RCM Technologies' (RCMT) CEO Rocco Campanelli on Q4 2015 Results - Earnings Call Transcript

| About: RCM Technologies, (RCMT)

RCM Technologies, Inc. (NASDAQ:RCMT)

Q4 2015 Earnings Conference Call

March 2, 2016 15:00 ET

Executives

Rocco Campanelli - President and Chief Executive Officer

Kevin Miller - Chief Financial Officer

Tim Brandt - Senior Vice President, IT Consulting and Solutions Group

Michael Saks - Senior Vice President, Healthcare

Analysts

Bill Sutherland - Emerging Growth Equities

Frank Kelly - Private Investor

Operator

Ladies and gentlemen, thank you for joining Year End Earnings Conference Call. Your host for today is Rocco Campanelli. You may begin.

Rocco Campanelli

Thank you. Good afternoon, everyone. This is Rocco Campanelli and welcome to the fourth quarter and year end 2015 earnings call. I am joined today by Kevin Miller, our Chief Financial Officer and Tim Brandt, Group Senior Vice President, IT Consulting and Solutions Group and Michael Saks, Senior Vice President of our Healthcare division. We are going to follow a little different format today. I asked both Tim and Mike to join us today because both have divisions that posted great results for fiscal 2015. Kevin will begin with a legal disclaimer, followed by Tim, then Mike and myself summarizing the operating results for each of the segments, and then we will open it up for questions. Kevin?

Kevin Miller

Good afternoon, everyone. Our presentation on 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 issued from time-to-time. Thank you.

Rocco Campanelli

Thanks, Kevin. As we mentioned in our press release, we are disappointed with our performance for fiscal 2015, particularly as compared to fiscal 2014. However, we were able to achieve some significant accomplishments. We grew U.S.A. EBIT by 23% to $7.1 million in 2015 from $5.8 million in 2014. We generated $12.5 million in cash from operations. We only increased debt by $1 million, but paid a $12.5 million special cash dividend in December. We repurchased 585,966 shares and $4.84 for $2.8 million. We acquired Substation Design Services and we invested $2.8 million in PP&A and infrastructure. And our DSOs improved to 97.8 days at Q4 2015 from 109.2 days at Q4 2014.

I will now turn over the call first to Tim Brandt and then to Mike Saks.

Tim Brandt

Hello, everyone. This is Tim Brandt. I am responsible for most of RCM’s information technology business. I am here to provide overview of the IT segments 2015 performance. Coming off a very strong 2014, we knew our IT group had a very tough act to follow and we responded well. As previously reported, finite life science projects from our two largest 2014 clients peaked that year. We knew at the end of 2014 those projects are already been completed or would come to a successful close in early 2015. As a result of completing those projects, those two clients generated $8.8 million less revenue in 2015. Most of the IT teams fortunately picked up the slack by generating very high sales in recruiting activity levels at opening new doors, accomplishments my team have become known for, to compensate for the ending projects, making year-over-year revenue essentially flat from 2014 to 2015. That ability to open new doors has also allowed us to be selective in the accounts we work with enabling another year-over-year gross margin percentage increase, something else we have made consistent progress with in recent years.

We increased our gross margin percentage from an already strong 30.3% in 2014 to 30.7% in 2015. Those of you who really know the IT competitive landscape should really appreciate our progress in that area as many of our competitors are moving in the opposite direction. IT is made up of multiple teams, some providing time and material staffing services and others providing project or solution services. While they have different areas of specialization, most of them very effectively collaborate, support and cross-sell with the other IT teams.

I would like to highlight accomplishments from the top performing IT teams in 2015. Our top performing solutions team in 2015 was our HR Solutions team, led by Barbara Dockrill and David Pena. HR Solutions grew their revenues and gross profit in 2015 over 2014 by about 54% and 66% respectively. Their biggest project for a large payroll services company couldn’t have been accomplished independently. They received very effective support from most of the other IT teams to make it happen. Our top performing staffing team was our East team led by Pat Kimmel and Erricka Dumas. That team grew both 2015 revenues and gross profit by about 47% over 2014.

