Earnings Call Transcript - RCMT Q3 2024

Kevin Miller, CFO

Good morning and thank you for joining us. This is Kevin Miller, Chief Financial Officer of RCM Technologies. I'm 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 change. 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 the call over to Brad Vizi, Executive Chairman, to provide an overview of RCM's operating performance during the second quarter.

Brad Vizi, Executive Chairman

Thanks, Kevin. Good morning, everyone. Third quarter growth was led by Healthcare and Engineering as both businesses continue to ramp in their respective end markets. Though Q3 should always be considered through the lens of seasonality, the breadth of progress in each of our businesses is inspiring as we continue to land new clients while maintaining and expanding existing ones. Sustainable progress never comes in a straight line. However, the resilience of our platform and the commitment of our people across several continents have allowed for consistent progress throughout the cycle and in the ever-evolving world. Our strategic construct allows us to not just deliver over the short term, but to provide a sustainable long-term path for the company. It is our philosophy throughout the organization to evaluate the impact of today's decisions many years into the future. As we head into the final quarter of 2024, RCM Healthcare is positioned to close the year on a high note with all operating units demonstrating momentum. Our K through 12 client roster continues to grow with new partnerships already yielding strong results. The K through 12 staffing marketplace presents an evolving landscape with heightened demand for behavioral health support and specialized services that meet the diverse needs of today's students. This growth is a testament to our team's commitment to delivering high-quality providers and addressing children's unique requirements across our partner districts. Additionally, our OPWDD division has demonstrated extraordinary potential providing a long runway for expansion in the years ahead. Looking forward, we are excited by the robust pipeline of international nurses waiting on priority dates. Once cleared, this represents a strategic pillar to accelerate growth as we meet increasing demands across our healthcare and education clients. With these developments and the continued success of our recruitment team within the correction space, we are confident in our trajectory toward a record 2025, reinforcing our standing as a leader in healthcare and education staffing solutions. In Q3, our Life Sciences, Data & Solutions division demonstrated strong performance characterized by robust client engagement, successful project completions and a strategic focus on expanding our service offerings. Performance in the quarter was supported by effective cost management and increased operational efficiencies. Continued investment in technology and process improvement has allowed us to optimize resource allocation as we continue to build the business. During the quarter, we welcomed several new clients across the Pharmaceutical and Biotech sectors and in our RPC Group, underscoring our reputation as a trusted advisor in navigating complex market dynamics. Our focus on delivering high-quality tailored solutions resulted in a 99% retention rate among existing clients. Feedback indicates strong satisfaction with our strategic insights and execution. We continue to deliver successfully on our managed solution initiatives and have started two new projects. Our HCM team successfully implemented and went live with the most modules since its inception. The demand for our consulting services in Life Sciences, specifically in the area of data integrity, has accelerated as clients increasingly seek data-driven insights to inform decision-making. We are proactively expanding our capabilities in these areas to align with market needs. As we approach Q4, we remain committed to our strategic goals. We plan to invest further in our sales team and training to enhance our capabilities and support our growth trajectory. Additionally, we will continue to monitor industry trends closely to anticipate client needs and maintain our competitive edge. Overall, our Q3 performance reflects a solid foundation and a positive outlook for the remainder of the year. By leveraging our strengths and addressing emerging challenges, we are well positioned to continue delivering exceptional value to our clients and stakeholders in the Life Sciences sector. Transitioning to Engineering, starting with Energy Services. After a strong Q3, Energy Services is on pace to exceed 2024 budgeted revenue and EBITDA numbers. In the US, we have been awarded another major substation project on the East Coast that will contribute to New York's grid modernization as part of the renewable energy build-out. In Europe, we were awarded an additional project contributing to the energy transition in Germany. Finally, in Puerto Rico, we have a robust pipeline of significant projects for 2025. As a result of our strong performance executing turnkey projects among the largest utilities in the world, the EPC Group developed strong relations with some of the largest construction companies, affording us the opportunity to further build the business through a new channel. In addition, the evaluation of possible partners in Europe and LATAM is in progress to fuel growth in Energy Services for many years to come. Also of note, at this year's SEGRO Paris session, Energy Services presented together with a large US utility an innovative technical paper on a future-oriented microgrid substation and demonstrated the latest technologies for digital project management to improve client cost positions and increase project execution quality. In Process & Industrial, the RCM Thermal Kinetics office has delivered the first of two modular evaporation systems for a zero-carbon chemical manufacturing customer. The engineering team is completing two ethanol plant optimization and expansion studies that integrate the RCM CK patented energy integration design, enabling clients to lower their carbon intensity score. The need for ethanol plants to expand has evolved into a marketing campaign that employs engineering and equipment designs not typically used in the ethanol space. TK Engineers bring a wealth of petroleum engineering knowledge, which has become the basis for the launch of the TK Next Campaign, new ethanol expansion technology. The office expects its first equipment order from the campaign in November, expanding a plant from 85 million gallons per year to 105 million gallons per year. The project will have a 12 to 18 month ROI providing a compelling value proposition to the client. The team has completed a detailed process design and firm proposal for a planned SAF facility for a US-based customer. This project has a tentative Q1 equipment order schedule. A large engineering order is utilizing engineering and lab resources to develop novel solution chemistry for a customer-planned lithium facility in the US. Equipment for this facility is scheduled for purchase in late Q1. This project is a good example of the strength of the TK team and the supporting test center. Two major customers are in the final stages of either exclusivity or partnership agreements with TK. One client has used TK exclusively to support the proprietary CO2 capture conversion plans for seven years. The test center continues to exhibit strong utilization through the end of 2024 and into 2025. The team remains focused on continuing their emergence as a market leader in responsible and sustainable chemical process design. Within aerospace and defense, the engineering business is thriving as we continue to build our infrastructure with the three new clients secured in Q2 2024. Headcount has more than doubled in two of these new clients in Q3. Our estimate of realizing a significant increase in gross profit for 2024 compared to 2023 still holds true, and the revenue run rate has now increased by well over $100,000 per week. The RFIs, RFQs, and MSA expected were finalized, and therefore, we have experienced an aggressive increase in headcount, revenue, and profit, which we expect to continue to grow through Q4 2024. We have realized much anticipated increases in customer requirements in Q3. Our world-class trusted recruitment team continues to successfully execute, which has allowed us to experience twice the amount of new hires in Q3 compared to Q2. As anticipated, we have been awarded a new multiyear contract in Q3 with one of the largest aerospace and defense OEMs. This award will allow us to drive and expand our model-based expertise, software systems, logistics, mechanical, and avionic expertise throughout 2024, 2025, and 2026. We have also been awarded a large contract with another eVTOL manufacturer in our aftermarket arena, which is expected to help the group recover and deliver a strong 2025. We also continue to build within our current client base due to challenges they are facing with expansion in their direct workforce caused by smaller and shorter time frame contracts. The first three quarters of 2024 set us up for a much improved Q4 and beyond.

