Ladies and gentlemen, welcome to the RCM Technologies First Quarter Earnings Update. I will now turn the program over to RCM Management.

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 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.

Thanks, Kevin. Good morning, everyone. As discussed in our prior call, the first quarter concluded as expected with a seasonally slow start in January, an acceleration as we moved through the quarter. Our breadth of focus is both widening and deepening throughout the organization, with all teams executing on current initiatives while seeding new initiatives to propel growth well into the future. Further galvanizing the strength of the platform, we have introduced the shared services team whose mandate is to help streamline the strategic focus of our groups, strengthen collaboration, and enhance communication about our RCM platform. Throughout the month, we will launch a much-improved digital initiative, highlighting the mission-critical work of each of our groups and helping distinguish us as what I believe to be a one-of-a-kind platform in the marketplace. Without further ado, I will get into updates on the progress of each of our teams, starting with health care. The Health Care division started 2024 with a continued emphasis on its core. Excluding business we consider to be non-strategic, primarily consisting of a slow-paying long-term care facility client, we made the decision to reduce. Health Care demonstrated solid double-digit top line growth year-over-year. As we finish lapping the bulk of this headwind in Q2, we anticipate a re-acceleration of growth in the second half for Health Care. This progress is a testament to the hard work and dedication of the team. Our K through 12 education business, one of our key focus areas, continues to strengthen. We are confident about the potential of five new school districts already onboarded and twelve more in the final stages of negotiation, each anticipated to generate revenue in excess of $300,000. Also of note, there are eleven new districts toward the late stages of the sales cycle that show promising contribution in the 2024-2025 school year. Our expansion efforts to grow our client base nationwide continue to yield substantial results. We are leveraging our leadership position in K through 12 staffing to capture new opportunities and strengthen our advantage. As we continue to execute our strategy, we are confident in our ability to deliver sustained value and growth to our shareholders. Transitioning to Life Sciences and Data Solutions. First quarter results demonstrated continued progress in executing against our strategy to pursue project solution and managed service solutions client engagements. Our renewal business doubled year-over-year. We have seen increased demand for our services in Life Sciences, HCM, and Puerto Rico solutions, and our pipeline continues to grow quarter-over-quarter. Our customers have challenged us to expand our services in HCM with the introduction of direct white-glove and post-implementation support. We have expanded our data management team and built a dedicated ERP solutions team. We have broadened our program practice team by introducing a robust series of organizational change management services that will enhance all of our solution practices. As we look toward the remainder of 2024, we continue to see strong momentum in the business. Energy Services closed the first quarter of 2024 with strong results, delivering double-digit forecasted revenue and EBITDA increases. Client development continues to be an area of investment for us, given the technical success of several marquee projects within the industry. To say it differently, widely followed technical success is conducive to growth, and we are highly focused on leveraging our momentum in the marketplace. During Q1, Energy Services invested in client development in the Northeast and Midwestern United States, Puerto Rico, and Europe, building partnerships for the net zero transition and modernization of the electrical grid. Also of note, organizational changes have strengthened the EPC and transmission line business to capitalize on increasing market demand. We believe that the foundation is set for Energy Services to provide a material economic contribution to RCM in 2024 and well into the future. Within our process industrial group, RCM Thermal Kinetics continued execution efforts for multiple equipment contracts in the zero carbon chemical manufacturing sector. The Thermal Kinetics office has also won new engineering business in Q1 related to ethanol plant expansion and optimization studies. The Thermal Kinetics team feels that this is a strategic area of focus as production plants try to reduce their carbon footprint and are incentivized by state and federal governments to do so. In addition, a large engineering order related to an SIF production plant was also received in Q1. The new Thermal Kinetics testing lab was at 100% utilization through Q1 2024. Client interest in the facility continues, and we anticipate utilization of the lab will continue through 2024. The team remains focused on the continuation of its emergence as a market leader in responsible and sustainable chemical process design. The Aerospace and Defense Group had mixed results in Q1 2024 due to a lull in workload in our aftermarket segment during January and February. However, EBITDA for the division still grew year-over-year. The engineering piece of the business is driving, executing with three new clients in Q1 2024. There are RFIs, RFQs, and MSAs in process, most including engineering and aftermarket services with two new OEMs in vertical lift and land vehicles, three new Tier 1 manufacturers in power supplies, inverters, electronics, and aerospace components, and one new air mobility client throughout the Aerospace and Defense division by the end of Q2 2024. Our strategy to continue to drive and expand our model-based expertise, digital conversion, and software and systems expertise throughout the organization and customer base has resulted in continuing inquiries and partnership opportunities throughout the quarter. Our new service offering, which revolves around solving quality and production issues within our clients' supply bases, continues to grow with interest and engagement throughout our client base. This expertise is also attracting new client interest. We will continue to expand our reach with these clients and prioritize these engagements in 2024. Our project and program management additions in our engineering and aftermarket sectors are instituting welcome changes with the entire team excited and engaged. We have already seen quantifiable results from the program management office stemming from the team's exceptional efforts. I will return the call to Kevin to discuss the Q1 2024 financial results in more detail.

