RCM Technologies Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 6 speakers on the call.

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 Veasey, 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.

Operator

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 ks, 10 Q and 8 ks 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 Veasey, Executive Chairman, to provide an overview of RCM's operating performance during the Q2.

Speaker 1

Thanks, Kevin. Good morning, everyone. 2nd quarter growth was led by engineering as project activity continues to ramp, building on the foundation carefully laid over the last several years. More important, engineering's leadership corroborates a fundamental aspect of the RCM thesis. The success of our company is not predicated on any one division or discipline.

Speaker 1

In 2022, performance was propelled by the success of healthcare. In 2023, life sciences, data and solutions were a key pillar to maintaining the company's trajectory, completing the transition to a post COVID world. And now in 2024, we are witnessing the emergence of a world class engineering division with the infrastructure to scale. 5 years ago, we presented RCM not as a healthcare company, not as an IT practice, nor an engineering outfit, but an emerging world class professional services firm that can compete and win on the global stage. That was the vision then and this is our reality today.

Speaker 1

Also of note, we anticipate continued strong contribution from engineering along with increased strength in the other two divisions in the back half of the year. Now I will provide a more granular update on the progress of each of our teams starting with healthcare. RCM's healthcare division finished the school year strong. Looking ahead to the 2024 2025 school year, we are extremely encouraged about our prospects. We have successfully added many new school districts to our portfolio, several potentially requiring 50 to 75 new providers.

Speaker 1

While the exact value of these districts is yet to be determined, RCN has a proven track record of entering new districts and quickly becoming the primary vendor. Our dedicated team is working tirelessly to streamline our recruiting and credentialing processes, reducing time it takes to bring new providers onboard and into the field. This commitment to efficiency is not the cost of quality, but to ensure that we can meet the growing demand swiftly and maintain high standard of service our clients expect. In addition to our domestic growth, we have significantly expanded our operations in the Philippines. This expansion includes not only increasing our recruitment team, but also building a robust operational support team.

Speaker 1

Investments in both our domestic and international operations coupled with our unwavering commitment to efficiency and high standards position us strongly for continued growth and success. We are not just hopeful, but confident that our efforts will drive significant value for our stakeholders as we continue to expand our footprint and enhance our service offerings. In Life Sciences, Data and Solutions, the 2nd quarter showed continued progress as we implemented our solutions integrated approach. We have seen a structural profitability increase relative to the historic performance and work to continue to strengthen the business. We believe our HCM practice is one of the premier partners in the industry.

Speaker 1

For the 8th straight quarter, we have exceeded implementation quotas for 1 strategic client. In life sciences, our Puerto Rico team just completed a successful 9 month 15 person quality control project for a major pharma packaging company. Our life science commercial practice leads our growth as it continues to demonstrate its ability to assist clients to bring new products to market faster, cheaper, while improving compliance reporting. We continue to see strong interest in our managed service offerings. We can support a broad range of functions ranging from our industry leading RPC to quality to validation and qualification to application support.

Speaker 1

Transitioning to engineering, starting with Energy Services. Q2 of 2024 demonstrated robust results, delivering revenue and EBITDA figures exceeding forecast. Backlog remains solid and activity is healthy, as we continue to execute against large engineering substation projects while maintaining high levels of client satisfaction. The EPC Group maintains strong relations with existing clients, but also targeted additional potential customers for new projects in the U. S, including Puerto Rico.

Speaker 1

To participate in the growing energy markets internationally, Energy Services is evaluating cooperation agreements in LatAm and Europe. The German office sees a significant increase in high voltage substation demand and has begun staffing to prepare for further growth. Increasing our market awareness, Energy Services continued a strong presence in most significant technical associations during the IEEE events in Puerto Rico and Anaheim, California, becoming a major contributor in the electrical engineering industry. For the upcoming SIGGRAPHIRIS session this August, Energy Services will present together with a large U. S.

