RCM Technologies, Inc.'s (RCMT) Q1 2022 Results - Earnings Call Transcript

RCM Technologies, Inc. (NASDAQ:RCMT) Q1 2022 Earnings Conference Call April 28, 2022 10:00 AM ET

Company Participants

Kevin Miller - Chief Financial Officer

Brad Vizi - Executive Chairman

Conference Call Participants

Bill Sutherland - The Benchmark Company

Min Cho - B. Riley Securities

Frank Kelly - Scopia Capital

Operator

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. 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.

I will now turn the call over to Brad Vizi, Executive Chairman, to provide an overview of RCM’s operating performance during the quarter.

Brad Vizi

Thanks, Kevin. Good morning, everyone. RCM’s first quarter results demonstrate a strong start to 2022 as we continue to build on the foundation we've established and drive execution across each of our business units. We also expect continued strength from each of our divisions with every member of our team steadfast in their commitment, delivering excellence to our clients each and every day.

Once again, all of our units performed well during the quarter. Our engineering team is seeing robust activity across the board. Our healthcare services team continues to expand its client footprint fortifying its presence as the premier service provider for school districts across the country.

Lastly, our life sciences and IT group is making demonstrable strides toward becoming a leading solutions and managed service provider to the Life Sciences end market. I will speak to several of the operational highlights in a moment, but first, I want to thank the team for a job well done and their commitment to propelling RCM to the next level. As proud as I am of the team's historical performance, we must continue to remind ourselves that we are still in the early stages of unlocking the massive potential of our platform.

In fact, I believe we're just scratching the surface and remain confident that we have a long runway ahead. The level of collaboration has been contagious amongst the groups, and the shared institutional knowledge has been demonstrably accretive to today's results. Each group brings a unique and valuable skill set the entire firm can leverage when delivering value to our clients.

We are attacking markets with increasingly holistic approach and it is resonating with our clients as the level of engagement has never been better. This mindset shift from a solid approach to one of seamless collaboration is a testament to a strong company culture, [spawned] [ph] by leadership, and embrace throughout the organization. I am convinced the tangible benefits we are seeing today have galvanized a sustainable culture shift that will be one of the hallmarks of RCM for years to come.

Before Kevin dives deeper into the numbers, I want to share a few highlights and discuss several of the exciting initiatives we have underway at some of our top performing business units. First quarter results represent another step change in performance, further highlighting our team's commitment to the RCM platform. We continue to see strong contributions from each of our divisions.

As a company, RCM generated first quarter revenue of approximately $82 million, a 26% increase sequentially and an 84% increase year-over-year. Even more impressive, we posted record profitability during the quarter. In total, EBITDA for Q1 came in at $9.3 million, representing growth of 74% sequentially, and well over 400% year-over-year.

I would like to call out a few of our star performers during the quarter and discuss at a high level some of the exciting developments that we expect will move the needle in the future. First, our healthcare team continues to execute against our long-term plan through its unwavering commitment to serving the youth of our country and education end market. By introducing new services, serving new schools, and increasing penetration of our long-term partners, the team continues to fortify its position in this vital end market.

Strength was broad based as reflected in divisions financial performance. Our aerospace team is doing a tremendous job across the board. Our new teammates set hand in glove with the rest of the organization. Starting with their unwavering commitment to the client, which is only augmented by their insatiable appetite for innovation.

To give you a sense as to the scale of this group's growth pipeline, the team's overall head count has increased from 107 as of Q4 2020 to 272 currently. As mentioned on our fourth quarter call, my level of excitement remains unabated regarding the in-roads we are making within multiple new ecosystems. The pace of innovation and overall industry activity is impressive, and I have conviction that RCM has definitive role to play in helping our clients make history within some of these emerging markets.