Thank you, Brad. Regarding our consolidated results, consolidated gross profit for the first quarter of 2024 grew by 7.1% as compared to 2023 from $19.0 million to $20.4 million. Adjusted EBITDA for the first quarter grew 11.1% from $6.1 million to $6.8 million. Adjusted diluted EPS for the first quarter of 2024 grew by 30.4% from $0.41 to $0.53. As for segment performance in the first quarter of 2024, Engineering gross profit grew by 27.1%. Life Sciences, Data & Solutions gross profit grew by 7.9%. Health Care gross profit was down 2.4%. However, if we remove the impact of COVID from the comparable first quarter in 2023, we estimate that 2024 revenue grew by about 7.3%. If we remove the impact of COVID and the deliberate reduction in services to a large long-term slow-paying long-term care facility, we estimate that 2024 grew by about 12.8%. School revenue of $31.9 million for the first quarter of 2024 grew by 19.1% after removing COVID revenue from the first quarter of 2023. As for the remainder of fiscal 2024, we continue to anticipate that we will see at least low double-digit consolidated adjusted EBITDA growth as compared to fiscal 2023, with a similar quarterly cadence to EBITDA when compared to fiscal 2023. We also believe that there is significant upside to the fourth quarter with such a robust school pipeline starting in the 2024-2025 school year. This concludes our prepared remarks. At this time, we will open the call for questions.

And first off, it looks like we have Bill Sutherland.

It was a great quarter, and the new business you have lined up is very impressive. On the Health Care side, you've onboarded five districts, which will impact the fiscal years 2024 and 2025, correct, Kevin?

I didn't quite hear that; it might be my phone.

Yes, I’ll handle that. I believe Kevin may be experiencing some audio issues. We have five deals already secured and many more in advanced stages. I think the number pending execution is around eleven, with a similar quantity that we believe will come through. In total, we’re looking at approximately thirty deals that we think have significant potential.

Brad, while you're speaking, could you elaborate a bit more on the expanding services in the HCM part of Life-Sci?

Yes. So two of our strongest practices in that business or in that division are Life Sciences and HCM, as you are aware. And we've had quite a bit of success in HCM the last couple of years and been embraced by some of our clients here. And naturally, when that happens, when you are successful with them with one particular need, you're at the front of the queue with respect to ancillary opportunities, and opportunities to build on the business that you've worked with them to build. So it's very much along the lines that we look for in terms of identifying strategic clients, putting our energy into them, doing well for them, and then ultimately, that leading to incremental opportunities. So again, benefiting from our growth in terms of our ability to deliver value to them as well as their growth. And that particular market is very robust.

In Engineering, you mentioned Aerospace improving after the first quarter. Do you think this will be a gradual increase? You noted three new clients starting up, and I'm trying to understand the pace for Aerospace this year.

Kevin, would you like to address cadence, or should I take this one? Regarding Aerospace, that division has made significant progress in optimizing its business mix and positioning its portfolio for the long term to ensure good returns and higher margins. They've made solid advances in Engineering, as I mentioned in the prepared remarks. In the aftermarket, there was a brief slowdown, but it's now gaining momentum, especially with some larger purchase orders finalizing this quarter and new clients initiating work, albeit on smaller scales initially. As we continue to deliver for them and build their trust, they respond by awarding us more projects. Therefore, considering these factors, we have significantly higher expectations for the second half of the year compared to the first four months.

And just one more. Kevin, let me take a victory lap here on the cash in the quarter. And you mentioned continued improvement. Is there any kind of mention you want to put on that?

Well, we quite frankly expect Q2 and Q3 to be better than Q1 in terms of cash flow from operations. How much better remains to be seen. But I'll be very disappointed if we don't have. When you add up Q2 and Q3, and I don't care if a lot of it comes in Q3 versus Q2 or whatever. But when you add up those two, they should be a lot more than 2x Q1. And if not significantly higher, I'm going to be very disappointed with the cash flow.

It's not just about timing; there has also been progress regarding some of the working capital effects.

It's everything. It starts with achieving a solid net income, especially when accounting for seasonality and effectively managing working capital across the balance sheet. The main focus is on receivables, and we anticipate our receivables will decrease by the end of Q2 compared to their level at the end of Q1 and will drop even further by the end of Q3. Currently, we are observing some progress in reducing receivables to a more acceptable level than where they stand today.