Our Microsoft Solutions team, led by Tim Sokoloski and Bill Stefanik [ph] was our most improved solutions team, converting relatively poor 2014 performance into a substantial contribution in 2015 and they will be counted on again to be a big part of the successful 2016. Our West staffing team led by Tim Davis with support from Heather Kalks was our most improved staffing team, also reversing poor 2014 performance in 2015, positioning them as well to be a big contributor this year. We sold our QAD solutions team at the end of 2015 after being approached by our largest competitor in that space and struggling to effectively integrate that business into the rest of our IT portfolio. While they performed below expectations in 2015, that team did make significant contributions to RCM success in past years. We want to thank the approximately 20 former employees for their years of service and wish them well with their new company.

IT is excited about 2016. We will continue to push towards profitable growth and work hard to maintain our robust gross profit margins. Unfortunately, we are in a similar position today as we were in the beginning of last year with a very large national project from HR Solutions successfully winding down. So, we expect a slow start again in 2016 building momentum as the year progresses through the high activity levels discussed earlier. IT is also looking to grow our gross profit dollars again, while continuing to efficiently manage our SG&A spend.

Thank you for your time and your interest in RCM. I am now turning the call over to Mike Saks.

Michael Saks

Thanks, Tim. Congratulations on very good year. Good afternoon, everyone. This is Michael Saks speaking and I am happy to give an overview of the Healthcare segment’s 2015 performance. I am proud to say that our healthcare group had its best year since inception in the mid-90s, achieving our highest revenues and gross profit ever. Here is a closer look at some of the highlights for fiscal 2015. Revenues and gross profit grew by 32% and 36% respectively as compared to 2014. Gross margin percentage improved to 29.4% as compared to 28.5% in 2014. We achieved these numbers in 2015 by getting significant contributions from just about every group. Travel nursing led by Tricia Spangler, just over 2 years old now, grew revenues 260% generating $5 million in revenues in 2015 versus $1.4 million in 2014 and ended 2015 on a $7 million run-rate.

Health information management led by Ryan Slominsky and Nathan Hayes also just over 2 years old grew revenues 139%, generating $2.8 million in revenues in 2015 versus $1.2 million in 2014 and ended 2015 on a $4 million run-rate. Our very highly profitable executive search team, led by Ann Hindman grew revenues 39% generating $2.1 million in revenues in 2015 versus $1.5 million in 2014. And while these three teams excelled, the rest of our team by no means could have ran and watched. In fact, the rest of the team grew our larger base of revenues by 18%.

Our School Services division, led by Andy Hay, won two major contracts in 2015. First, we renewed our exclusive nursing staffing contract with State of Hawaii, Department of Education, in a competitive re-bid process. The Hawaii contract started with the school year August 2015 with two 1-year renewals. We are optimistic that Hawaii contract will run 3 years through July 2018 before another re-bid process. We also won a very competitive bid process with the Chicago public school system and won an exclusive nurse staffing contract. The Chicago contract is 4 years with Chicago having an optional two 1-year renewals. So hopefully that contract will last 6 years before its re-bid.

We are also very excited about 2016. Healthcare revenues of $14.3 million in Q4 2015 were by far our highest quarterly revenues ever. So that’s a really nice jumping off for 2016. While we are certainly not counting on the same growth in 2016 that we saw in 2015, I can tell you that we are budgeting for revenue growth north of 15% and hope to beat that number. So how well we do it, we will look to continue to aggressively grow our travel nurse and HIM divisions. We are looking to expand our school services revenues well beyond the big three and a dozen or so smaller school contracts. We have a good pipeline of new public school opportunities and we will also focus on charter school contracts this year. We will look to expand our presence in the greater Chicago area market focusing both on new schools and many healthcare facilities in that geographic hotbed. We also feel there is more headroom to win additional nursing and rehab work in the New York City metro area.

Lastly and we don’t know when yet, but we plan to launch a new Locum Tenens Staffing division sometime in fiscal 2016. This is a huge market that is growing very quickly and we expect to attack it in a similar fashion to our highly successful approach with our travel and HIM divisions. I would be remiss if I didn’t mention the amazing efforts of Marc Chafetz, my business partner, who helps me to run this division everyday. Thank you so much for your time today and your interest in RCM.

At this time, I will turn the call back over to Rocco.