Our team has been extremely adept at finding niche skill sets in a tight labor market to help our clients scale. In return, we are increasingly being thought of, not only as a vendor, but a partner of choice. Speaking of being a partner of choice, our energy services team is also worth highlighting. Their unwavering commitment to the client goes beyond projects in the field. As a reminder, this week, we are presenting in partnership with one of our premier clients at the IEEE T&D Conference in New Orleans. We hope you'll be able to tune in.

Finally, our Life Sciences team continues to gain traction with several blue chip clients as the group pivots to a more attractive managed services model. In particular, our validation practice is seeing robust demand for its services as the Life Sciences industry undergoes a substantial upgrade of its manufacturing capacity. This strong demand backdrop has been precipitated by the pandemic, but is also being driven by the desire of many companies to simplify and secure their supply chains, which has led to a large onshoring effort.

Taken together, their execution is paying off as the group grew revenue by more than 27% year-over-year, and increased profitability by approximately 43% over the same time frame. It is also worth noting that the outlook is just as robust with business activity remaining elevated across all service lines.

I want to thank Bill and his team for their unwavering commitment to restoring RCM Life Sciences and IT back to the crown jewel status it once held many years ago. It serves as a beacon within our organization, and we appreciate the group's tireless efforts towards making RCM a marquee franchise within this vital end market.

In closing, I am proud of the team's focus and execution as we enter 2022. We are committed to building on the successes of last year’s robust and broad based performance. Our strong leadership throughout the organization has each of our groups position well for the future, and I look forward to sharing more updates as the year progresses.

Now, I will turn the call back to Kevin to discuss the Q1 2022 financial results in more detail.

Kevin Miller

Thanks, Brad. Regarding our consolidated results, revenue for the quarter was 82 million growing over 17 million sequentially, and 37.4 million on a year-over-year basis. Adjusted EBITDA in Q1 2022 was 9.3 million, representing a sequential increase of almost 4 million and a 7.6 million increase over Q1 2021, adjusted EBITDA.

Gross profit expanded to 23.4 million, a 32% sequential increase from Q4 2021 and just over 115% increase from Q1 2021. We are proud of the performance for the quarter as we continue to demonstrate the ability to both benefit from the inherent leverage within our business model, while also keeping an eye on future growth by making strategic investments in our team.

Turning to our health care segment. The group generated revenue of 52.2 million in Q1 2022, which represents a 50% increase sequentially and a 147% increase on a year-over-year basis. The performance was broad based.

Turning to our Life Sciences and Information Technology segment, the group performs well during the quarter with revenue and profitability growing on a year-over-year basis. Regarding revenue, we generated 9.9 million in Q1 2022, compared to 8.9 million in Q1 2021. As Brad mentioned, our Life Sciences team continues to expand its footprint across various strategic accounts. We remain encouraged regarding the success we are having in pivoting the business to a managed service model.

And finally, turning to our engineering segment, we generated revenue of 19.9 million in Q1 2022, growing both sequentially and year-over-year. After removing the impact of Canada Power Systems from Q1 2021, the group increased revenue by 7.8 million on a year-over-year basis and 1.6 million sequentially. At the unit level, as Brad mentioned, our aerospace team continues to hit its stride as the group expands into some very exciting end markets.

Another strong performer was our process and industrial group. The team's initiatives across carbon capture, decarbonization of supply chains and renewables are all gaining momentum. Although some of these markets are nascent in their development, we are excited about the in-roads the group has made by leveraging our existing process equipment technology.

Lastly, our energy services team continues to execute well and has laid the groundwork for strong 2022 as client activity remains high across the electric utility space. As Brad mentioned, as strong as our performance was in Q1, we are excited going forward as our utilization levels and overall pipeline activity remains strong. This concludes our prepared remarks.

At this time, we will open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Alright, and we do have a question coming in from Bill Sutherland.

Kevin Miller

Good morning, Bill.