Speaker 1

Utility and innovative technical paper of a future oriented microgrid substation. In Process and Industrial, RCM Thermokinetics remains active in the 0 carbon chemical production market with 3 equipment projects in various stages of completion. The Thermo Kinetics office is also executing 2 ethanol plant optimization expansion studies that integrate the patented energy integration design, enabling clients to lower their carbon intensity score. The team is also completing a detailed process design for a planned SAF facility for a U. S.-based customer.

Speaker 1

Various tests are being conducted for our customers utilizing test rigs for crystallization, filtration and evaporation. The sales team is forced on the current market needs and has strategically pursued business in lithium markets. That focus has yielded an engineering order placement this week for a lithium production facility in the United States. The engineering order involves the development of the lithium solution chemistry and processing equipment design. The team also expects to close an equipment order for lithium refinement, which employs crystallization technology and downstream drying crystals.

Speaker 1

This project is a good example of the strength of the Teekay team and the supporting test center. The theoretical chemistry used in the lithium solution chemistry is complex and is derisked by running the process in the test center with the chemical engineers who are designing the plant. The test center continues to gain momentum and is at 100% utilization through Q2 and well into Q3 2024. We continually evaluate further investment in additional equipment the test center that benefits our clients. RCM Thermal Kinetics recently presented at the Fuel Ethanol Workshop trade show in June.

Speaker 1

The focus again was plant optimization and identifying areas of improvement that our engineers excel The team remains focused on the continuation of our emergence as a market leader in responsible and sustainable chemical process design. The Aerospace and Defense Group had mixed results in Q2 2024 due to a slower than anticipated recovery in aftermarket. However, EBITDA for the division remains healthy. The engineering business is thriving, executing with 3 or new clients in Q2 of 2024. Our estimate of realizing a healthy increase in EBITDA for 2024 holds true, and the overall strategy remains the same.

Speaker 1

Recognizing most of our customers' spend in the engineering domain. RFIs, RFQs and MSAs expected to finalize have begun to produce new revenue in Q2 with an aggressive increase in headcount. Revenue and profit anticipated to escalate in the second half of twenty twenty four. The most significant piece of the business that has had immediate impact is in the engineering arena with 1 of our new vertical of customers, our current space customers, as well as our expansion into other divisions with 1 of our existing aerospace component manufacturers. We have realized much anticipated increases in customer requirements in Q2.

Speaker 1

Our world class recruitment team continues to successfully execute, which has allowed us to experience a noteworthy increase in new hires. We have experienced a 54% increase in new hires in Q2 2024 versus Q1 2024. We expect to see this increase quarter over quarter in Q3 and Q4. We continue to drive and expand our model based expertise, software systems, mechanical and avionics expertise throughout the customer base in Q2 2024 with continuous inquiries and partnership opportunities as well. Our new service offering involving solving quality and production issues within the supply base of our clients continues to grow with interest.

Speaker 1

New statements of work with major OEMs have been received with expanded skills and scheduled starts in Q3, Q4 2024 and Q1 2025. We will continue to expand our reach with these clients and prioritize these engagements throughout 2024 2025. We have received 3 large RFQs for engineering and aftermarkets within our OEM client base and with a potential new client in the air mobility arena. The outlook for the second half of twenty twenty four is bright. Now I will return the call to Kevin to discuss the Q2 2024 financial results in more detail.

Operator

Thank you, Brad. Regarding our consolidated results, consolidated gross profit for the Q2 of 2024 grew by 6.6% as compared to 2023 from $18,800,000 to 20,000,000 dollars Adjusted EBITDA for the 2nd quarter grew by 10.8 percent from $6,500,000 to 7,200,000 dollars Adjusted diluted EPS for the Q2 of 2024 grew by 12.0 percent from $0.50 to $0.56 As for our segment performance, in the Q1 of 2024, engineering gross profit grew by 23.7%. Life Sciences Data and Solutions gross profit decreased by 17.9%. Healthcare second quarter gross profit grew by 8.6 percent. If we remove the impact of COVID from the comparable Q2 of 2023, we estimate that Q2 2024 revenue grew by about 11.1%.