Rocco Campanelli

Thanks Mike, great job. I would like to now cover our Engineering segment. Our Canadian energy services engineering group had a disappointing year after coming off a record breaking 2014. As I have said in previous calls, Canada’s lackluster performance was mainly attributed to the completion of some major projects at OPG and the delay in ramping up projects for our new 6-year Bruce Power master services agreement. Bruce Power has a significant spend profile for this year and the foreseeable future. And we are very well positioned to benefit from this work. We have seen an increase in request proposals and have been winning a reasonable number of these requests. Our expectations as of today is that sometime in the second quarter we will see a major increase in engineering requirements. The difficulty is to predict exactly when these requirements will turn into real work. We are confident that our backlog at Bruce Power will continue to ramp up throughout 2016 and it has the potential to grow quickly. We also continue to win work at OPG, although not at the rate we were winning projects in 2013 and 2014.

Our aerospace group on a consolidated basis also experienced the challenging year as revenues declined by 4% and gross dollars were flat. We believe that a big reason for the decline in activity was the purchase of our major client Sikorsky aircraft by Lockheed Martin. From the times that Sikorsky was unofficially up for sale in 2015 to the time that the deal closed in November, we observed that the pipeline for component design engineering, RFPs significantly slowed. At this time, we don’t believe that the sale to Lockheed will negatively impact work going forward. On the bright side, our technical publications group grew revenues and gross profit by 7% and 15%, respectively, as compared to fiscal 2014.

Our U.S. energy services group is doing very well with both backlog and pipeline being strong. In 2015, we grew revenues by 19%. We continue to focus our sales and marketing efforts in transmission and distribution, power generation, alternative energy, demand side management and have been successful in closing work in testing and commissioning. Our focus on diversifying our client base has paid dividends during the last half of 2015. We have added some major clients and grew some of our existing clients. We added ABB, Alstom, Pepco Holdings, BG&E, American Electric Power, Atlantic City Electric, MasterCard and Verizon to name a few. We have expanded our services and increased our run rate at consolidated Edison Company of New York, Covanta, Eversource and PSE&G. As previously mentioned, we are disappointed in our consolidated 2015 performance, but we are optimistic in our ability to develop good results for 2016 and beyond. Of course, there are always risks, but we believe that the table is set for a banner of 2016.

Thank you for your time and I would like to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Bill Sutherland with Emerging Growth Equities. Please go ahead.

Bill Sutherland

Thanks very much. Hello everybody. I wondered if we could just – I have the revenue number for the healthcare group for the fourth quarter of ‘15, I didn’t see the other two groups and data for gross profit?

Kevin Miller

Yes. They are actually in the last page of the press release, where I would be happy to read them out.

Bill Sutherland

That’s okay, Kevin. I thought I have paged through the little thing and I will go back to. Yes, there it is, never mind. So I wanted to just ask a couple of questions about the healthcare group and also actually the other two groups. In healthcare, you have got sales based on your run rates and your newer businesses and as well as the it sounds like the expansion opportunities in a couple of the education contracts, it looks to me like you should be up from the $14.3 million right out of the gate, is that a good assumption?

Kevin Miller

Yes. It doesn’t necessarily work that way Bill, just because of especially with the school contracts and school closings and all of that, but we should have a real strong first quarter for sure. Those run rates that Michael talked about certainly are reflected in the fourth quarter. So while we certainly hope that revenues in the first quarter of this year will beat the fourth quarter of next year to the extent that we beat those revenues out, that’s going to be new incremental revenues, right, because there is nothing new coming on in Q4 other than just normal blocking and tackling and hopefully adding more people, but they aren’t anything like new contracts that are going to kicking in. So for instance, Chicago, we had 100% of Chicago in the fourth quarter. And we will have 100% of it in the first quarter. So I would probably think that the revenues for healthcare in the first quarter could be a little bit better, but I wouldn’t expect anything dramatically higher. Mike, but when you start getting out into some of the – when you are comparing obviously, Q1 to Q1, you are going to see a wonderful comparison. And I think we are going to continue to see that as we go out, but if you go in Q1 to Q4, I wouldn’t expect any kind of big jump. We would like to see it obviously, but we will see how it comes in.

Bill Sutherland

And in IT, the impressive margin performance at the gross margin line, is that something that could be further moved ahead or…?