Kevin Miller, CFO

Thank you, Brad. Regarding our consolidated results, consolidated gross profit for the third quarter of 2024 grew by 3.2% compared to 2023 from $17.3 million to $17.8 million. Consolidated gross profit for the third quarter year-to-date grew by 5.7% compared to 2023 from $55.1 million to $58.2 million. Adjusted EBITDA for the third quarter grew by 9.5% from $5.1 million to $5.6 million. Adjusted EBITDA for the third quarter year-to-date grew by 10.5% from $17.7 million to $19.6 million. As for our segment performance in the third quarter of 2024, Healthcare gross profit grew by 11.1%, Engineering gross profit increased by 5.1%, Life Sciences Data & Solutions gross profit decreased by 13.1%. As for Healthcare third quarter revenue, school revenue grew by 16.3% from $17.3 million to $20.2 million. On our last call, we talked about a record number of new school contracts heading into 2024 and 2025. While we're pleased with 16.3% growth, several new contracts started slow and have demonstrated a steepening ramp as the year progresses. We remain optimistic that school revenue for the 2024 and 2025 school year ending in June 2025 will yield growth in the neighborhood of 20%. Nonschool revenue was $6.4 million compared to $7.6 million. However, if we remove a large long-term care group where we deliberately reduced services, revenue was flat at $5.6 million in both periods. We do expect healthy sequential growth to nonschool revenue in the fourth quarter of 2024. As for the fourth quarter of fiscal 2024 consolidated results, we remain optimistic that we will see attractive consolidated adjusted EBITDA growth compared to fiscal 2023. This concludes our prepared remarks. At this time, we will open the call for questions.