Operator

If we remove the impact of COVID and the deliberate reduction in services to a large long time but slow paying rehab customer, we estimate that Q2 2024 grew by about 19.1%. School revenue of $30,800,000 for the Q2 of 2024 grew by 23.0 percent after removing COVID revenue from the Q2 of 2023. While we certainly consider our non school revenue important for our future growth, our healthcare business is largely a school based healthcare delivery model. Our year to date 2024 school revenue in 2024 exceeds 83%. The 2023-twenty 24 school year is the 3rd school year since schools returned from virtual school.

Operator

The 2023 2024 school year is also the 1st school year to comprise 0 COVID related revenue. We see some exciting trends. 2023-twenty 24 revenue of $109,800,000 grew by 24.9% over 20222023 after removing COVID related revenue from the prior school year. Our non COVID school revenue in 20222023 grew by 29.2% over 2021, 2022. School revenue from the last pre COVID year of 20 eighteen-twenty 19 was 60 point $2,000,000 which we nearly doubled in 2023-twenty 24.

Operator

We now have 15 school districts that exceed 500 ks in revenue. In 20 eighteen-twenty 19, we had 3. For 2021, 2022, we had 5. We are optimistic we'll get this well over 20 school districts that exceed 500 ks for the 2024, 2025 school year that begins in August, September of this year. As our new school pipeline is the best it's ever been heading into a new school year.

Operator

While we often don't know in July, August if a new school client will generate $50,000 or $500,000 in revenue, what I can say is that we've signed far more new school contracts for 2024, 2025 than we have at any time in our long history serving school districts. As for the second half of fiscal twenty twenty four, we are optimistic that we will continue to see low double digit consolidated adjusted EBITDA growth as compared to fiscal 2023 with a similar quarterly cadence when compared to fiscal 2023. This concludes our prepared remarks. At this time, we will open the call for questions. All right.

Operator

First up, we have Alex Rygiel of B. Riley Securities.

Speaker 2

Thank you, Brad and Kevin. Very solid quarter. Nice to see.

Operator

Thank you.

Speaker 1

Thank you.

Speaker 2

Couple of quick questions here. First, schools business, obviously, it's doing fantastic.

Operator

But the strength in the schools business

Speaker 2

and the commentary with regards to engineering and other segments, it all seems very bullish and more bullish than low double digit EBITDA growth. I wanted to talk to you a little bit about maybe helping us to understand that what I feel is maybe a conservative target?

Operator

Well, just bear in mind, we're talking about Q3 and Q4 of this year. A lot of that revenue is sort of already baked, right? The schools don't really get going until sort of like the 2nd week in September. I mean, they kind of sprinkle in to August and into September. And we often don't know how strong they're going to start in terms of the new schools and even some of the long time clients sometimes start a little slow and then ramp up.

Operator

So it's we're very bullish on the school year in general, but we have some if you look at the numbers compared to 2023, we had a pretty big jump in Q4 from Q3, right? So basically predicting sort of a 10% -ish increase in EBITDA is already baking in a pretty nice increase in terms of the sequential the sequential movement of revenue and EBITDA. But yes, I mean, we are being a little bit conservative, but that's by design because obviously things can change pretty rapidly and we don't want to put big numbers out there obviously.

Speaker 2

And then Brad, as you think about sort of the next 12 months, from a revenue standpoint, which segment do you think grows fastest?

Speaker 1

Well, that's an interesting question. Look, we think about the business every single day. So we can set work with the team leaders to help set that business up for success, T+2, T+3 and well into the future. So naturally, when you look at the strength of all three of these businesses, right, being able to underwrite the success relative to one another over the short term, right, based on drivers that were invested in and put in place 2, 3 potentially 2, 3 years ago, right? It can become difficult from an underwriting perspective.

Speaker 1

However, I think that this emphasizes a really key point is quite a bit of confidence can be gained in the platform, right, this collection of businesses that was built up, right, when you think about the underwriting of outcomes both short and long term. But when you isolate any one of the divisions over a short period of time, right, inevitably there could be some gyration that's expected and frankly unexpected. So sorry if it's a little bit too much or not enough, Alex, but I hope that answers your question.

Speaker 2

And lastly, balance sheet is pretty strong. So quick thoughts on capital allocation priorities?

