RCM Technologies, Inc. (NASDAQ:RCMT) Q3 2023 Earnings Call Transcript

RCM Technologies, Inc. (NASDAQ:RCMT) Q3 2023 Earnings Call Transcript November 9, 2023

RCM Technologies, Inc. beats earnings expectations. Reported EPS is $0.46, expectations were $0.3.

Kevin Miller: 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, 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 over the call to Brad Vizi. Executive Chairman to provide an overview of RCM’s operating performance during the quarter.

Brad Vizi: Thanks, Kevin. Good morning, everyone. Consistent with our prior update, the business cadence continues to accelerate as we move through the year. As such, the fourth quarter will be our strongest, and we expect to exhibit EBITDA growth year-over-year. Also of note, the outlook for 2024 and beyond is bright. Our ability to parlay our high-value capabilities into long-term partnerships, where we continue to deliver increased value into strategic accounts has take hold. We believe our collection of high value capabilities is unique to the marketplace, serving as a key differentiator for which to land and expand. Internally, we continue to build on our unique structure that fosters innovation and increased depth of penetration, within each of our end markets, while increasingly strengthening points of collaboration between groups.

Our ability to continue to execute this strategy will increase – with increasing success will further fuel growth future growth into our secular end markets for years to come. Since we last spoke, progress has been made across each of our divisions, that I am excited to discuss in more detail, starting with our Healthcare division. The school year is off to a strong start for our Healthcare team. Notably, we continue to add new school accounts, while growing our presence within our existing client base. We attribute ongoing success to the goodwill we continue to build upon in this end market underpinned by our commitment to supplying highly qualified healthcare professionals to education institutions and other healthcare facilities nationwide.

Behavioral health continues to drive our business at an increasing rate, and we believe, we are in the early innings of this much-needed upgrade to our nation’s social infrastructure. Also, with increased demand for behavioral health services, comes the opportunity to further service our clients with other critical healthcare needs, cementing our status as a partner, not just another vendor, which is core to the RCM business model. RCM Healthcare’s tailored staffing solutions, coupled with a rigorous selection process have bolstered our reputation in education domain, solidifying our status as the leader in this segment of the market, and the gold standard for treating our nation’s youth. As we move forward, we remain committed to sustainable growth, innovation and the highest standard of service.

We anticipate further expansion into new markets and the development of cutting-edge staffing solutions that meet the evolving needs of the healthcare industry. Our dedication to improving the quality of healthcare services positions us to continue exceeding the expectations of our stakeholders, driving value for our shareholders, and positively impacting healthcare and education in the years ahead. The ability to build good businesses while serving a critical need in society and strengthening our communities resides at the core of our company’s values. Our Life Sciences and Information Technology Group continues to emerge as a shining star in the portfolio. Though the macroeconomic landscape in Information Technology was challenging in 2023, including budget reductions across several sectors from high-tech to financial services, our decision to continue investing in market segments demonstrating secular growth has paid off.

The Group’s overall EBITDA contribution is up nearly 55% year-over-year. As we continue to double down the winning formula, just this last quarter, we have expanded our Life Sciences practice in regulatory compliance, ERP design and implementation. We are building out our organizational change management practice, which will further allow us to support our clients across their entire business landscape, while providing improved value through our current delivery models. We continue to see positive trends entering the last leg of 2023, and have a positive outlook for 2024. In Engineering, Energy Services strong execution demonstrates increasing leverage in the model, highlighted by continued delivery of milestones on time for several world-class projects, resulting in client satisfaction and solid gross margins.

Technical highlights include successfully completing site acceptance tests as part of an eHealth high-voltage application utilizing the IEC 61850 protocol. In addition, we were approached to pursue an offshore high-voltage GIS substation with a large international operating – OEM as part of a potential long-term partnership. Also, several vital deliverables were executed on time for a critical infrastructure project with a major utility client in New York. This project represents a significant milestone in the clean energy transition in the Northeast United States. In Europe, our newly established office in Germany received recognition, as a strong technical partner to support turnkey projects that will transfer the power supply to a carbon free electric grid.

We are in the late stages of negotiation for our second major project award, demonstrating increasing client confidence. To serve the increased demand for EPC projects in 2024 and beyond, Energy Services will further expand its EPC capabilities in Europe and North America. We believe the recent addition of a high profile industry veteran to the RCM Energy Services leadership team will accelerate the award and execution of EPC projects in the United States, and further enable to prudently evaluate new regional areas such as South America. RCM Thermal Kinetics continues to execute detailed engineering contracts for distillation, evaporation and dehydration technologies employed in the carbon capture and sustainable aviation fuel markets. On the equipment side, the office is currently executing three concurrent projects for a zero carbon chemical manufacturing customer, primarily using evaporation and crystallization technologies.

