RCM Technologies, Inc.

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 and 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.

Thanks, Kevin. Good morning, everyone. Consistent with our prior update, the business cadence continues to accelerate as we move through the year. As such, the fourth quarter will be our strongest, and we expect to exhibit EBITDA growth year over year. Also of note, the outlook for 2024 and beyond is bright. Our ability to parlay our high-value capabilities into long-term partnerships where we continue to deliver increased value into strategic accounts has taken hold. We believe our collection of high-value capabilities is unique to the marketplace, serving as a key differentiator for which to land and expand. Internally, we continue to build on our unique structure that fosters innovation and increased depth of penetration within each of our end markets, while increasingly strengthening points of collaboration between groups. Our ability to continue to execute this strategy with increasing success will further fuel future growth into our secular end markets for years to come. Since we last spoke, progress has been made across each of our divisions that I am excited to discuss in more detail, starting with our healthcare division. The school year is off to a strong start for our healthcare team, notably, We continue to add new school accounts while growing our presence within our existing client base. We attribute ongoing success to the goodwill we continue to build upon in this end market, underpinned by our commitment to supplying highly qualified healthcare professionals to education institutions and other healthcare facilities nationwide. Behavioral health continues to drive our business at an increasing rate, and we believe we are in the early innings of of this much needed upgrade to our nation's social infrastructure. Also, with increased demand for behavioral health services comes the opportunity to further service our clients with other critical healthcare needs, cementing our status as a partner, not just another vendor, which is core to the RCM business model. RCM Healthcare's tailored staffing solutions coupled with a rigorous selection process have bolstered our reputation in the education domain, solidifying our status as the leader in this segment of the market and the gold standard for treating our nation's youth. As we move forward, we remain committed to sustainable growth, innovation, and the highest standard of service. We anticipate further expansion into new markets and the development of cutting-edge staffing solutions that meet the evolving needs of the healthcare industry. Our dedication to improving the quality of healthcare services positions us to continue exceeding the expectations of our stakeholders, driving value for our shareholders, and positively impacting healthcare and education in the years ahead. The ability to build good businesses while serving a critical need in society and strengthening our communities resides at the core of our company's values. Our life sciences and information technology group continues to emerge as a shining star in the portfolio. Though the macroeconomic landscape in information technology was challenging in 2023, including budget reductions across several sectors from high-tech to financial services, our decision to continue investing in market segments demonstrating secular growth has paid off. The group's overall EBITDA contribution is up nearly 55% year over year, As we continue to double down on the winning formula, just this last quarter, we have expanded our life sciences practice in regulatory compliance, ERP design, and implementation. We are building out our organizational change management practice, which will further allow us to support our clients across their entire business landscape while providing improved value through our current delivery models. we continue to see positive trends entering the last leg of 2023 and have a positive outlook for 2024. In engineering, energy services' strong execution demonstrates increasing leverage in the model, highlighted by continued delivery of milestones on time for several world-class projects, resulting in client satisfaction and solid gross margins. Technical highlights include successfully completing site acceptance tests, as part of an e-house high voltage application utilizing the IEC 61850 protocol. In addition, we were approached to pursue an offshore high voltage GIS substation with a large international operating OEM as part of a potential long-term partnership. Also, several vital deliverables were executed on time for a critical infrastructure project with a major utility client in New York. This project represents a significant milestone in the clean energy transition in the Northeast United States. In Europe, our newly established office in Germany received recognition as a strong technical partner to support turnkey projects that will transfer the power supply to a carbon-free electric grid. We are in the late stages of negotiation for our second major project award, demonstrating increasing client confidence. To serve the increased demand for EPC projects in 2024 and beyond, Energy Services will further expand its EPC capabilities in Europe and North America. We believe the recent addition of a high-profile industry veteran to the RCM Energy Services leadership team will accelerate the award and execution of EPC projects in the United States and further enable us to prudently evaluate new regional areas such as South America. RCM Thermal Kinetics continues to execute detailed engineering contracts for distillation, evaporation, and dehydration technologies employed in the carbon capture and sustainable aviation fuel markets. On the equipment side, the office is currently executing three concurrent projects for a zero-carbon chemical manufacturing customer, primarily using evaporation and crystallization technologies. The main driver for successfully awarding the orders to RCM Thermokinetics is the advanced energy integration techniques utilized in the design. The RCM Thermokinetics engineering expertise related to energy integration of extensive chemical processes has an obvious tie-in to these environmentally responsible projects. It is why customers are standardizing on RCM Thermokinetics as their process design and equipment supplier. We recently opened RCM Thermal Kinetics testing facility. It is beginning to gain traction. The coming weeks, two purchase orders are expected from clients requesting process feasibility and product profile testing. The office has greatly strengthened ties to local universities to support staffing of the testing lab through chemical engineering internships. The customer support offered through process testing has a track record of receiving additional project orders. It provides the benefit of process risk reduction for both the client and RCM thermokinetics. We expect lab utilization to ramp up in 2024 for new customers and testing related to existing customer projects. In addition to our lab, the engineers are now working on the design of a 30 gallon crystallization pilot plant. RCM Thermokinetics receives a large number of crystallization inquiries. More than any other technology, crystallization projects benefit from the ability to conduct robust piloting trials to produce product samples for our customers. The current schedule would have this pilot testing service ready for client use in May of 2024. RCM Thermal Kinetics recently presented at the Advanced Bio Leadership Conference in San Francisco. The team has been a member of ABLC for many years and benefits from building relationships with emerging companies interested in developing new processes that require our technologies. Many of our customers today were cultivated from ABLC meetings over the past 10 years. The sales team has also attended the Aluminum USA show. RCM Thermokinetics has successfully supplied environmental equipment to aluminum production plants in the United States. The team remains focused on continuing its emergence as a responsible and sustainable chemical process design market leader. As for our aerospace team, the growth and recovery we expect mid-year has begun to materialize in the third quarter with nine new clients, resulting in our weekly run rate and headcount increasing, nearing our historical numbers. We still believe we have the potential to close three more new clients before the end of the year, totaling 12 for 2023. We also continue to increase the number of hires quarter over quarter with a total of 40 in the third quarter compared to 30 in the second quarter of 2023. This continued expansion includes new clients in defense, including sea vessels, land vehicle programs, and new vertical lift customers. Expanding existing and new clients with our core expertise and new arenas provides us much desired depth and breadth of the organization and firmly positions us for 2024. As the management team within some of our existing clients continues to change, we have utilized our long-term relationships, reputation, and expertise to stay relevant. We believe we will see traction on one of our most significant awards for a design center well into 2026. We continue to market our digital conversion expertise and methodology within aftermarket and our model-based design prowess, which now expands across multiple clients throughout the United States. We have multiple contracts with large OEMs finalized and executed in 2023. We also await a large, all-encompassing RFP from one of the largest defense contractors providing a vehicle to support this client across all engineering and aftermarket disciplines. We will continue to expand our reach with these clients and prioritize these types of engagements in 2024. We continue to market the S-Factor, which broadens our reach beyond S1000D publications into S2000M material management, S3000L logistics support analysis, S4000P maintenance, and S5000F in-service data feedback. We are happy to report that we have our first launch client, which we will support in these expanded areas beyond technical publications. We have reorganized the aftermarket arena to provide opportunities in other areas for our team members, and we have increased our business development team for the first time in two years. We are excited about the opportunities that this team has already uncovered. Before turning the call to Kevin, I would like to reiterate the financial expectations provided during the third quarter. We continue to anticipate EBITDA growth during the fourth quarter, a resumption toward our long-term objective, which is also in line with our expectations for 2024. I also want to reiterate that as a general policy, we do not give guidance. However, we felt a more granular expectation as we closed the year would be appropriate given the advanced macroeconomic noise in the marketplace. I will return the call to Kevin to discuss the Q3 2023 financial results in more detail.

