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spk03: Good morning, and thank you for joining us. This is Kevin Miller, Chief Financial Officer of RCM Technologies. I am joined today by Brad Veazey, 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 Veazey, Executive Chairman, to provide an overview of RCM's operating performance during the quarter.
spk01: Thanks, Kevin. Good morning, everyone. As discussed in March, after finishing 2022 strong, RCM started 2023 slower than expected, with a sequential decline in run rate, primarily due to project timing and program ramp up in our engineering segment. But as anticipated, the cadence of activity increased as we moved through the year, following allowing us to retain our offensive posture as we continue to build on the foundation carefully laid in each of our business units. Also, despite the steady drumbeat of companies shedding staff, RCM continues to hire. In my experience, the best time to invest is when others pull back, fortifying our greatest asset, our workforce. If anything, we believe wholesale restructuring in certain parts of the economy's labor force should provide further secular tailwind to our business model In addition, increasing employee turnover, technological dynamism, and perennial macroeconomic uncertainty further incentivize companies to focus on what they do best and embrace us as a value-added partner with decades of experience in human capital management. Now I will briefly provide an update on each business unit, starting with healthcare. Our specialty healthcare division had a solid first quarter. exceeding our fourth quarter performance and demonstrating sequential growth. The increased demand for nurses, allied health, and behavioral health professionals significantly contributed to our success. Our dedication to delivering best-in-class healthcare staffing solutions to our clients has been the primary driver of our results. We have attracted new hospital and K-12 school clients, and our existing clients have increased their essential workforce further fueling growth. In addition, we have a robust pipeline of new school districts across the United States. This expansion presents significant growth opportunities, and we are excited about its potential. Our focus on providing highly skilled and experienced healthcare professionals to school districts will drive our success in this growing market. The current nursing and behavioral health professional shortages in schools have become a significant concern for educators and healthcare providers. The post-pandemic environment has further stressed a system already facing decades of underinvestment. This shortage of healthcare professionals impacts the students' health and well-being. It poses a significant challenge for educators and healthcare providers responsible for ensuring they receive the best care and education. The need for nurses in schools has become even more critical. Nurses play a vital role in educating and promoting health among students. Additionally, the need for more behavioral health professionals in schools has become a significant challenge for educators. The lack of mental health resources makes it difficult for schools to provide students with the necessary support to cope with behavioral health issues. At RCM, we understand the importance of collaboration with our clients to address these shortages and support students. We are committed to working closely with our K-12 partners to find innovative healthcare staffing solutions and ensure students receive best-in-class care. On the life sciences and IT front, our HCM practice continues to excel by expanding our managed services agreements with a large workforce management technology provider. The program has been so successful that we have become the largest partner for one of its core offerings and expanded our partnership into the client's second flagship offering. Collectively, the two programs bolster our multi-year managed service portfolio. Our life sciences team has secured several new clients, including two large-scale manufacturing commercialization projects. In addition, our shift to long-term managed service contracts has largely mitigated our exposure to business volatility. We see increased opportunities for 2023 as we expand our services and reach across all our primary service offerings. The shift in focus away from one-off episodic engagements to long-term offerings has provided a platform for growth in all economic conditions. Moving to engineering. First quarter, RCM process and industrial results were modestly above plan with strong growth in backlog and pipeline. A high level of startup and commissioning work at our job sites and the timing of new customer projects led to performance below the Q4 run rate. However, the strong uptick in bookings at the end of the quarter demonstrates delivery to the forecast and a trajectory for year-over-year growth. Growth is forecast to continue as additional projects become fully funded and current demonstration scale work