Operator, Operator

And first up is Bill Sutherland. Your line is now open.

William Sutherland, Analyst

Thank you. Hey, guys. I wanted to, Kevin, just stay on healthcare for a second. You're saying that for the quarters corresponding with the current school year, you are looking for the school revenue to grow 20%. So that's through the second quarter next year.

Kevin Miller, CFO

Yes, in the neighborhood of 20%, I think, is what I said. But, yes, now just to be clear, the current school year that we're in now is the third quarter of this year, the third and fourth quarters of 2024 and the first two quarters of 2025, right? So school years generally run from July through June. So when we get to the end of the 2024-2025 school year, we're optimistic that the revenue growth school year to school year will be in the neighborhood of 20%, yes.

William Sutherland, Analyst

And you had said that on the last call that this is due to having 20, an additional, more than 20 school districts averaging 0.5 million each. And additional school districts for interpretation.

Kevin Miller, CFO

Yes, we've added significantly more than 20 new contracts. Some of these will be small, while others are expected to perform well. We didn't sign as many new school contracts before the last school year, but some of those that began small are gaining traction this year. I don't anticipate that 20 new schools will all become clients generating $500,000 a year. Instead, we discussed reaching over 20 schools averaging above $500,000. Nevertheless, we expect several of these new school contracts to have a considerable impact this school year. While some may be small, we anticipate others will grow even more in 2025 and 2026. The key takeaway is that our school revenue, from both new and existing contracts, is experiencing strong growth, and we believe that trend will continue this year and into future school years. It’s a robust market, and we excel at executing with schools.

William Sutherland, Analyst

I'm glad you clarified that there are at least 20 school districts compared to 15 last year that will have 0.5 million. I didn't mean to imply that you won that many. That's great. What was it you mentioned about nonschool? I didn't quite catch your comment regarding the fourth quarter for nonschool.

Kevin Miller, CFO

Yes. We think when we compare our nonschool revenue in Q4 2024 to Q3 2024, we're going to see a nice pickup. That's in spite of the fact that we're deliberately winding down our services with one of our largest clients in the nonschool business and we significantly curtailed that business. But we have several new clients in the nonschool arena. And if at some point, we can start getting more of our foreign nurses in, well, look out, we're going to really turbocharge that.

William Sutherland, Analyst

Right. I was just impressed because it's not the narrative I'm hearing from a couple of the players in just the pure healthcare nurse business. Last one for me is just any commentary around the cash picture as we head into this quarter and maybe into the first part of next year?

Kevin Miller, CFO

We expect strong cash flow in the fourth quarter. While there were some challenges in the third quarter, I believe many factors will improve in the fourth quarter. When considering the combined cash flow for the fourth quarter and the first quarter of next year, we anticipate results in line with our usual performance. We're off to a good start in the fourth quarter, but we'll see how the next seven weeks unfold.

William Sutherland, Analyst

So it's mostly just focusing on the DSO picture?

Kevin Miller, CFO

Well, yes, look, when you see our DSOs spike, it's not necessarily the day-to-day clients. Most of our clients pay quite well. But from time to time, we're going to see little spikes. I don't know if you had a chance to read the K, but I put a little bit of color around where the receivables were at 928 to sort of explain why they're probably at least $10 million higher than I think that they would otherwise be. But we're excited about the cash flow and we think we'll see good cash flow in Q4 and good cash flow in Q1. When you look at this company over a long period of time, the cash flow is excellent. If you look at the last 17 quarters, we averaged about $5 million cash flow per quarter. But when you look at one quarter or two quarters, sometimes you see cash flow that's not great. But when you look at it over a period of time, you'll see really strong cash flow and we expect that to continue.

William Sutherland, Analyst

Okay. Great.

Kevin Miller, CFO

And I'm talking about cash flow from operations obviously.

William Sutherland, Analyst

Okay. Thanks again.

Operator, Operator

All right. Next up, we have Alex Rygiel of B. Riley Securities.

Alexander Rygiel, Analyst

Thank you and good morning, gentlemen. Nice quarter.

Kevin Miller, CFO

Thank you. Thank you, Alex.

Brad Vizi, Executive Chairman

Thanks, Alex.