Kevin Miller

No. We should hope so, but I got to be really honest with you that you can only push the IT margins so much. And especially, if you are going out and looking to win new business, I mean Tim’s group does a wonderful job of going out and looking for high value, high margin opportunities, but I wouldn’t necessarily expect that to happen every year because at some point you are – they are just going to hit a ceiling that you just can’t beat. One of the things that obviously has a big impact out is the mix of some of the solutions versus the staffing. And the real focus though obviously, we want to see gross margin percentage increase because that’s outstanding, but the real focus is to grow gross profit dollars. And if we take a step back in gross margins, but we grow gross profit dollars, we will be just as happy with that result, because as you know growing gross profit dollars is the most important thing, especially in a group like our IT group that has a lot of leveragability on our SG&A.

Bill Sutherland

And on SG&A, Kevin, is you are approaching $11 million a quarter, is that a good run-rate number at this point?

Kevin Miller

Well, we are projecting about – we are budgeting for about a 6% increase in SG&A from last year to this year. You have to take out roughly I think about $1.8 million or so I don’t have the exact number in front of me for the QAD business that we sold that was the high SG&A business. But on an apples-to-apples basis, we are budgeting for about 6% increase. So, we are looking hopefully at a smaller SG&A increase this year than we had last year. If we are higher than that, it’s not necessarily a bad thing, because that just means we are growing and we are adding recruiters and salespeople.

Bill Sutherland

If you could also just – while I have got you just go over that kind of where you are with DSO progress?

Kevin Miller

Well, we made a lot of progress this year taking approximately 10 days out of DSOs. But from our perspective, we have little long ways to go. We expect to see similar improvement this year. As you know with DSOs, it’s a bit of a game of whack them all, because as soon as you knock one down, another one pops up in terms of clients, where you have delayed payment issues, but we are not by any stretch happy with where our revenues are today. In fact, we think we can do a lot better.

Bill Sutherland

So, okay. And then let’s see what else I was going to run through, I think that’s – and then Rocco as far as visibility in Canada primarily with Bruce, I suppose is there a power purchase agreement in place yet?

Rocco Campanelli

Yes, the power purchase agreement is in place and they have informed us of their spend profile and it’s pretty significant and we are very optimistic that in the next like I said in my prepared statement that we are very optimistic that it will start in short order.

Kevin Miller

Right. But the caveat to that is we have heard that from our utility clients many times in the past, but the floodgates are going to open in a certain month and 3 months later, it still hasn’t happened, but we do believe for them to be on schedules that they need to hit that they are going to start letting a lot of work hopefully sometime in the second quarter. And we believe that we are ideally positioned to win a lot of that work.

Bill Sutherland

Right. When you all set in your press release should be because of the soft to a slower start in Q1, does that mean that $18.6 million won’t be the local point for engineering and that you did in Q4?

Kevin Miller

We could be a little lower than that in Q1, we will wee. We have got three major issues that I think are going to impact Q1. One is the issue we have every year, which is the resetting of statutory taxes and we have the same issue in the U.S. as Canada and that’s typically in previous years that’s about $400,000 impact to the bottom line. And as you know, the big component is the unemployment taxes. In the first quarter, we are paying full unemployment taxes and then of course, you are also paying full security taxes. They don’t start winding down for holy comp individuals to maybe second or third quarter and some wind down depending on and paying people whether they hit the threshold for social security, but the unemployment taxes are the ones that you really get, you get the full brunt in the first quarter. And when you are in the capital business like us and your biggest expense is people, it has a pretty big impact. So that’s one. Two is we are in a little bit of a holding pattern in Canada. We are not going to have a situation like we had in Q2 of last year, where we lost a bunch of money in Canada, but we are not really going to be making much of anything in Canada in Q1. They are just not going to contribute to our operating income and they did contribute some in Q4. And then the last one is our IT group, we are in a situation where we have a really great big project that wind it down. And Tim’s group is going to need to make up that work and it’s not going to all happen in one quarter. So, they are clearly up for the challenge, but IT is not the going to have it great.

Bill Sutherland

Okay. All helpful. Thanks everybody.

Rocco Campanelli

Thanks, Bill.

Operator

[Operator Instructions] Our next question comes from Frank Kelly with Investor. Please go ahead.

Rocco Campanelli

Hi, Frank.

Frank Kelly

Hi, folks. How are you? Just a couple of things. One, Kevin congratulations on bringing that DSO down, I know that brought in some cash available, made the dividend available or selling much easier to make that decision. My super congrats go to Michael Saks and Marc Chafetz, they are absolutely doing an outstanding job certainly leading the firm as far as any other groups and divisions and they are actually I noticed that they have actually on the top line past the IT group in quarterly rev run-rate. Congratulations Michael and Mark.

