R C M Technologies Inc (RCMT) 2020 Q1 法說會逐字稿

Good morning, everyone. This is Brad Vizi, Executive Chairman of RCM Technologies. Welcome to RCM Technologies' 2020 First 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 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 file with the SEC as well as our press releases that we issue from time to time.

Thanks, Kevin. We last spoke about 2 months ago, but the world has obviously changed since. Like most companies, we are heavily impacted by COVID-19. To put the impact in perspective, we need to discuss the implications by segment. But first, I want to stress several overarching themes.

When COVID-19 quickly escalated, our highest priority was the safety of our employees. We very quickly moved most of our billable and non-billable staff to work from home. While part of our workforce is accustomed to occasionally working from home, the sheer volume and suddenness of the transition throughout the company required a Herculean effort. We are proud of our entire company for quickly adapting to the new environment.

As it pertains to financial performance, in the short term, our revenue in all 3 segments is impacted. Our #1 focus right now is maximizing cash flow and strengthening our balance sheet. We are reducing debt by aggressively pursuing the reduction and deferment of costs and vigilantly managing accounts receivable. As far as cost reductions are concerned, we need to consider each segment separately, while aggressively applying the same 2 principles: first, maximize utilization; and second, reducing SG&A expense. These 2 overarching themes must be managed carefully in order to maximize cash flow in the short term, while not harming the company in the long term.

COVID-19 has had the most significant impact on our health care staffing segment. Before the pandemic, our health care staffing segment was well on its way to another record quarter. But as many of you know, most of our school clients, including New York City, Hawaii and Chicago, abruptly closed in the middle of March. The impact on Q1 was twofold. We lost approximately $3 million in revenue from school personnel that we would have otherwise billed in Q1. We also lost over $1 million in gross profit from this lost revenue in Q1.

In addition to our normal margins, we incurred certain payroll costs for the full month of March. To help offset the short-term revenue reduction, our health care segment has aggressively reduced its cost structure. After absorbing most statutory mandated non-billable costs for direct personnel in Q1, we have furloughed close to 100% of our billable staff that is not fully utilized. Our utilization rate in health care are running at or near 100%. To date, we have reduced SG&A expense by more than $1.5 million on an annualized basis. The actions we have taken enable us to flex our cost structure down over the short term, while allowing us to ramp up for the 2020-2021 school year once we gain confidence that the schools are reopening on schedule.

As compared to health care, COVID-19 demonstrated less impact on our engineering and IT segments, though neither group has seen a material reduction in current assignments as a result of COVID-19, both segments have predictably seen a slowing of new business inquiries and proposals. Visibility beyond Q2 is challenging. Though we have several significant opportunities in our engineering pipeline and we expect pent-up demand for electrical substation field work, the timing of the work is more challenging to predict than usual.

As a result, we have also focused on reducing our cost structure in both engineering and IT segments. We are more focused on driving utilization than ever, while still preserving room for proposal preparation. We are going to great lengths to minimize bench through RIFs, furloughs, converting salaried staff to hourly and increasing the billable hour quotient for senior direct personnel. Consistent with the rest of the company, we are making material reductions in SG&A. For engineering and IT, on an annualized basis, we have eliminated just under $2 million of SG&A expense and delayed previously budgeted expenditures wherever possible. This is in addition to significant SG&A expense reduction in 2019.

In summary, during the next 2 quarters, our primary focus will be cost and debt reduction without sacrificing the long-term progress we have made in the business. While aggressively managing the business to today's economic reality, the entire RCM team is committed to making sure the company is positioned to grow in a post-COVID world.

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

(Operator Instructions) And our first question will come from Bill Sutherland.

So on health care, you -- Brad, you mentioned 100% -- or nearly -- it's never 100%, nearly 100% utilization. Does that mean -- because I think of the business also having a temporary staffing aspect to it. I just want to understand what you -- a little more understanding of what you mean by that.

Well, most of our health care staffing business is naturally 100% other than sick time and paid time off. We don't have a lot of bench in the health care staffing segment, but we do have some bench, and we have bench, particularly in 2 areas. We have bench with supervisors that we use in the schools that are meant to be partially billable, and in some cases, not billable at all or built into the rates of the people that we staff in schools. We also have a number of therapists that are salaried. And so they can have bench time as well. The guys do a fantastic job of keeping utilization in the 97%, 98% range under normal times. March, we got hammered a little bit because of statutory requirements. They were kind of back [to work] in Illinois and New York.