fuel multiple production scale ventures. The potential of the process industrial group, and most notably the thermokinetics business unit, continues to flourish with diversification in customers and markets, evidenced by backlog and recent awards. RCN Thermokinetics has gained momentum with several new clients and strategic partnerships, including Solugen, a global leader in scalable synthetic biology, bringing sustainability and non-toxic ingredients to the chemicals industry. You can read more about the work in the March edition of Manufacturing Today magazine, where Solugen is featured in a major editorial. New partnerships like this complement long-standing ones with companies like Fluidquip Technologies, where we have brought another two fuel ethanol projects online in Q1, both in Brazil. As a push for a carbon-neutral future and increased demand for materials drives investment for facility owners, RCM Thermokinetics is also seeing an increase in demand for equipment in the aluminum rolling mill industry. Our technology provides a high-value solution for recovering expensive rolling oils through a distillation process and supports plant operators in meeting environmental compliance while reducing costs. This is another example of diversification in customers and markets our technology-led business model serves. Energy Services continues to build growth and momentum through the first quarter. The team kicked off several projects with one of North America's largest utilities mid-quarter and is seeing the backlog and pipeline grow substantially for this work well beyond 2023, with multiple seven-figure PO awards secured during the quarter. The Energy Services Group continues to grow its footprint and is pleased to announce the opening of its new office in Germany. This achievement is well aligned with the group's mission to be a trusted partner as we grow our footprint to better align with the expansion of these key relationships. We were awarded a substantial project for a large European utility client during the quarter. We look forward to strengthening its ability to support the modernization of the grid in and partnering toward a carbon-neutral future for energy across Europe. The Energy Services Group has one of the most robust portfolios of clients and backlog in its history. It remains focused on building upon this sturdy foundation to deliver efficient, quality-focused, innovative solutions for our clients' success. Aerospace continued to drive growth through the first quarter of 2023 by adding customers and expanding scope with existing clients, while adding new capabilities and seasoned executive management to complement the existing team. We have added three new customers to our portfolio and broken into the aerospace component and engine market, presenting huge potential. Our new senior management team provides much needed experience and expertise in the manufacturing realm of this environment. Our employee base in the space and air mobility arenas continues to expand into other adjacent areas in engineering and aftermarket with both new and current customers. Our sales pipeline is the largest it has ever been, with potential to close on five to seven new clients and opportunities before year-end 2023, gaining us a foothold in many of the largest and most successful OEMs in the industry. The depth and breadth of this new development will include new air mobility clients, vertical flight, sea vessels, and commercial airlines. Our recruitment team remains ready to compete and utilize its network agility and speed to market approach, which has proven successful with several recent ramp rate requirements at clients. Additionally, we added a Senior Vice President of Aftermarket with experience in negotiating maintenance agreements, leading cross-functional teams and surplus part strategies, and establishing partnership agreements in new market segments. This addition will help drive diversification into other areas of aftermarket. The aftermarket segment continues to be an area of growth throughout the industry. Attending Aviation Week MRO Americas in April, we learned that demand for air travel remains strong, while skilled labor and park shortages continue to be challenging. This combination is ideal for RCM's aftermarket solutions, as evident in our many discussions with OEMs and MROs. Before turning the call to Kevin, who will cover our financial results in more detail, I will take a moment to touch on our progress on the capital allocation front. Since the start of the year, Our clean balance sheet and high-cash generating business model have allowed us to repurchase over 1.2 million shares, including purchasing 334,000 shares in an opportunistic private transaction. In addition, as we work through our seasonally strongest cash-generated quarter, we maintain great financial flexibility to pursue growth programs and react opportunistically to capitalize on market anxiety. Now, I will turn the call to Kevin to discuss the Q1 2023 full-year financial results in more detail.