The main driver for successfully awarding the orders to RCM Thermal Kinetics is the advanced energy integration techniques utilized in the design. The RCM Thermal Kinetics engineering expertise related to energy integration of extensive chemical processes has an obvious tie in to these environmentally responsible projects. It is why customers are standardizing on RCM Thermo Kinetics as their process design and equipment supplier. We recently opened RCM Thermo Kinetics testing facility. It is beginning to gain traction. The coming weeks, two purchase orders are expected from clients requesting process feasibility and product profile testing. The office has greatly strengthened ties to local universities to support staffing of the testing lab through chemical engineering internships.

The customer support offered through process testing has a track record of receiving additional project orders. It provides the benefit of process risk reduction for both the client and RCM Thermo Kinetics. We expect lab utilization to ramp up in 2024 for new customers and testing related to existing customer projects. In addition to our lab, the engineers are now working on the design of a 30 gallon crystallization pilot Plant. RCM Thermo Kinetics receives a large number of crystallization inquiries. More than any other technology, crystallization projects benefit from the ability to conduct robust piloting trials to produce product samples for our customers. The current schedule would have this pilot testing service ready for client use in May of 2024.

A skilled machinist inspecting a precision bearing for a aerospace/defense application.

RCM Thermo Kinetics recently presented at the Advanced Bio Leadership Conference in San Francisco. The team has been a member of ABLC for many years and benefits from building relationships with emerging companies interested in developing new processes that require our technologies. Many of our customers today were cultivated from ABLC meetings over the past 10 years, the sales team has also attended the aluminum USA show. RCM Thermo Kinetics has successfully supplied environmental equipment to aluminum production plants in the United States. The team remains focused on continuing its emergence as a responsible and sustainable chemical process design market leader. As for our aerospace team, the growth and recovery we expect mid-year has begun to materialize in the third quarter with nine new clients resulting in our weekly revenue rate and headcount increasing nearing our historical numbers.

We still believe we have the potential to close three more new clients before the end of the year, totaling 12 for 2023. We also continue to increase the number of hires quarter-over-quarter with a total of 40 in the third quarter compared to 30 in the second quarter of 2023. Discontinued expansion includes new clients in defense, including sea vessels, land vehicle programs, and new vertical lift customers. Expanding existing and new clients with our core expertise and new arenas provides us much desired depth and breadth of the organization and firmly positions us for 2024. As the management team within some of our existing clients continues to change, we have utilized our long-term relationships, reputation, and expertise to stay relevant.

We believe we will see traction on one of our most significant awards for a design center well into 2026. We continue to market our digital conversion expertise and methodology within aftermarket and our model-based design prowess, which now expands across multiple clients throughout the United States. We have multiple contracts with large OEMs finalized and executed in 2023. We also await a large all-encompassing RFP from one of the largest defense contractors providing a vehicle to support this client across all engineering and aftermarket disciplines. We will continue to expand our reach with these clients and prioritize these types of engagements in 2024. We continue to market the S factor, which broadens our reach beyond S1000D publications into S2000M material management, S3000L logistics support analysis, S4000P maintenance, and S5000F in service data feedback.

We are happy to report that we have our first launch client, which we will support in these expanded areas beyond technical publications. We have reorganized the aftermarket arena to provide opportunities in other areas for our team members, and we have increased our business development team for the first time in two years. We are excited about the opportunities that this team has already uncovered. Before turning the call to Kevin, I would like to reiterate the financial expectations provided during the third quarter. We continue to anticipate EBITDA growth during the fourth quarter, a resumption toward our long-term objective, which is also in line with our expectation for 2024. I also want to reiterate that as a general policy, we do not give guidance.

However, we felt a more granular expectation as we close the year would be appropriate given the advanced macroeconomic noise in the marketplace. I will return the call to Kevin to discuss the Q3 2023 financial results in more detail.

Kevin Miller: Thank you, Brad. Regarding our consolidated results, gross profit for the third quarter was essentially flat year-over-year was 17.3 million in Q3 2023 versus 17.4 million in Q3 2022. Healthcare gross profit in Q3 2023 was 7.5 million versus 9.0 million in Q3 2022. There were primarily two reasons for the quarterly decline in healthcare gross profit. First, we believe that Q3 2023 was our first quarter where we derived zero COVID related revenue. To give this perspective, if we remove the estimated impact of COVID, we saw our school revenue grow by approximately 25% in September 2023 compared to September 2022. We experienced similar results in October 2023. COVID also impacts our non-school revenue comp. Second, we deliberately called the services provided to a multi-location continuing care client in the five boroughs of New York City and Long Island.

At the beginning of COVID, we acted as an emergency VMS to this client as the gross margins from the non-direct revenue shrunk post-COVID, we decided that the contribution margin on that revenue was insufficient for our return model. On a year-over-year basis, our quarterly revenue decreased by 2.1 million from this client. If we compare Q3 2023 to Q2 2023, this client decreased by one million sequentially. The decrease in this low margin business helped us grow sequential gross margin to 30% in Q3 2023 versus 27.6% in Q2 2023. We grew engineering gross profit in Q3 2023 by 5.2% over Q3 2022. The growth and gross profit was primarily driven by increased project debt activity in our Energy Services group and getting our engineering gross margin closer to target levels.