Yes. Could you remind us what the DSO was in the quarter and what your target is moving forward?

Well, it's 93. Long term, I'd like to be in the low 70s, that may be a little too optimistic over the next two quarters. But we need to first get it to 85 and then get it to 80 and then get it to 75. And we're just going to keep working to get it down. Obviously, there are always factors that influence that. Sometimes we do take on high-margin clients that maybe have a little bit slower profile. And sometimes when you're working with big companies.

Like school districts?

Well, school districts are interesting. They pay quickly. But sometimes, there are just a lot of administrative groups you need to jump through. So that causes some significant fluctuations. And we've seen quarters where our school DSOs are incredibly pristine and then we've seen other quarters where just a little bit higher, but the great thing about the schools is they pay and they pay quickly once they approve invoices. And once the POs get all tied up and above on somebody's desk, the schools historically pay pretty well. It's just up to us to do a little bit better job of getting through some of the administrative sort of traps that are out there. But yes, we're excited because I can see on our two largest clients that we're going to be in really, really good shape on those receivables over the next two quarters.

Next up, we have Alex Rygiel.

Brad and Kevin, nice quarter here. A quick question as it relates to the robust school pipeline and the potential for the fourth quarter upside, when do you think you're going to have good visibility on this?

It will definitely be better when we reconnect in early August, as we will have better clarity regarding the contracts we have in place. We'll likely have some insight into the revenue they will generate right away. However, we won't fully understand the revenue expectations from all the schools until around September or October. Schools can sometimes surprise us on their ramp-up, both positively and negatively. With the number of new schools we expect for next year, Brad and I believe that at least a few will become strong clients immediately. We will work on the others to develop them into significant clients later in the year or by 2025 and 2026. We haven't seen a pipeline of new schools like this in the company's history, which is very exciting.

And when you sign up and execute on these new contracts with the schools, can you address if there's any sort of margin headwind maybe in the first 90 days of that new contract? Or if there's a notable receivables headwind?

I don't feel there are any receivables challenges. When onboarding a new school client, each school can have unique administrative processes for approving purchase orders, invoices, timesheets, and IEPs. It sometimes takes a little while to navigate the administrative requirements of a specific school, which can lead to slower payments initially as we address what they need. However, schools consistently pay, and there's no particular school that is likely to be delayed significantly. Any delays are typically related to administrative issues. This doesn't worry me at all. Regarding revenue and gross margin, we can't be certain until we start working with the schools. We expect that the new schools we plan to add will have margin profiles similar to our existing ones. Occasionally, we may need to place a few people at slightly lower margins to build a strong relationship and get the contract started, but we aren't currently facing significant margin challenges for schools.

And then more broadly across all three of your business segments, are there any other kind of sizable contracts that are nearing conclusion or you're contemplating or have recently sort of walked away from that are worth discussing?

There is a significant health care client that Brad mentioned, a long-term care facility primarily funded by Medicaid, which has been slow in payment. We always receive payments from them, and they have been a client for over 20 years without any write-offs. However, it doesn't make sense to continue servicing them at the same level we did in 2022 and 2023 because we don't want to have that much capital tied up in a single client. While there is no payment risk, it's more about how we allocate our capital, and Brad and I have decided to slow things down a bit. This may affect us in the short term, but it's the right decision for the long term. Regarding major contracts, we try to avoid discussing them too much to prevent the risk of not securing what we anticipate. Nonetheless, our pipeline and backlog look strong across all divisions. Brad, do you want to add anything?

Yes, Alex, to clarify, there will always be some degree of project orientation in our business. However, regarding potential challenges from projects coming to an end, we do not foresee any issues on the horizon that would hinder our growth. The main challenge we've noted, as Kevin reiterated, is within the Health Care sector, and we believe we will largely overcome that by the end of this quarter.

And I'm going to end with the capital allocation question here. Clearly, your cash flow outlook is very positive. Balance sheet is really strong. I don't believe you bought any shares back in the quarter, but can you talk about how you're thinking about prioritizing buybacks versus acquisitions?

Yes. Just to be clear on that, Alex, and you'll see when the Q is filed here, we bought a couple of hundred thousand shares in the quarter.

In Q2?

Yes. As cash begins to flow in over the next few quarters, we should be close to being delevered. We're going to be strategic and are comfortable holding onto some cash for a time. When the right opportunity arises that aligns with our return criteria, we'll act quickly. That said, we have been exploring a few acquisitions that we believe could add significant value, and the chemistry with the sellers is promising. When they align with our technical capabilities in a rapidly growing market segment, we can leverage our sales force and recruiting power effectively. We're making progress, and we may have more to discuss in August regarding this.

Next up, we have Ben Andrews.

