Earnings Call Transcript - RCMT Q1 2020

Bradley Vizi, Executive Chairman

Good morning, everyone. This is Brad Vizi, Executive Chairman of RCM Technologies. Welcome to the RCM Technologies 2020 First Quarter Earnings Call. I’m joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin with a legal disclaimer, and then I will summarize the operating results for each of our business units before opening it up for questions. Kevin?

Kevin Miller, CFO

Good morning, everyone. Our presentation in this call will contain forward-looking statements. The information contained in these 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.

Bradley Vizi, Executive Chairman

Thanks, Kevin. We last spoke about two months ago, but the world has obviously changed since then. Like most companies, we are heavily impacted by COVID-19. To put the impact in perspective, we need to discuss the implications by segment. But first, I want to stress several overarching themes. When COVID-19 quickly escalated, our highest priority was the safety of our employees. We very quickly moved most of our billable and non-billable staff to work from home. Though a part of our workforce is accustomed to occasionally working from home, the sheer volume and suddenness of the transition throughout the company required a Herculean effort. We are proud of our entire company for quickly adapting to the new environment. As it pertains to financial performance, our revenue in all three segments is impacted. Our number one focus right now is maximizing cash flow and shrinking our balance sheet. We are reducing debt by aggressively pursuing the reduction and deferment of costs and vigilantly managing accounts receivable. As far as cost reductions are concerned, we need to consider each segment separately while aggressively applying the same two principles: first, maximizing utilization; and second, reducing SG&A expense. These two overarching themes must be managed carefully in order to maximize cash flow in the short term, while not harming the company in the long term. COVID-19 has had the most significant impact on our healthcare staffing segment. Before the pandemic, our healthcare staffing segment was well on its way to another record quarter. But as many of you know, most of our school clients, including New York City, Hawaii, and Chicago, abruptly closed in the middle of March. The impact on Q1 was twofold: we lost approximately $3 million in revenue from school personnel that we would have otherwise billed in Q1, and we also lost over $1 million in gross profit from this lost revenue in Q1. In addition to our normal margins, we incurred certain payroll costs for the full month of March. To help offset the short-term revenue reduction, our healthcare segment has aggressively reduced its cost structure. After absorbing most statutory mandated non-billable costs for direct personnel in Q1, we have furloughed close to 100% of our billable staff that is not fully utilized. Our utilization rates in healthcare are running at or near 100%. Today, we have reduced SG&A expense by more than $1.5 million on an annualized basis. The actions we have taken enable us to flex our cost structure down over the short term while allowing us to ramp up to the 2020/2021 school year once we gain confidence that the schools are reopening on schedule. As compared to healthcare, COVID-19 demonstrated less impact on our engineering and IT segments. Though neither group has seen a material reduction in current assignments as a result of COVID-19, both segments have predictably seen a slowing of new business inquiries and proposals. Visibility beyond Q2 is challenging. Though we have several significant opportunities in our engineering pipeline and we expect pent-up demand for electrical substation field work, the timing of the work is more challenging to predict than usual. As a result, we have also focused on reducing our cost structure in both engineering and IT segments. We are more focused on driving utilization than ever while still preserving room for proposal preparation. We are going to great lengths to minimize bench through RIFs, furloughs, converting salaried staff to hourly, and increasing the billable hour quotient for senior direct personnel. Consistent with the rest of the company, we are making material reductions in SG&A. For engineering and IT, on an annualized basis, we have eliminated just under $2 million of SG&A expense and delayed previously budgeted expenditures wherever possible. This is in addition to significant SG&A expense reduction in 2019. In summary, during the next two quarters, our primary focus will be cost and debt reduction without sacrificing the long-term progress we have made in the business. While aggressively managing the business to today’s economic reality, the entire RCM team is committed to making sure the company is positioned to grow in a post-COVID world. This concludes our prepared remarks. At this time, we will open the call for questions.

Operator, Operator

All right. [Operator Instructions] And our first question will come from Bill Sutherland.

Kevin Miller, CFO

Good morning, Bill.

Bill Sutherland, Analyst

Hey, good morning, Kevin. Good morning, Brad. Thanks for taking the questions. So on healthcare, Brad, you mentioned nearly 100% utilization. Does that mean, I think of the business also having a temporary staffing aspect to it? I just want to understand what you mean by that.