Rocco Campanelli

Thanks, Frank.

Frank Kelly

Rocco, I know within the IT group, we know the very nature of the businesses that big projects come to an end and we saw this in your notes in 2014 case it was known that we were going to loose almost $9 million as a whole coming into 2015.

Rocco Campanelli

Not lose $9 million, but a drop in $9 million in revenue.

Frank Kelly

Correct, correct. On a run-rate basis, $9 million coming down.

Rocco Campanelli

It should be up, Frank.

Frank Kelly

Right. So – and we hear not uncommonly that this whole is occurring again in the 2015 into 2016 from some of the comments we heard today that may not be – I don’t know what the amount was, because that wasn’t shared, but do we have – my concern is, do we have IT management in place capable of backfilling known contract inclusions, because we know that these are happening timely while incrementally growing baseline revenue. And then the second question is, what is the full year revenue budget for the IT group in 2016?

Rocco Campanelli

Well, we don’t disclose our budgets, Frank, but we expect the IT group to grow this year. We are not expecting huge growth from the IT group based on where we sit today. Of course, as things develop, that could change. But again, the IT group doesn’t need to – yes, the IT group does not need to grow a lot on the top line to grow contribution margin. But one of the things I think when you look at the IT group, you have to be really fair to these guys, which is they have had several years, 4 years of consecutive growth. And what you don’t see and what the average investor doesn’t see is their contribution margin has grown way more than the top line. So, the IT group in 2014 grew their contribution margin, which we also don’t disclose and I am not going to disclose. But just to make point is that the IT group, the 90% that Tim runs grew their contribution margin in 2014 over 60% from 2013 and then grew it again 10% in 2015 to 2014. And nobody is across the line over 10% growth, but we are all pretty damn excited about compound annual growth of 30% a year over 2 years. That’s pretty awesome. In fact – and we got this fast-forward to 30% of it into 2014. So, to grow your contribution margin 60% in 1 year and then grow it again 10% in next year, from our perspective is hell of an accomplishment and something we are very proud of and Tim and his entire group should also be very proud of it. And I am confident that when we are having this conversation again next year that the IT group will have grown again, just because we have 4 straight years of growing. So we will see how 2016 shakes out. We are very comfortable with the position we are in today for the IT group.

Frank Kelly

Great. And the last question I had is on gross margin in the same group, if you normalize the contribution margin by taking out QED and I am not sure when that was actually solved and what QED numbers were in this number, what would normalize it and you took it out, what would the gross margin rate be?

Rocco Campanelli

Frank, the gross margin rate would probably be down a little bit. Look, they did $3.4 million in 20 – in fact, I can give you some exact numbers rather than they did $3.4 million last year. And we booked a full 100% because we sold them on the very last day of the year. So they did $3.4 million in revenues this year and did 33.3%, which is slightly above the overall gross margin. So but they also did 35.8% in the prior year. So when you are looking at the improvement year-over-year, it would look even better if we took out QED. But more importantly, the QED Group just because of their business model has very high SG&A. So while the gross margins grade are attractive, it’s barely profitable at the contribution operating income level. And when you put any kind of reasonable allocation of IT overhead costs and corporate overhead costs, they were losing money. So and it was a pretty easy decision. I should be rushed it if we didn’t take the offer that was presented to us. So it was – this was a really good deal for us and generated a significant amount of cash flow. Additionally, it allowed us to put out a $12.5 million dividend and 100% return of capital have we not sold QED and done a large tax deduction, that would have been like 50-50. So in addition to getting like on cash flow basis 25x their contribution margin, it also allowed us to issue 100% return of capital dividend, which I am pretty sure our shareholders really appreciate. So I am not sure how much you wanted on the QED, but since you asked that figure I would give it to you.

Frank Kelly

Definitely a homerun on a dog [ph] today, that’s for sure. Great. Thank you. That’s all I have.

Operator

[Operator Instructions] There are no questions in queue at this time.

Rocco Campanelli

Thank you, everyone for joining the call. And I look forward to talking to you again after our first quarter and giving you another update. Thanks again.

Operator

Ladies and gentlemen, this now concludes your conference call. You may all disconnect and have a great day.

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