Two questions. When I look at the Health Care year-over-year, it looks like gross margin went down a little bit. So the accounts that you're calling that are slow paying, they're also high-margin business?

No. They're right around the normal margin. The main reason for the downturn in the margin, frankly, was we had a pretty big increase to some of our employment taxes in New York. That's sort of the biggest hit that we took in Q1. We had a pretty big increase. That will run through and then you just have normal noise and mix shift in the margin, but that you're going to see. But there's nothing other than that issue in Q1 that I would say is impacting the year-over-year comparison. And keep in mind that Q1 of last year was pretty high margin compared to historic margins.

Okay. And then this might be intertwined with that question as well. But regarding accounts receivable, for a long time now, many years, it seems that you guys get it together and then it spins out of control, then you get it together and then it spins out of control. Is that indicative of that client? Or is that indicative of the revenue split on the type of clients you have? And why is that?

Yes. The best way to explain this is that we occasionally encounter administrative issues, especially with our largest clients. We've experienced several consecutive quarters of outstanding days sales outstanding for those two clients, excluding the last couple, and we expect to return to a better level. There will always be variability with certain clients, particularly on the project side, because payment is often contingent on project completion and certain milestones. This leads to fluctuations in accounts receivable. If you examine our company over a 12-year period, you'll find that we no longer face some of the issues we had in the past. We have been significantly more diligent and focused on accounts receivable recently. I believe that this discipline and focus is firmly established and has been for some time. Looking ahead over the next three to four years, I don't expect to see the same level of fluctuations we had five years ago. However, there are still some areas that require our attention now, and that is our current focus.

Okay. Well, that's good to hear. Hopefully, we'll see that going forward, kind of an ongoing lower DSO.

Yes. And we will absolutely get them down. The only thing I would add to that also is we're very, very focused on, obviously, cash flow, return on equity. Like so if we have a client that we know is going to be 90 days or 120, and a lot of these big companies, it's 90, 120, or there's eight companies behind us that will take the business. We're pretty careful about how we select those companies. And we also need to make sure that if we're going to have high DSOs with the client, that the juice is worth the squeeze. We're going to make sure that we get a good margin from that client to make sure that that capital allocation is worthwhile. So we spent a lot of time looking at this, and we spent a lot of time thinking about it very, very carefully.

Right. And that's why I'm asking this because it clearly looks like it has happened before, and I'm just trying to understand your customer base more.

Yes. I would like to emphasize, as Kevin mentioned, that when we evaluate Days Sales Outstanding in relation to overall returns on capital, we consider scenarios where a client has a 50% gross margin but wants to pay in 90 days. If we believe the client is a good credit risk, that’s acceptable. We take a comprehensive approach to assess our clients, but there are nuances as we scale our services platform. As a business grows, especially one with diverse project activities like ours, performance can fluctuate due to even minor incidents or missed deadlines. Additionally, onboarding can be a complex process, particularly with clients like schools that can be demanding. If there’s turnover on their side, the new personnel may have a learning curve to navigate their systems, which can slow down progress. These challenges are part of the natural ebb and flow of business. Overall, we perceive this as a long-term opportunity. Whenever we encounter challenges with a client that prevent us from reaching a steady state, it becomes a chance to address their issues and transition from being merely a vendor to a valued partner, enhancing the durability of our relationship.

If I look at earnings in the quarter, I was impressed. I mean, when you back out the gain on sale, like $400,000 from last year, clearly, your EBIT went up more than I thought it was going to go up and definitely more than the Street analysts thought. And you did it with the Health Care engine not really running this quarter or being masked by stuff falling off. So how should I look at that type of margin looking out over a few quarters, when these schools and possibly aerospace clients are coming on? Should you maintain relatively the same margin? Or can we see nice growth like we did year-over-year in Q1 or even better?

On a sequential basis, I expect improvement. While I won't claim there will be a significant jump in gross margin from Q1, we should see progress as we advance through the quarters. Starting to cover 100% of unemployment expenses for many of our employees will boost margins by 50 basis points alone. We had strong margins last year, so comparisons year-over-year may be challenging. However, I want to emphasize that while gross margin is crucial and a priority for us, our focus is also on increasing gross profit dollars and achieving returns on those dollars. If it makes sense to pursue a larger deal with a 22% or 20% margin that has minimal direct SG&A impact, we will proceed with that. Overall, I do anticipate some sequential improvements in gross margin across all three of our businesses.

Well, excellent. Hopefully, the world recognizes the work you've done, and you've transformed RCM back into a growth company. I suppose buying it could offer a double benefit, as you could achieve that growth while the stock is clearly trading at or below market valuation. So let's see. Thank you for everything. I appreciate it.

At this time, 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 August.

And with that, ladies and gentlemen, this does conclude your call. You may now disconnect your lines, and thank you again for joining us today.