Bill Sutherland

Good morning , guys. I guess I'll just lead you through what you're maybe going to get into, Kevin as far as some of the numbers. Brad mentioned in healthcare, growth was, you know, contributed to by new services, new schools, and also increased penetration, so I’m interested in that, and then also just a split between education, and, you know, the [travel per DM] [ph], the regular business.

Brad Vizi

Yeah. I'm happy to start, and, you know, Kevin you can certainly add to the extent that I miss anything. So, as you mentioned, Bill, you know, a lot of the growth has been driven by new services that have been introduced, you know, new schools that we've been serving, right, as well as further penetration of schools so that, you know, we've been working with for long time. And a lot of that service offerings that we've introduced, they tend to be skewed more towards the behavioral health end market, special education teachers, etcetera.

And so, you know, what you're also seeing is a more rich mix, which is, you know, not only to driving growth in these end markets, but also increased margin more in-line with the education segment. Kevin, do you have anything to add to that?

Kevin Miller

No. I think that that covers it.

Operator

Alright. And we do have another question. This one is coming from Min Cho.

Min Cho

Sorry about that. Hi. Thank you gentlemen. Great quarter here. I know you don't provide a lot of guidance, but I was wondering if there's anything kind of one-time in nature in the first quarter or if these are good quarterly run rates for each of the segments in terms of revenue and margins to kind of use going forward?

Brad Vizi

Yeah. I don't think there’s anything one-time in the quarter. And, you know, every single year, each of our businesses is tasked with growing in the double digits. So... and, you know, we also all aim for double-digit operating margins. Inevitably, what happens is as you scale that starts to show up on a consolidated basis. So, our marching orders have not changed. I don't see them changing for the foreseeable future, just given our size relative to the large end markets we play in.

So, no, I don't view this quarter as extraordinary in nature, beyond obviously the efforts of really thousands of employees at RCM. So…

Operator

[Operator Instructions] We do have another question coming from Bill Sutherland.

Bill Sutherland

Hope there’s a layback [indiscernible] ask more than one question. So, Kevin can – again in the quarter, because there was such a big upside in healthcare [roped] [ph] in my model, what was the driver of the healthcare and I'm sort of getting it that by asking about the split between education and...?

Kevin Miller

Sure. Well, I mean, so the growth is frankly broad based across, you know, all of our groups, but you know, obviously, you know, we're a heavily concentrated school business right? So, that is, you know probably the biggest driver is the penetration and growth, you know, in schools frankly, but we are growing really everything. And we, you know, we expect to continue to see growth, you know, outside of the school business as well.

Bill Sutherland

Yeah. I'm just asking because the – it's becoming clear that the rates are going to start to normalize, particularly in the travel business going forward, and the volume growth is probably going to moderate as well. So, that's why I'm trying to understand…

Brad Vizi

Well, we really do very little travel. I think, you know, and, you know, we may do more of that in the future. Certainly – we certainly are interested in doing that, but right now, our greatest focus is on serving our school clients and serving non travel related business to hospitals, rehab centers, you know, nursing homes, you know, what was our bread and butter business before we got in the schools many years ago.

So, we're not really, you know, to the extent there's a contraction, you know, in rates in the travel business. You know, that's really, I don't expect that to impact us in any material way. We do very little travel. You know, maybe a couple million a year, right now. That's about it.

Bill Sutherland

Yeah. Okay. That's kind of what I need to find out. Then there's excellent gross margin realization in IT while revenues were little light sequentially, any color on that?

Brad Vizi

Yeah. Well, we had an extraordinarily, you know, extraordinary quarter in IT in Q4. You know, we had a big project that we delivered, you know, in sort of a short period of time. So, you know, we saw a big jump in the Q4 revenues. So, you know, it wasn't, you know, a big surprise to us to see Q1 revenues, you know, sort of more in-line with Q3 of last year. As far as the margins are concerned, you know, that's not by accident and obviously we're transitioning our model, you know, to more manage services, more higher margin work where we're seeing some of our growth, you know, is in Life Sciences, which, you know, if you're in the right niche markets, you should, you know, you should see the kind of margins that we're seeing.