Speaker 1

Yes. Look, we've always tried to play this down the middle and just be very open minded and flexible and be in a position to move opportunistically. So not necessarily manage the balance sheet to any one optimal capital structure, right, but to be nimble and flexible, right, and be in a position to also manage our risk profile and keep it relatively low. So, with respect to share buybacks, obviously, we've been very active over the last several years. Well, over 40% of the company at this point has been retired.

Speaker 1

At the same time, opportunities on the M and A front, it continues to be the pipeline continues to strengthen. But we're not going to deviate from our baseline plan with respect to evaluating opportunities that we can bolt on to the platform that we believe we can grow substantially and have an alignment and culture and vision, right, with the existing base. So we always say 1 +1 equals 5. Over the near term in terms of the opportunity set, the ones I think are probably most relevant are in engineering, but that can change too. So on the capital allocation front, like as you said, we've been pretty consistent, under $1,000,000 one turn of EBITDA of leverage.

Speaker 1

It's not that we're wed to that mark, but that seems to be right where we've things have fallen nicely in the place as far as the model. Very helpful. Thank you very much. Nice quarter. Thank you.

Speaker 3

All right. Next up, we have Bill Sutherland of Benchmark.

Speaker 4

Thanks. Hey, guys. Hey, Brad, you mentioned a 54% increase in new hires, I think for first half. And I guess just if you could clarify if that's the

Speaker 1

timeframe and whether it's all of engineering? That's aerospace. Frankly, aerospace was a little bit more sluggish than we anticipated as a whole in first half. However, our confidence and the crystallization of that pipeline is improving. So those remarks are also in aerospace.

Speaker 4

Okay. Thanks. A little dip

Speaker 1

quarter to quarter in or

Speaker 4

more pronounced than you usually see in life size. Is that just project timing?

Speaker 1

Yes. Good guess. That's a little bit of timing. So we had a particular high margin project come to an end in Q2 of last year. And basically, what we're going to back what we're backfilling with started a little bit later in Q3.

Speaker 1

So we actually think as you get into the back half of Q3 and into Q4, it should be a very healthy uptick in that business.

Speaker 4

Okay. And when you or maybe Kevin refers to districts school districts in the pipe, Are those ready? I mean those are signed and just it's an implementation pipeline or is this a So

Operator

we have a significant number of school districts that are signed, over 20 actually, And we think we'll we're hopeful we'll sign over 30 new school districts heading into next year. And that's a pretty significant it's a really significant number. Now on the flip side, I have to caution you because we just we get into these schools and sometimes we're pretty disappointed with the number of recs that we get. But we've never been sitting here in July with the number of new school districts that we have for next year. So hopefully we can penetrate, I don't know, meaningfully 10 of them, maybe more.

Operator

We'll just have to see how it all plays out. But it's a real exciting time for the healthcare business.

Speaker 4

So just to be clear, the 20 you've got signed up for more than 'twenty, that's for the 'twenty four I'm sorry, for the 'twenty five, 'twenty six school year?

Operator

No, for 'twenty four, 'twenty five. They're starting in August, September. I mean, we're recruiting for some of these schools right now. Okay, okay. When I say 24, 25, just to be clear, and different schools in different parts of the country start at different times.

Operator

They start anywhere from early August to sort of early September, and they end anywhere from early May to late June, right? So when I talk about school years, I'm talking about our 3rd and fourth quarter added to our 1st and second quarter for a school year. Right.

Speaker 4

And then last, just looking at the cash flow and seeing that Q2 kind of in terms of operating cash flow was pretty much in line with Q1. Should we think about the back half being like the first half?

Operator

I hope it's better. I hope it's better. I expect the Q3 should be strong, right, because we have a drop in revenue due to seasonality. So that naturally is going to goose cash flow. Obviously, the revenue spikes back up in Q4, which will hurt cash flow.

Operator

But I just we're working hard to improve our DSOs in Q4 to sort of offset some of that. So when we look at the second half versus the first half, I expect second half cash flow when you take Q3 and Q4 and add them together to be better than Q1 and Q2. I'll be disappointed if it's not. And that's cash flow from operations, obviously.

