platforms will become a more significant part of school services, both in the short and long term. Furthermore, we believe that we are ideally situated to leverage our leadership position in the school business to accumulate market share by providing a leading telehealth offering to this end market.

We are only in the early innings for telehealth services to the schools, but we are very excited about the opportunity. We believe these services will become an integral part of the undefined post-COVID education system.

As compared to health care, COVID demonstrated less impact on Engineering and IT segments. Though neither group has seen a material reduction in current assignments as a result of COVID, both segments have predictably seen a slowing of new business inquiries and proposals. Visibility going forward is challenging but improving.

Our Engineering segment expect to see sequential growth in the second half of 2020 as compared to the first half based on our current backlog and pipeline. We have recently won several meaningful projects in both transmission and distribution and our industrial processing groups. At this time, we are optimistic about these 2 groups for the second half of 2020 and into 2021. The area we saw the most significant weakness is on the commercial side of our aerospace group. Historically, our commercial business has represented roughly 30% of our aerospace revenue.

As discussed on previous calls, we have been working diligently to reconfigure the company to deliver superior gross margin on a go-forward basis. Our gross margins to date demonstrate sizable progress toward this objective as a result of several strategic initiatives.

Specifically, to illustrate the depth of the progress when comparing Q2 2020 Engineering gross margin versus Q2 2018 gross margin, we were able to achieve 400 basis points of improvement. On a year-to-date basis, the improvement over the same period was 270 basis points.

These improvements were a function of several initiatives that we laid out in our strategic plan 2 years ago, which include structural changes and the way we manage utilization, superior project management, an increased focus on project work and increased leverage of our Serbian partners.

Finally, we have made an effort throughout each division to move closer to the client and evolve into more of a value added partner. Not only have we made significant progress toward this objective, but in many instances, RCM has evolved into a critical extension of the client's operation. We believe the progress made on this front was evident in the relative continuity of our business.

Our IT group performed relatively well in the second quarter. The sequential decline in revenue was primarily due to HCM-related projects that were delayed, canceled or not replaced. The rest of our IT business increased sequentially.

At this time, we do not expect any significant decline in revenue from IT, but we recognize the inherent risk in the current economic and political environment.

Like Engineering, I would like to take a moment and highlight the progress we made improving gross margins. On a year-to-date basis, when comparing Q2 2020 versus Q2 2018, we demonstrated 175 basis points of improvement. When excluding HCM, which outside of health care suffered the greatest impact as a result of the pandemic, our IT division delivered more substantial improvement. This improvement in gross margin affords us valuable gross profit dollars to further invest in sales infrastructure, leading to a sustainable growth trajectory.

We do not have a great lens to filter expectations for the rest of 2020, especially for our school clients, but we do want to leave you with a few thoughts. We will continue to execute on our COVID plan that we swiftly implemented early in the second quarter. More specifically, we will continue to optimize the efficiency of our SG&A cost structure. While we accomplished much of our desired cost reductions in the second quarter, if necessary, we can take further action on costs.

We will remain focused on maximizing utilization and gross margin. We expect to see steady cash flow in the third quarter. If we experienced a healthy uptick in revenue in the fourth quarter, we will see accounts receivable that rise from lower Q3 levels. Although as a policy, we try to avoid providing guidance, we believe that we will see positive EBITDA for the remainder of 2020.

In summary, we continue to face significant challenges as a result of the pandemic. However, we think we are positioned to handle these challenges and exit the pandemic stronger than we entered. This concludes our prepared remarks. At this time, we will open the call for questions.

Sorry about that. I was on mute. So our first question will come from Bill Sutherland.

So I wanted to ask you just a couple of things on the health care group. Mostly because you do have a fair amount of your revenue from 3 school districts, what's the latest update on their plans and how that could impact how your third and fourth quarters look?

Sure. Well, New York City has filtered out some ideas, but I feel like they haven't really formalized anything. They're allowed to open for New York State. They've surveyed a lot of parents, and they believe approximately 74% of students are expected to participate in whatever in-person school is offered by New York. Right now, we believe -- basically, what's out there is that kids are going to go to school every other week, 2 days, 1 week; 3 days, the other week. There are other options on the table for the schools to choose from, how -- whether that's going to happen day 1. Normally, they would open September 8. There has not been anything out there that I've seen that says they're definitely going to open September 8 or they're not. There's not anything out there that they may -- we haven't heard anything in terms of them going fully online for some period of time.

Our best intelligence right now is that they're going to open around September 8 with a hybrid model. That will impact us compared to previous levels. Exactly how we just don't know. We think that our nursing and therapy revenue won't be impacted a lot. That's our belief, but that our paraprofessional, which is the biggest component of New York, we believe that's going to be impacted. At what level we just don't know.

And obviously, it's all subject to change because there's almost a month to go, and schools are changing their plans daily, as you know.

Hawaii was -- as of Friday, was scheduled to open on August 17. They normally open in the first week of August. But Hawaii announced on Friday that for the island of Oahu, which is about -- which represents about 70% of our Hawaii revenue is that the first 4 weeks are going to be online. And after that, they're hoping to go in-person or to hybrid. But that 4 weeks could obviously be longer, we just don't know. They've also indicated that they're going to give some in-person preference to at-risk kids. So they've indicated that some at-risk kids may be in school even during the 4 weeks, where they're going to be primarily online. A lot of our kids are considered at-risk.

So at this point, we just don't know how much we're going to be impacted by the first 4 weeks being online. And after that, we just don't know. As far as Chicago has -- is concerned, the latest that we've heard is that they're going to be online for the first quarter, which brings us into early November, that they're going to be 100% online. Almost all of our revenue in Chicago is nursing. And the school has indicated that they're going to use 100% of our nurses from day 1 for all different types of initiatives, some being telehealth initiatives and some being where they do have schools open physically for limited purposes where they want extra nurses.

So at this time, we believe our Chicago revenue is not going to be materially impacted. But obviously, everything is subject to change.

Right. That's a great run down. The nursing component of New York City, is that going to be shifted to telehealth like Chicago or...

We believe that our nursing will be a combination of telehealth and them using our nurses in centers where they have kids, even if they're not in school, or where they just need them at certain facilities. So we don't believe our nursing is going to take a big hit. But the biggest portion of our New York City revenue is coming from paraprofessionals, and there's just a lot of uncertainty around.

We do believe there's going to be some sort of telehealth offering for the paraprofessionals. And we do believe that we're going to be utilizing them on the 3 and 2 days, but a lot need to get ironed out between now and the time school starts.

Right. Just 1 more for me and I'll hop in the queue. The -- I've just read what Brad said about using telehealth as a means of gaining share. So can you give us any color on kind of what you're intending to do there?

Yes. I'll take that one. So we're still in the early days of that initiative. When this all happened, it was clear that we were going to have to service our kids one way or another. And we had already had a telehealth offering. This was -- it just made a decision really easy to invest behind it. And now we're looking at all sorts of options in terms of taking it to market. But really, the underlying premise is to leverage our leading position as a provider of therapists and nurses to schools to ultimately gain share against many of our competitors, which ultimately tend to be regional and don't have quite the presence and the wherewithal panoply of offerings, et cetera. So -- but that is certainly front and center for us and an opportunity that we're focused on.

(Operator Instructions) All right. At this time, there are no further questions in queue.

Okay.

Thank you for attending RCM's second quarter conference call. We look forward to our next update in November.

Ladies and gentlemen, at this time, you may now disconnect.