At least that's the way we feel about it. We've also, you know, we've also seen a lot of improvement in our human capital services, you know, our HR Services Group, which we also typically see pretty good margins, you know, as long as we're doing a good job managing our utilization, which we have done for the last couple of quarters.

Bill Sutherland

How big is Life Sciences as a percent of your IT Group team?

Brad Vizi

It's probably roughly, you know, 70%.

Bill Sutherland

Okay. That's okay. And then as you know, impressive job on the cash, any updated thinking on capital allocation plans?

Kevin Miller

You know, nothing to – certainly nothing to announce, but it's a heavy, heavy focus for Brad, the board and myself in terms of how to allocate capital. It's something we think a lot about. You know, nothing really, you know to talk about today, but, you know, all I can say, and I'm sure, Brad would probably want to speak to this because this is something he’s incredibly focused on. But, you know, we're going to allocate the capital in a way that we think is most efficient and most beneficial to the shareholders.

Bill Sutherland

Got it. Okay. Thanks, gentlemen. Congrats.

Kevin Miller

Thank you, Bill.

Operator

Alright. Our next question is coming from Frank Kelly.

Kevin Miller

Good morning, Frank.

Frank Kelly

Good morning, gentlemen. How are you?

Kevin Miller

Good.

Frank Kelly

It looks like we had another great, great quarter for all the units. I'd like to add my congratulations to all the group heads and to the leadership team up at the top. Have a couple questions. One is, in the SG&A area, it looks like year-over-year, it's gone up 55% or $5 million, can we shed some color on as to, you know, where those monies are spent?

Kevin Miller

Sure. I mean, at a high level Frank, we're hiring people and paying them more as they deliver more gross profit. You know, we, as you know, we – this is a very labor intensive business, particularly on the recruiting and sales front. And particularly, you know, as far as our school business is concerned and all of the credentialing and all of the, you know, things that need to go on behind the scenes to put somebody to work.

So, we're just investing in our people. We're investing in our systems. We're obviously, as gross profit increases, sort of commissions and so do bonuses and everything else, but, you know, we're – what Brad and I and the other leaders in this business here are trying to do is balance, you know, investment for the future with good profitability and good cash flow in the present, right?

And right now, we're happy with where we are, but you know, we'll continue to keep an eye on SG&A and make sure we're efficiently deploying it.

Frank Kelly

Great. The second question I had was, AR, do we – is our DSOs, because it looks like it, you know, obviously, with revenue going up, sales going up, we expect AR to continue, but it – where are DSOs today versus a year ago?

Kevin Miller

Much improved, you know, we had the best DSO quarter in Q1 that we've ever had in the company. And, you know, Q4 was the best quarter we ever had until Q1 of this year. So, you know, we're well under 70 days. I don't have the exact number in front of me, but I think it's right around 66 for Q1 and we’re right around, I think, 67, 68 for Q4. So, we're very pleased with where the DSOs are at this point.

Frank Kelly

Great. Great. And then so that kind of dovetails into my next point, which Bill brought up as well, on a, you know, on the shareholder appreciation program if you will. And, you know, we're all looking forward to hearing some good news in that as we see these great numbers trickle through the financials.

Kevin Miller

Well, you're not expecting a different answer than we gave Bill, are you?

Frank Kelly

I am not, but just kind of a re – also reiterating his valid point. I guess he brought it up on the last call as well. And would like to, you know, would like to hear – look forward to hearing what kind of program that, you know, we have or intentions that we have down the line?

Kevin Miller

Right. Well we appreciate your positive feedback and you know, I think you know that we keep a very close eye on capital allocation and view it has an incredibly important function of executive management here.

Frank Kelly

Great. Great quarter.

Kevin Miller

Thanks, Frank.

Operator

Alright. Our next question is coming from Min Cho.