spk03: Thank you, Brad. Regarding our consolidated results, revenue for the first quarter was $67.2 million. The decrease in revenue was mainly due to the following. In healthcare, we have a comp against our peak COVID impact in Q1 of 2022. So naturally, we saw a decline in revenue as the pandemic shifted to an endemic. However, as telegraphed in our last call, we saw solid sequential growth as the underlying non-COVID related demand for our services is robust. As for engineering, Q123 was a quarter we occasionally see where there is a gap from several large projects ending around the same time and not getting immediately replaced with new projects. We expect our engineering group to see sequential increases throughout the rest of 2023. Gross margin in the first quarter was 28.3% versus 28.6%. We saw outstanding gross margin performance from healthcare and life sciences and IT. However, we saw weak margin performance in our engineering due to lower utilization associated with project gaps. As we look to the second quarter, we expect healthcare to continue to experience its underlying sequential growth trend. Due to school closings, we expect to see a sequential top line decline. Our second largest school client closes at the end of May, and most other school clients are not in session through June 30th. We are optimistic that our engineering group can match whatever sequential decline we see from healthcare. As for IT, we expect to see a modest sequential increase in the second quarter. As we look beyond the second quarter, we expect our health care group to continue to see strong growth trends. As we get through summer school closings in Q3, we believe that Q4-23 will be health care's best quarter in 2023 by a significant amount. In addition, we are incredibly excited about new schools and our behavioral health offering for the 2023-2024 school year. We expect to continue to see significant sequential gains in our engineering group as we realize our strong project backlog and continue to convert the pipeline. With recent managed service wins in life sciences and IT, we anticipate sequential growth each quarter in 2023. In summary, we believe we are lining up an impressive fourth quarter and run rate as we head into fiscal 2024. This concludes our prepared remarks. At this time, we will open the call for questions.
spk06: And with that, ladies and gentlemen, if you do have any questions, please press star 1 on your telephone keypad. Again, that's star 1 on your telephone keypad for questions. Let's see. And it does look like we got at least one question in so far from Alex Rigel from B. Riley Financial. Your line is now open.
spk02: Thank you, Kevin. And thanks for the added guidance there. As it related to your comment about specialty health, sequentially being down a little bit. It sounded like you suggested that two Q sequential down would be basically offset by the engineering team, so I wanted to confirm that first.
spk03: Yeah, I mean, sure. Obviously, we don't know what the exact revenues are going to be in Q2, but like I said, we're optimistic that the two will offset each other.
spk02: Great. And then, Brad, bigger picture here, very bullish comments. From a macro standpoint, your capital allocation and your share repurchases in the first quarter would suggest your confidence kind of heading out. You referenced a number of new customers, and it sounds like, therefore, backlog is growing. I know you don't disclose backlog, but can you help us to sort of understand maybe how backlog has changed year over year sequentially and how you see that growing throughout the year?
spk01: Yeah, backlog's certainly building, but what's probably more encouraging is pipeline activity and the level of confidence that we have. Not only is it broadening across the portfolio, but the size of the work and the level of involvement with our clients is also increasing. So again, as the business continues to mature and we have increased confidence in And in cadence, you know, we're certainly willing to share that, you know, inevitably, given the project oriented orientation of some of what we do, you know, when you start to get the kind of precise guidance, guidance, it becomes a little bit more difficult, you know, particularly when you're balancing, you know, growth versus profitability.
spk02: It's very helpful. Thank you very much.
spk06: And with that, there are no further – we just got another question. Bill Sutherland of Benchmark, your line is now open.
spk04: Thanks. Hey, guys. So as you try to, you know, think about the timing of the projects coming on in engineering, does it feel like it's going to be not just a back halfway year, but maybe even more to – in the fourth quarter, or will it be more evenly distributed?
spk03: Hard to say exactly, Bill, because some of the timing of the projects is difficult to project, but I think that we'll see. Q3 should be significantly better than Q2 and Q2 should be significantly better than Q1, and I think Q4 will be better than Q3. So I think we're going to, you know, I think both Q3 and Q4 should be strong as we sit here today and forecast the backlog rollout and the realization of pipeline, but Q4 should be better than Q3 as well. So we're optimistic we'll see, you know, a nice little increase each quarter as we head out.
spk04: And you typically get a seasonal Q1 seasonally off at least a little bit from Q4 just because of the projects that get wrapped up and you have to start new ones?
spk03: Typically, yes. You know, every year is a little different, but, you know, we often see that. You know, one of the things that impacted us in the Q1 in addition to some, you know, major projects ending is, you know, one of our major aerospace clients, you know, lost a contract and we had about 30 people, you know, come off billing, which is fine. You know, these types of things happens when you're in the business of, you know, filling gaps for clients, you're going to wind up with some gaps yourself. But we're seeing that rebuild. And we think the second half for our space is going to be dynamite. You know, Brad mentioned that we have a whole bunch of new clients that we've never worked with in the past that that we think we're going to close. And we've added several new clients in the beginning of this year. They'll take a little while to ramp. And then we have five to seven more that we think we could close between now and the end of the year. So we're really, really excited about what we have going on in the aerospace group, despite not showing up in the Q1 numbers.