Our gross margin in Q3 2023 was 25.0%, a significant sequential improvement from Q2 2023 gross margin of 22.9%. We continue to see outstanding results from our Life Sciences and IT group with 38.4% quarterly growth in gross profit year-over-year. We are seeing fantastic results, as we drive more revenue through our high-value, high-margin managed service offerings. We hope there is another gear we can get to in Q4 2023. As we look to our fourth quarter of 2023 and our fiscal 2024, we expect all three segments to show good results, with growth in consolidated adjusted EBITDA. We estimate adjusted EBITDA in Q4 2023 between $7.6 million and $8.2 million. Also in Q4 2023, we estimate consolidated revenue between $70.0 million and $74.0 million with a similar gross margin profile to Q3 2023.

More gradually, we estimate Life Sciences and IT revenue between $11.0 million $11.5 million. We estimate Engineering revenue between $21.5 million and $23.0 million. We estimate healthcare revenue between $37.5 million and $39.5 million. Since we have discussed some variability and seasonality in our Healthcare segment, we thought it would be helpful to discuss our weighted-average school days in 2023. Q1 2023 was approximately 55-days, Q2 2023 was approximately 45-days, Q3 2023 was approximately 27-days, Q4 2023 is estimated as about 51-days. So that is about a 7% decline in school days when comparing Q4 2023 to Q1 2023. While we haven’t penciled our first budgets yet, we expect a similar cadence to school days in 2024 except one or two days may shift from Q1 to Q2.

We will give 2024 estimates on our next call, as we have our budgets ready for the year. As for fiscal 2024 adjusted EBITDA, we will be highly disappointed if we don’t see at least low double-digit growth. Our internal goals will undoubtedly reflect a much higher percentage. We are optimistic about growing all three segments in fiscal 2024 and beyond. This concludes our prepared remarks. At this time, we will open the call for questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question is going to come from Alex Rygiel with B. Riley. Your line is open.

Alex Rygiel: Thank you, gentlemen. Very nice quarter and appreciate the added guidance there. Super helpful. Couple of quick questions for you here. First, as it relates to Healthcare, what was your revenue from schools in the third quarter?

Kevin Miller: The schools was $17.4 million.

Alex Rygiel: Thank you. And then your balance sheet is incredibly strong. And you talked a bit about expanding into new staffing markets. So maybe, Brad, you could go a little bit deeper on that.

Brad Vizi: Look, as alluded to in the prepared remarks and been pretty consistent with our dialogue over the last couple of years. We have these businesses at a point where we have a lot of confidence in a number of places in the portfolio. So we are in a position to be opportunistic with respect to deployment of capital and expansion into new adjacencies. We are not looking to go Greenfield into any new areas per se, simply because there is plenty of opportunity, to build on the core of what we do. So, naturally or first inclination is to do it organically by bolting on talent. And to the extent that there is opportunity in organically with respect to M&A, we are going to react opportunistically and would anticipate it being more of a Bolton than any type of a major transformational platform type acquisition. So I don’t know if that answers your question sufficiently.

Alex Rygiel: Definitely does. And then as it relates to the engineering segment, can you talk a bit about the backlog there and the outlook for 2024?

Kevin Miller: Yes, we feel pretty good about what is going on in engineering. It like we have increasing momentum with respect to the metric that we track. It is almost like a hybrid pipeline and backlog metric given that we feel is appropriate given the mix of our business, it continues to grow. So we are anticipating good things. But engineering inevitably given the nature of the project work, it could certainly deviate, but do not expect anything substantial. It is a question in our minds as to whether or not it is going to be a pretty good year to a very nice increase year-over-year.

Alex Rygiel: And then lastly, as we think about the first quarter of 2023, you mentioned that there were 55 school days, and then you mentioned that in the third quarter there were 27 and you had no sort of COVID related revenue. I guess my question here is, as we think about the fourth quarter being 51 days, and that is down 7% from the first quarter. In the first quarter, was there any COVID related kind of legacy revenue in that first quarter?

Brad Vizi: Yes, certainly. But I think, we gave pretty good guidance for Q4, right. So we do not expect any COVID related revenue inQ4. And so far, what we have seen at least in October, is if we look at our schools, okay, which is our core business in healthcare. Obviously we do a lot of work outside of schools, but at the end of the day, we are a healthcare school business, that is our core business in healthcare. That grew 25% in September, and it grew 25% in October. And we really think we can build from there.

Operator: Our next question is going to come from Ben Andrews from Andrews Capital Management. Your line is open.

Ben Andrews: Couple of balance sheet type questions, if I may. Understanding the transit account, I always thought it was subcontractor related, is that have a specific industry or segment flare, is that your engineering segment or primarily what does that tie to?

Brad Vizi: You got it right. It is tied to engineering and mostly to EPC contracts. So we have several large EPC contracts where we do the E and the P, but we don’t do the C. We don’t take inventory of the equipment. The equipment we purchase the equipment, but it goes straight from the OEM to the client. So, we never take inventory of that equipment. And so a lot of that is advanced payments for equipment and construction.