Kevin Miller, CFO

Well, most of our healthcare staffing business is naturally 100% other than sick time and paid time off. We don’t have a lot of bench in the healthcare staffing segment, but we do have some bench, particularly in two areas. We have bench with supervisors that we use in the schools that are meant to be partially billable, and in some cases, not billable at all or built into the rates of the people that we staff in schools. We also have a number of therapists that are salaried, so they can have bench time as well. The team does a fantastic job of keeping utilization in the 97% to 98% range under normal times. In March, we were impacted a little because of statutory requirements in Illinois and New York. And then, of course, we do have salaried therapists that we didn’t necessarily put to work right away. Some of our supervisors, some of whom we needed to lay off, we can’t just lay them off with 24 hours notice, right? So it depends on years of service and all that. So we had a fair amount of bench time in March, unfortunately, which when Brad discussed the loss revenue versus the lost gross profit, you'll see that the ratio is a little out of whack in terms of our normal margins. That’s just because we wound up having extra costs for the last two weeks of March that didn’t go against any revenue. But we are very focused in all three business lines on maximizing gross margin going forward. And as you mentioned, we’ll never achieve 100% utilization…

Bill Sutherland, Analyst

Yes.

Kevin Miller, CFO

...but we’re running around 99% right now, upper 98% to 99%, and on some weeks, pretty close to 100%.

Bill Sutherland, Analyst

Yes.

Kevin Miller, CFO

The main point is that we’re always focused on gross margin and utilization, but we’re even more focused on it right now because it’s just critical to maximizing our cash flow.

Bill Sutherland, Analyst

And the other issue, of course, is the outlook for the fall. I guess, I assume you have to go with a couple of different assumptions. If you begin to think that it could be delayed, are you working with other opportunities to place people?

Kevin Miller, CFO

Yes. Yes, certainly. We are looking at many different opportunities. I would say the two most promising new things that we’re exploring would be COVID testing, both in testing centers and the rollout of a corporate product for screening. So when I say testing, that means screening centers. We are offering a service to large corporations to have on-site nurses to do temperature screenings and checks with the employees as they come into work every day. That’s probably not going to take off right away because a lot of people aren’t working in offices right now, but for a lot of businesses, that’s going to change. So we have that offering ready to go right now. We’ve got a number of clients that are interested in that service. In terms of what that’s going to generate in revenue, it’s really hard to say. And then the other area we’ve seen an uptick in is providing nurses to commercial screening centers, like airports and hospitals and state governments. We have not seen significant revenue from that yet, but we’re optimistic that will grow over time. One of the things that’s been interesting, though, is there’s so much chaos in the healthcare market right now. We’re not seeing – we’re seeing a lot of demand for nurses, but we’re not seeing as much execution as we would like to see. But we think that over time, we’ll get better with it. The other thing that we’re offering is telehealth for schools. So we are doing a small amount of teletherapy with our therapists. It’s not a giant amount of revenue. But if schools don’t reopen, they’ll likely consider this more seriously than they are right now. It’s our opinion that the schools will be open for the 2020/2021 year and exactly when and how they open may differ from New York to Chicago to Hawaii, because they all have different exposures to the virus.

Bill Sutherland, Analyst

Yes, exactly. Okay. And then wanted to – you talked about some good demand in the transmission and distribution area, the power generation. And I’m just kind of curious how you think? And you were building some good backlog, just wondering how you’re thinking about the potential conversion or are you thinking about just being deferred or as opposed to canceled?

Kevin Miller, CFO

We’re not getting any sense that any of our major projects are going to be canceled. In fact, I can tell you, we haven’t had any big project or bid on which the client has said they’re not doing this for the foreseeable future. I think we would be kidding ourselves if we think that some of the things that the clients have not executed on aren’t going to get delayed. Of course, some of the projects are going to get delayed. We are seeing a decent amount of proposal activity in the transmission and distribution space. So we’re encouraged by that. We also think that there’s going to be a lot of pent-up demand for field services that aren’t getting done right now. I mean, there are very few people allowed to visit a lot of our utility points. But at some point, safety and field service-type work has to get done. Walkdowns and all kinds of work need to be done. So, we’re cautiously optimistic about engineering. But as Brad said in the prepared remarks, visibility is a big challenge, particularly past Q2. But we have not seen significant erosion in any of our current work in engineering or IT. We are seeing a slowdown in proposals. But even in the last week or so, we’ve seen a couple of nice proposals come out of T&D. Therefore, we’re cautiously optimistic about those two businesses going forward with the asterisk that we don’t know what we don’t know.