spk04: And then when you look at the clients that you're onboarding in education, in the fall for this coming school year. Do these tend to have contracts that kind of start September 1-ish, or do you have some that are a little off the traditional education calendar?
spk03: Just curious as far as that. Yeah, the contracts are kind of, you know, a bit all over the map, but a lot of the newer contracts that we're getting, you know, are general MSAs, right? And you know, if you win an MSA with a school client in April, you know, you may or may not be able to place some people with that client at the end of, you know, the current school year. Sometimes we can add a few people. Sometimes, you know, you win a contract and it's okay, we're gearing up for, you know, September of 2023. But, you know, we're optimistic that when the new school year rolls around and some of our clients, you know, start and August. Some of them start in September. You know, we're really optimistic about a lot of the new contracts, either contracts that are new and we're not, we don't have a lot of providers there, or contracts, you know, potentially that we could win between now and the 2023-2024 school year, because we're talking to a whole bunch of schools that we feel good that we can close, you know, sometime over the summer so that we can get some people, you know, in there in September. And then you've got you know, school contracts that we won for 2022-23, you know, you don't always go in there and put 30 people in. You know, the first year you might put in 10, you know, and then the next year maybe you get up to 30, and the next year maybe you get up to 40 or 50 if the school is big enough to support that many people. So it's really kind of all over the map, but I think the bottom line is we're very optimistic about you know, when we look at the new schools that we've added and the pipeline schools that we haven't added yet that we think we can add, we're really excited about 23, 24, and we won't see that impact until, you know, September, end of August. So that, you know, the main reason we talk about, you know, healthcare having a great Q4, that's why. We think we're going to have a really good Q4 for healthcare.
spk04: Got it. And then on... Brad, on capital allocation, you guys have repurchased 1.2 million shares through the end of 1Q?
spk03: No, through today.
spk04: Through today, okay.
spk03: Through today, right. So if you want, I know you always like to get our share count. I'd be happy to give it to you.
spk04: Yeah, absolutely.
spk03: So our share count as of today, and this is without dilutive shares, is... $8,269,332. So that's our share count as of today without dilutive shares. And the dilutive shares in Q1 were about 229,000 shares. Wait, you... Well, so let me just so you're not confused. As of today, our share count without dilutive shares is $8,269,332. But I'll give you the Q1 as well because I know you like to get those. that there's no confusion here hold on let me just flip to the queue which i expect to file at the end of today to our footnote here so our share our diluted average share count for q1 was nine million four oh one eight six seven got it okay all right so and that includes 229.356 of dilutive shares for QE.
spk04: Oh, I understand what you're saying. Okay, now I understand what you're saying. And then you're just in kind of an opportunistic posture. I mean, the authorization is how big at this point?
spk03: As of today, 23.5 million we have left for potential purchases. Okay.
spk01: Yeah, I think the one thing I'd add to that, Bill, is we're not capital constrained whatsoever. And we have a high level of confidence in the business that we're building here and the teams that we brought on and have filled out are increasingly enhancing and the activity that they're generating. So we obviously have done a good job converting cash flow over the last few years, you know, we anticipate to continue to generate significant amounts of free cash flow. We actively evaluate bolt-on opportunities that we feel like we can grow materially, you know, as part of the RCM platform. You know, so, you know, with kind of the stock trading at the current levels, it's, you know, The decision tree is relatively straightforward. What we like to do in terms of capital and the high return projects we like to target, they're not mutually exclusive. It's kind of the ones that make sense will move forward. We have plenty of capacity to deploy capital where it makes sense. Got it.
spk04: Okay. Thanks, guys. Appreciate the color.
spk06: All right. And next up, it looks like we have Frank Kelly, a private investor, now on the line.