And then, of course, we do have salaried therapists that we didn't necessarily put to work right away. And some of our supervisors, some of which we needed to lay off, but can't just lay them off on 24 hours' notice, right? So necessarily depending on years of service and all that. But -- so we have a fair amount of bench time in March, unfortunately, which Brad gave sort of the lost revenue versus the lost gross profit, you'll see that the ratio is kind of out of whack in terms of our normal margins. And that's just because we wound up having extra cost for the last 2 weeks of March that didn't go against any revenue. But we are very, very focused in all 3 business lines in maximizing gross margin going forward. And as you mentioned, we'll never have a 100% utilization, 100.0%, but we're running around 99% right now, upper 98%, 99%, and some weeks, pretty close to 100%. The main point is that we're always focused on gross margin and utilization, but we're even more focused on it right now because it's just critical to maximizing our cash flow.

And the other issue, of course, is the outlook for the fall. I guess -- I assume you have to go with a couple of different assumptions. If you begin to think that it could be delayed, are you working with other opportunities to place people?

Yes. Yes. Certainly, we are looking at many different opportunities. I would say the 2 most promising of new things that we're looking at would be COVID testing, both in testing centers, and we're rolling out a corporate product -- when I say testing, that means screening centers. So not actual COVID testing -- screening centers. So we are offering a service to large corporations to have on-site nurses to do temperature screening and check the employees as they come into work every day. That's probably not going to take off right away because a lot of people aren't working in offices right now, but for a lot of businesses, that's going to change. So we have that offering ready to go right now. We've got a number of clients that are interested in that service. In terms of what that's going to generate in revenue, it's really hard to say.

And then the other area is that we have seen an uptick in providing nurses to commercial screening centers, like airports, for instance, and hospitals and state governments. And we have not seen significant revenue from that yet, but we're optimistic that that will grow over time. One of the things that's been interesting, Bill, is that there's so much chaos in the health care market right now. We're not seeing -- we're seeing a lot of demand for nurses, but we're not seeing as much execution as we would like to see. But we think that over time, we'll get better at it.

The other thing that we're offering is telehealth to the schools. So we are doing a small amount. Our therapists are doing some teletherapy. It's not a giant amount of revenue, but we may also be doing some teletherapy or telehealth in some other schools. Certainly, if schools don't reopen, I think that they'll be looking at this more seriously than they are right now. It's our opinion that -- and again, this is just our opinion, but it's our opinion that the schools will reopen for the '20-'21 year. And exactly when and how they open may be different for New York versus Chicago versus Hawaii, right? Because they're all different, I mean, they all have different exposures to the virus.

Yes. Exactly. Okay. And then wanted to -- you talked about some good demand in the transmission and distribution area, the power gen. And I'm just kind of curious how you think. And you were building some good backlog. Just wondering how you're thinking about the potential conversion or are you thinking about just be deferred or -- as opposed to canceled?

I don't think -- we are not getting any sense that any of our major projects are going to be canceled. In fact, I can tell you, we haven't had any big project or -- that we're bidding on or that we're working on where the client has said, we're not doing this for the foreseeable future. That hasn't happened. I think we would be kidding ourselves if we would think that some of the stuff that the clients have not executed on isn't going to get delayed. Of course, some of the stuff is going to get delayed. We are seeing a decent amount of proposal activity in the T&D space. So we're encouraged by that.

We also think that there's going to be a lot of pent-up demand for field services that isn't getting done right now. I mean there's very few people allowed in to even visit a lot of our utility clients. But at some point, safety and field service-type work, like that work has to get done. So walk downs and all kinds of work needs to get done. So we're cautiously optimistic about engineering, but it's -- like as Brad said on the prepared remarks, it's just -- the visibility is a big, big challenge, particularly past Q2.

But we have not seen a big erosion in any of our current work in engineering or IT. We are seeing a slowdown in proposals. But even the last week or so, we've seen a couple of nice proposals come out of T&D. And so we're cautiously optimistic about those 2 business going forward with the asterisk that we don't know what the hell we don't know.

And then, I know in your business, the only sort of lining is your cash improves and things get slower. And I guess that's -- we can expect a decent cash quarter.