Bill Sutherland, Analyst

And then, I know in your business, the only silver lining is your cash improves when things get slower. And I guess, that’s – we can expect a decent cash quarter?

Kevin Miller, CFO

Yes, yes. You can expect a decent cash quarter. I believe in both Q2 and Q3, and we are going to be hyper-focused on cash flow going forward. No matter how long this lasts, we realize it’s critical for us to be at least cash flow neutral. But really, we’re driving towards being cash flow positive and we’re definitely going to be cash flow positive in Q2 and Q3.

Bill Sutherland, Analyst

Okay. That’s it from me. Thanks again, guys.

Operator, Operator

All right. At this time, there are no further questions in queue. [Operator Instructions] It does look like our next question will come from Alex Rygiel. Alex, your line is now open.

Kevin Miller, CFO

Good morning, Alex.

Alex Rygiel, Analyst

Good morning, Kevin and Brad. How are you today?

Bradley Vizi, Executive Chairman

Oh, good. Good.

Kevin Miller, CFO

Good to hear.

Alex Rygiel, Analyst

A couple of random questions. First, how many healthcare professionals are on assignment today? And what was the percentage of healthcare billable staff that was furloughed?

Kevin Miller, CFO

I don’t have those exact numbers in front of me, Alex. But I would tell you that just off the top of my head about probably more than two-thirds of our healthcare staff was furloughed. In terms of our billable staff, probably, 70%, at least, 70%, 75% maybe.

Alex Rygiel, Analyst

Okay.

Kevin Miller, CFO

And we also furloughed quite a few non-billable people as well unfortunately that were [indiscernible].

Alex Rygiel, Analyst

As it relates to that, 70% to 75%, I’m assuming that in theory, they wouldn’t come back on until the fall. School season starts up again, is that fair?

Kevin Miller, CFO

Oh, yes, that’s pretty fair. I mean, we’re looking for work for all of them. But realistically, best-case scenario is we find work for a handful of our furloughed billable staff. But we are looking for work. We have a big goal of nurses that we’re looking to place wherever we can. As far as the professionals are concerned, there’s not much we can do for them in the short term.

Alex Rygiel, Analyst

Sure. And then can you update us on your debt covenants and where you stand right now?

Kevin Miller, CFO

Well, we have a waiver for Q1. The way that our formula works for Q1, our debt-to-EBITDA ratio was 4.4. That’s higher than we’d like to see it. It’s above where we’re supposed to be. I would characterize it that getting the waiver from Citizens Bank was relatively easy and automatic. If we need waivers in the future, I feel reasonably confident that that won’t be an issue, provided that we execute on our end in terms of paying down debt and having positive cash flow, which we will. So I don’t see that as an issue going forward. We’ve been with Citizens Bank for over 20 years. And through thick and thin, they stood behind us. We barely need to get any waivers or amendments. But in the past, it’s never been a problem. And every indication we're getting from Citizens Bank today is no problem; keep doing what you’re doing and we’ll stand behind you.

Alex Rygiel, Analyst

As it relates to the arbitration settlement, correct me if I'm wrong, but I thought there might be three of them that were outstanding with up to maybe 14 million on the books or just one?

Kevin Miller, CFO

Yes. There were three major projects involved in one arbitration. So the arbitration is complete. That’s the best news about the arbitration; we are done.

Alex Rygiel, Analyst

Excellent. And then can you be cash flow positive in the second quarter in the special childcare business?

Kevin Miller, CFO

Yes.

Alex Rygiel, Analyst

Excellent. That’s it for me. Thank you.

Kevin Miller, CFO

Okay. Thank you, Alex.

Operator, Operator

All right, Speakers, it doesn’t look like we have any more questions in queue. Do you want me to reprompt or…

Kevin Miller, CFO

We’ll go.

Operator, Operator

We’re getting some, I think. We do have one from Steve Bulva. Do you want to take that as a final question?

Kevin Miller, CFO

Please? That would be great.