spk05: Gentlemen, good morning. How are you, Brad? How are you, Kevin? Good. Hi, Frank. Great. I was looking at AR. Our DSOs are considerably up year over year. I think they've got to be pretty incredible. And then I turned around and I looked at interest expense on our – on our line, would it be – what do we have to say about that? And it looks like it's the $9 million in increased line that we've used. We could save half a million dollars in interest versus collecting that cash. What do you guys think on the DSO and what's happening there?
spk03: Sure. I mean, the DSOs are definitely up in Q1 and certainly above a level, you know, that we've been accustomed to for the last, you know, two years. As you know, Frank, they can fluctuate for all kinds of reasons. We often see a spike in Q1, you know, just because I think, you know, we usually see, you know, a lot of our clients push to get cashed out the door at the end of a calendar year. And then sometimes they take a little pause in the first quarter. So it's not unusual to see a spike in the first quarter. But I would tell you that, frankly, they're a lot higher in Q1 than I'd like to see them. And I think they're higher than what we expect to see going forward. I think if we look at the last year, those are quite good. But the Q1 of 2023, they were not good, and we expect them to come down. As far as the interest is concerned, obviously a decline in DSOs will, assuming no big increase in revenue, will help us to decrease our debt, and that would obviously help us decrease our interest expense. But, you know, the main driver of the debt is obviously the repurchase program, which, you know, we'll take that trade-off in share count versus, you know, a little bit of an interest expense, you know, all day long in terms of the EPS and having a leverage ratio that makes sense.
spk01: Yeah, Frank, just to put a fine point on the interest expenses is, you know, under any set of reasonable assumptions, you know, we don't see kind of after-taxed uh, interest expense being much more than a million dollars. Um, you know, we don't anticipate significant leverage relative to our earnings power, uh, or anything like that. We have a great relationship with our bank. Um, so, you know, uh, but your point is well taken. Uh, you know, it wasn't our best collections quarter. The finance team is on it. Um, you know, we anticipate good free cashflow in Q2 as we would have seasonally anyways. Um, But, you know, there's also opportunity to improve DSOs from where we're at.
spk05: For sure. Great, great, great. I'm sure you guys are on it. The other question, could you shed some light on the gain of sale of assets, which kind of a one-off extra 400 grand this quarter? What was that as related to?
spk03: So, as I'm sure you're aware, we sold our Canada Power Systems Group in 2021 to and that there were some escrow funds associated with that. And, you know, the accounting on that is you don't recognize the gain until the cash comes in. Gotcha. That was just a matter of us collecting the last amount of escrow funds. It was like a one-third, two-thirds collection. You know, we collected some last year, which is what, you know, I think it was in the fourth quarter or third quarter it was recognized maybe. That was a smaller amount because that was a portion of the escrow, and then the balance of it was paid out this year, and there's no more funds. That deal is done. The escrow was completely returned to us.
spk05: Great, great. Yeah, just the extension on that was out two years, right?
spk03: 18 months, Frank, which, frankly, was a rough negotiation, but we got it in 18 months.
spk05: Great, great. Last question on the capital allocation, the program that the company is currently pursuing, do we see that to continue throughout the rest of the remainder of 2023?
spk01: Yeah, certainly through the remainder of 2023. We continue to be open-minded. Look, as the business continues to strengthen, we continue to grow EBITDA and share count is lower, that just further opens up the field. Like I said, we're not ruling anything out. Like I said, I don't think that it's fair to anticipate any type of a distribution or dividend this year. Going forward, we're not completely opposed to it. It's something that we do talk about.
spk05: Great. Great. I appreciate it. Keep up the good work. Look forward to it. Thanks, Frank. Thank you.
spk06: And with that, gentlemen, we no longer have any questions in queue. So I can remind participants, if they have any last-minute questions, please press star 1 on your telephone keypad. And at this time, I'm seeing no further questions in queue.
spk00: Thanks, everyone. Thank you, everyone, for your time today. We look forward to our next update in August.
spk06: All right, ladies and gentlemen, that does conclude your call. You may now disconnect your lines, and thank you again for joining us today.
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