Alexander Rygiel, Analyst

A couple of quick questions here. Brad, from a bigger picture standpoint, as we think about 2025, it definitely sounds like the organic growth rate in EBITDA is going to be accelerating. Any kind of macro thoughts on at what rate we can think about EBITDA growth in 2025?

Brad Vizi, Executive Chairman

We aim to build our business without overly depending on the macroeconomic environment. We have several factors in place to drive earnings growth each year. Regarding guidance, I'll stick to what I've said before: we expect to see at least low double-digit earnings growth from our diverse businesses in the long run. That's what we've consistently achieved, and I believe we will continue to do so. As we finish this year and head into next, we feel optimistic about all three of our businesses. While I hesitate to mention a potential downturn, we might see record performance from them because we strive each year to achieve new highs. Our markets are substantial and expanding, and we have a talented team. I hope this sufficiently addresses your question while remaining aligned with our previous statements.

Alexander Rygiel, Analyst

Definitely does. And looking at your practices in the past, you've gotten aggressive at certain times in buying back stock. You started to buy back some stock in the last few quarters. But maybe talk about sort of your interest level here in using a lot of this free cash flow here to more aggressively buy back shares.

Brad Vizi, Executive Chairman

We bought back a lot of stock. As you know, I think we're pushing probably about half the outstanding at this point. And from time to time I ask myself, how much more is out there realistically. And so I think we're in a good spot where it comes to, yes, sure, buybacks are always on the table. But at the same time, we're very happy to deliver. We have no debt on the balance sheet, be opportunistic and be small with capital. I mean at the end of the day, that's how you create value, right? I mean you definitely don't want to go at it with a mindset that money is burning a hole in your pocket or certainly capacity to draw money is, you want to have a very disciplined framework for what you deploy capital when the opportunity presents itself, you move on it. And that's the philosophy we've operated with and that's the one we're going to stick with.

Alexander Rygiel, Analyst

With the recent election this week, any unique outcomes that you think could develop that bode well for the company?

Brad Vizi, Executive Chairman

Yes. I mean when you just look at the whole hard and social infrastructure backdrop, it's really hard to and the size of our company, it's hard to believe that this isn't a positive development. Even at a bare minimum, you just simply look at clarity around corporate taxes, potential for even a decline further, depleted stocks with respect to defense and continued investment in aerospace. Again, literally trillions of dollars need to be spent hardening our great infrastructure and our social structure and I think probably one of the greatest or really crisis that of our career, certainly, that I've observed is frankly, just the disregard of our social infrastructure. So it's hard to see material funds diverted from any of those areas. So I'm quite optimistic with respect to recent developments.

Alexander Rygiel, Analyst

That's great. Nice quarter. Thank you.

Operator, Operator

All right. Next up we have Frank Kelly.

Frank Kelly, Analyst

Good afternoon, gentlemen. Good quarter. I have just one item that stands out. We've discussed the DSO and its impact. However, on the P&L, other expense net for the quarter was $620,000. Could you clarify what that entails?

Kevin Miller, CFO

Well, it's mostly interest expense, Frank. The Q is out, so you can certainly see the details in the Q, but I can just tell you that $490,000 is interest expense and $127,000 is loss on foreign currency transactions, which tends to be pretty haphazard in terms of one quarter, it's a gain, one quarter, it's a loss. Some quarters, it's small, some quarters, it's big. But the 619 breaks out to 127 is a loss on foreign currency and $492,000 in interest.

Frank Kelly, Analyst

Right. So is the assumption we can make that once we have this turnaround in cash flow that's either a) happening or will happen in the balance of this Q that we'll chase down that $30 million to kind of.

Kevin Miller, CFO

Well, Frank, there are other capital decisions that will affect our debt. However, if we focus solely on our goal, we believe we can reduce our receivables and consequently lower our debt. If that happens, the interest expense would decrease, and ideally, interest rates will also decline. They have decreased slightly recently, but not significantly.

Frank Kelly, Analyst

All right. That's it. Thanks. Keep up the good work.

Kevin Miller, CFO

Thanks, Frank.

Operator, Operator

At this time, I see no further questions in the queue. I'm still not seeing any questions.

Kevin Miller, CFO

Thank you for attending RCM's Third Quarter Conference call. We'll look forward to our next update in early March.

Operator, Operator

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