Min Cho

Hi there. I just had a couple more questions. Firstly, did you repurchase any shares in the first quarter?

Kevin Miller

We did. We did. If you bear with me, I’ll look that up. I want to say, it was around 400,000 shares, but I'll give you an exact number, hold on.

Brad Vizi

I think that's right.

Min Cho

[About 400,000] [ph] and how much did you...?

Kevin Miller

[Roughly] [ph].

Min Cho

Okay. And how much did you spend on that?

Brad Vizi

Like 2.7 million, 2.8 million, but Kevin, you can double check on that.

Kevin Miller

Yeah. Let's see. 2.8 million. 406,000 shares. The first quarter our average purchase was $6.84.

Min Cho

Perfect. Also, I think Bill was asking this question as well, but what percentage of your healthcare revenues is from the school districts? I think you’ve provided that information in the past?

Kevin Miller

Yeah. It's in our Q, in Q1 it was approximately 79%.

Min Cho

I'm sorry?

Kevin Miller

79%. Approximately 79%.

Min Cho

Okay. Great. Perfect. Also, in terms of your engineering business, are you trying to see any benefits from the infrastructure bill in terms of increased bidding pipeline, does anything anecdotally about the infrastructure bill has impact?

Kevin Miller

I don't think we've seen the impact yet, but we do expect that that there will be some impact in the future. I mean, this is kind of something as I'm sure you would understand that it's a pretty lagging, sort of impact, right. We're seeing a lot of demand for T&D services and we were seeing that before the infrastructure bill. And I think that there's a lot of – I mean, the big utilities all know that they're going to be spending a lot of money on T&D and they're gearing up for that.

So, I don't think that has really shown up and, frankly, you know, while we were very optimistic about the rest of this year, I'm not sure we're going to see much impact in 2022 specifically from the infrastructure bill, but we do believe it's going to have a major impact to our business, you know, over the long-term.

Min Cho

Got it. And then, also just to a quick question about your carbon capture technology, I know you've talked about it in the past, can you provide us a little more detail about that? Is this a proven technology, are customers actually using it, or you still in a testing phase? Just wondering to get any info on that?

Brad Vizi

Yeah. No. So, yes, it's very much commercial. You know, that we don't breakout process industrials. It’s safe to assume it's, you know, well into the eight figures of top line. And, you know, generally speaking above average margin, obviously, it could be project specific. And what happens is, as you start to partner with, you know, some of the larger players in the space, you're the preferred provider. And so there's quite a bit going on, you know, in terms of pilot programs that are actually sizable and we actually think that that entire space is in the very early stages of its development.

So, we anticipate, you know, benefiting from that over the long term, and it's already materially accretive to our results today.

Min Cho

Okay. And then just final question. I know you don't provide a backlog [per se] [ph], but can you talk about – I'm assuming giving your – given kind of the guidance for the year, just general guidance, that backlog trends kind of improved sequentially across all the segment as well?

Brad Vizi

Yeah. Backlog is very strong. You know, this might be a good opportunity for me to explain ultimately the mix of our engineering business. And, you know, depending on what business you're looking at, backlog is slightly more relevant, and some of our businesses, they're a bit more quick turn in nature. So, backlog might not be the best indicator and others that is a very good indicator, but what happens is, is these businesses are growing and the projects that we work on are larger backlog becomes a little more relevant nature.

That's why it's – we don't break it out and, you know, even internally, it's not necessarily the best indicator in isolation, but when you take it, you know, you triangulate it amongst a number of other things we look at. You have a really good sense as to how workflow is going.

Min Cho

Great. I understand. Alright. Great. Thank you.

Operator

Excuse me, gentlemen. I'm not showing any further questions at this time.

Brad Vizi

Thank you everyone for attending the RCM Q1 2022 conference call. We look forward to providing further updates going forward. We'll speak to you about Q2 in August.

Operator

Ladies and gentlemen, thank you for joining us. You may now disconnect.