Yes. Yes. You can expect a decent cash quarter, I believe, in both Q2 and Q3, and we are going to be hyper-focused on cash flow going forward. But not -- how long this lasts, we realize it's critical for us to be, at least, cash flow neutral, but really, we're driving towards being cash flow positive. And we'll definitely be cash flow positive in Q2 and Q3.

(Operator Instructions) It does look like your next question will come from Alex Rygiel.

A couple of random questions first. How many health care professionals are on assignment today? And what was the percentage of health care billable staff that was furloughed?

I don't have those exact numbers in front of me, Alex. But I would tell you that just off the top of my head, about probably more than 2/3 of our health care staff is furloughed. In terms of our billable staff, probably 70%, at least, 70%, 75% maybe. And we furloughed quite a few non-billable people as well and for sure. (inaudible)

As it relates to that 70% to 75%, I'm assuming that, in theory, they wouldn't come back on until the fall school season starts up again. Is that fair?

Yes, that's pretty fair. I mean we're going to -- we're looking for work for all of them. But realistically, best case scenario is we find work for a handful of our furloughed billable staff. But we are looking for work. We have a big [goal] of extra nurses that we're looking to place wherever we can. As far as the professionals are concerned, they're -- there's not much we can do for them in the short term.

Sure. And then can you update us on your debt covenants and where you stand right now?

Well, we have a waiver for Q1. The way that our formula works for Q1, our debt-to-EBITDA ratio after -- was 4.4. That's higher than we'd like to see it. It's above where we're supposed to be. I would say it was -- I would -- this is my characterization, but I feel like getting the waiver from Citizens Bank was relatively easy and automatic. If we need waivers in the future, I feel reasonably confident that that won't be an issue, provided that we execute on our end in terms of paying down debt and having positive cash flow, which we will. So I don't see that as an issue going forward.

We've been with Citizens Bank for over 20 years. And through thick and thin, they've stood behind us. It's been mostly thick fortunately. We have rarely needed to get any kind of waivers or amendments. But when we have in the past, it's never been a problem and every indication that we're getting from Citizens Bank today is no problem, keep doing what you're doing, and we'll stand behind you.

As it relates to the arbitration settlement, correct me, maybe I was wrong, but I thought there might be 3 of them that were outstanding with up to maybe $14 million on the books? These were (inaudible) or just one?

Yes. There was 3 major projects involved in 1 arbitration. So the arbitration is complete. So it's finished. That's the best news about the arbitration is we are done.

Excellent. And then, can you be cash flow positive in the second quarter in the specialty health care business?

Yes.

Speakers, it doesn't look like we have any more questions in queue. Do you want me to re-prompt or -- wait, we are getting some -- we do have one from [Steve Bova]. Do you want to take that as a final question?

Please, that would be great.

In regard to the arbitration, did you receive any cash that you hadn't received already as a result of that?

We have not received the cash yet. We do not know exactly when we're going to get that. But we're hopeful we'll get it in Q2.

What -- how much is that?

$7.4 million.

So -- and the write-off was $8 million. Is that right?

$8 million. $8.08 million, rounded.

$8 million. Okay. When was that finalized, that arbitration?

In April, a few weeks ago.

Okay. Does it -- do the -- your balance sheet or the...

The balance sheet's up -- yes, the balance sheet, the condensed balance sheet in the press release reflects -- does reflect it, and the full balance sheet that will be in our Q that we expect to file today will also reflect it. So we close it as a subsequent event, but since it is material and important, we incorporated that into our income statement [analogy].

Okay. What's -- how optimistic are you that you'll collect the $7.4 million during the quarter?

I'm not really sure, Steve. I think there's a pretty good chance. It doesn't make a lot of sense for our clients to not pay it. Without getting into any details, there's a few barbed wires in the decision that would incentivize them to pay it. So if they don't pay it, I think it would be an unwise decision, but I never thought we'd get into this position in the first place. So it's hard for me to project what they're going to do.

Okay. Switching over to COVID. Do you qualify for any PPP money?

We do not. We're too large.

Speakers, there are no further questions in queue.

Thank you for attending RCM's first quarter conference call. We look forward to our next update in early August.

Ladies and gentlemen, this concludes your call. You may now disconnect your lines.