Speaker 4

Okay. Thanks,

Operator

both. All right. And at We did get one more. Frank Kelly, your line is now open.

Speaker 5

Gentlemen, great quarter. Certainly seems to be on the right trend, a little bit improving in AR. But can you shed some light, Kevin, on the SG and A line item? Year over year, it's up over 6% and revenues obviously are not. But last year at this time when we were on the call, we said, oh, well, we're investing in infrastructure and whatnot and staff and we've been doing that now obviously for the last year.

Speaker 5

What drives that additional 6% plus in SG and A? And what are we doing to kind of

Operator

keep a pace on this? There's really 2 general drivers of it. Well, 3 I would say. 1 is just natural inflation of costs, right? Labor goes up, cost of technology goes up, rent goes up in some areas.

Operator

So that's 1. 2 is we're making a big investment in technology and particularly cybersecurity is an area where we've had to put a lot of money into it just to keep up with making sure our company doesn't get taken down by cyber threats, right? And there's a lot of money that's been invested in cybersecurity and other IT initiatives. And of course, just investing in infrastructure to support the growth that we expect to come, especially on the healthcare side. I mean, if we over hire a little bit in healthcare, we'll figure it out later, right?

Operator

But we'll hire as many recruiters in healthcare as we can find, just as an area. And we're continually investing in SG and A. By the same token, you know, because you've followed the company a long time, we continually look to prune SG and A as well. So we'll continue to look for opportunities to bring there's certain areas where you just can't bring it down and you just like the cost of being a public company, for instance, has just gone up incredibly over the last couple of years, like way above double digits. So, but we'll continue to look for opportunities.

Operator

For instance, Brad mentioned something about opening up an office in the Philippines. And we're going to continue to leverage some of the talent over there that is a lot cheaper than it is here. So we'll continue to look to ways to grow our gross profit in an amount that significantly exceeds the growth in SG and A. And that's sort of the way we look at it, Frank. I don't pay attention as much to the revenue growth relative to SG and A.

Operator

I look at the growth in gross profit versus SG and A. And we can continue to improve that ratio and we will.

Speaker 1

Yes. Frank, one thing I'd just add real quick, right, it's starting to think about the company more as a $500,000,000 company and a $1,000,000,000 company, right? So naturally, when you look at RCM historically, right, the infrastructure, we undervested a little bit frankly in infrastructure. And that was in our existing state. Now when you start to think forward, right, towards building a much larger company, an international company, right, Inevitably, in addition to catching up on some of that investment, right, that brings a whole another profile of infrastructure.

Speaker 1

And look, the good news is, it's well underway. As always, we're measured and thoughtful about how we add dollars into our cost structure. So far so good, right? And as revenue growth and GP accelerate, naturally, the fall through should as well.

Speaker 5

Right, great. Understood. And things like bricks and mortar spot locations that are becoming more and more unnecessary at this point, I'm sure we're looking at those as well to kind of bring down some of that expensive SG and A?

Operator

For sure. But our bricks and mortar costs have come down over the last couple of years, Frank, which is obviously not going to be a surprise to you. But we do think that depending on the business, having bricks and mortar is really important. We don't need the same amount of space on a per square foot per person that we needed 6, 7 years ago. But we still think it's really important to have bricks and mortar space for people to come to the office a couple of days a week.

Operator

And again, it depends on the business. There's some businesses that we have that are pretty much 95% remote and there's others that aren't. But we'd like to have space where our employees want to come to work and they want to collaborate and they want to learn and they want to get trained, it's important to us to have that space. So we're not ever going to move to a fully remote company, but we're always looking to keep those costs down. You know I love subleases and we have a couple of those that are pretty cheap and we just continue to look to drive those costs down any way we can.

Speaker 1

Yes, Frank, next time you're in Pennsahawk and why don't you stop by HQ and you'll feel pretty good about the leases that we're investing in. And when you think about some of our little bit higher leases, right, they tend to resemble more training centers being much more functional. As you walk through the facilities, it's pretty clear that there's an ROI associated with those investments.

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RCM Technologies Q2 2024
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