Thank you, Brad. Regarding our consolidated results, gross profit for the third quarter was essentially flat year over year, with $17.3 million in Q3 2023 versus $17.4 million in Q3 2022. Healthcare gross profit in Q3 2023 was 7.5 million versus 9.0 million in Q3 22. There were primarily two reasons for the quarterly decline in healthcare gross profit. First, we believe that Q3 23 was our first quarter where we derived zero COVID-related revenue. To give this perspective, if we remove the estimated impact of COVID We saw our school revenue grow by approximately 25% in September 2023 compared to September 2022. We experienced similar results in October 2023. COVID also impacts our non-school revenue comp. Second, we deliberately culled the services provided to a multi-location continuing care client in the five boroughs of New York City and Long Island. At the beginning of COVID, we acted as an emergency VMS to this client. As the gross margins from the non-direct revenue shrunk post-COVID, we decided that the contribution margin on that revenue was insufficient for our return model. On a year-over-year basis, our quarterly revenue decreased by $2.1 million from this client. If we compare Q3-23 to Q2-23, this client decreased by 1 million sequentially. The decrease in this low margin business helped us grow sequential gross margin to 30% in Q3 23 versus 27.6% in Q2 23. We grew engineering gross profit in Q3 23 by 5.2% over Q3 2022. The growth in gross profit was primarily driven by increased project activity in our energy services group and getting our engineering gross margin closer to target levels. Our gross margin in Q3 23 was 25.0%, a significant sequential improvement from Q2 23 gross margin of 22.9%. We continue to see outstanding results from our life sciences and IT group with 38.4% quarterly growth, and gross profit year over year. We are seeing fantastic results as we drive more revenue through our high-value, high-margin managed service offerings. We hope there is another year we can get to in Q4 23. As we look to our fourth quarter of 2023 and our fiscal 2024, we expect all three segments to show good results with growth in consolidated adjusted EBITDA. We estimate adjusted EBITDA in Q4 23 between 7.6 million and 8.2 million. Also in Q4 23, we estimate consolidated revenue between 70.0 million and 74.0 million with a similar gross margin profile to Q3 23. More granularly, we estimate life sciences and IP revenue between 11.0 million and 11.5 million. We estimate engineering revenue between 21.5 million and 23.0 million. We estimate healthcare revenue between 37.5 million and 39.5 million. Since we have discussed some variability and seasonality in our healthcare segment, we thought it would be helpful to discuss our weighted average school days in 2023. Q1 23 was approximately 55 days Q2 23 was approximately 45 days. Q3 23 was approximately 27 days. Q4 23 is estimated as about 51 days. So that's about a 7% decline in school days when comparing Q4 23 to Q1 23. While we haven't penciled our first budgets yet, we expect a similar cadence to school days in 2024. except one or two days may shift from Q1 to Q2. We'll give 2024 estimates on our next call as we have our budgets ready for the year. As for fiscal 2024 adjusted EBITDA, we will be highly disappointed if we don't see at least low double-digit growth. Our internal goals will undoubtedly reflect a much higher percentage. We are optimistic about growing all three segments in fiscal 24 and beyond. This concludes our prepared remarks.