Good morning, everyone. This is Brad Vizi, Executive Chairman of RCM Technologies. Welcome to the RCM Technologies 2019 Fourth Quarter Earnings Call. I am joined today by Kevin Miller, our Chief Financial Officer. Kevin will begin with the legal disclaimer, and then I will summarize the operating results for each of our business units before opening up for questions. Kevin?

Good morning, everyone. Our presentation in this call will contain forward-looking statements. The information contained in the forward-looking statements is based on our beliefs, estimates and 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. Thank you.

Thanks, Kevin. Now I am pleased to highlight the operating performance of our fourth quarter of fiscal 2019. I will discuss each division separately. Our Specialty Health Care group again set quarterly records for both revenue and gross profit. We eclipsed $25 million for the first time, growth of 9% as compared to the fourth quarter of 2018. Our gross profit of almost $6 million grew by 19% over the prior year. Our growth was principally driven by our school business, especially our behavioral health initiatives. With the New York City Board of Education, we had about 940 paraprofessionals on assignment in December of 2019. That compares to about 720 at the same time last year. With the Hawaii Department of Education, we had about 300 paraprofessionals and 40 RBTs on assignment in December of 2019. That compares to about 250 paraprofessionals and 0 RBTs at the same time last year. Our RBT contract started in September 2019 and is ramping nicely as we've added another 20 since December with about 60 on assignment as of today. We expect continued rapid growth in our RBT contract. We are very excited about our health care group in 2020 and beyond. Behavioral health will be a reoccurring theme for us well into the future. We believe that our ability to recruit and train paraprofessionals and RBTs are superior to our competitors. We plan to aggressively roll out these capabilities to more public school districts and charters for the 2020-2021 school year and well into the future. To accomplish this goal, we are investing in our behavioral health and school services team. Growth in behavioral health is significant, and we are working diligently to position ourselves as a leading provider in our education end markets. The performance of our Engineering group in the…

[Operator Instructions] Our first question will come from Alex Rygiel.

Alex Rygiel at B. Riley FBR. First, the unfortunate obvious question, could you comment on COVID-19 and how we should think about that, as an opportunity or a risk to your health care practice?

You're talking about our health care staffing practice?

Exactly.

At this time, we're not aware of any material impact, so positive or negative.

And as you sit back and think about that, do you see there being opportunities of increased staffing needs that you could help to support in certain areas?

There certainly could be. We don't provide a lot of people to hospitals. So I'm not sure that any spike in health care demand would have a big impact on our health care group. Obviously, anything that strains the health care labor market is probably good for us even if it's indirect. But I -- it's hard for us to envision that, that would have a major impact -- a major positive impact to our health care group. But we'll just have to see how things develop.

And do you see any risk of your health care providers being -- from a labor standpoint, being bid away from you, and therefore, possibly your labor rates changing that could impact your margins?

I suppose anything is possible at the end of the day. But it's hard for us to really envision that there would be a material impact in that way. But I think so much is unknown at this point that I think it's really hard to really speculate beyond where we are right now.

Okay. And then as it relates to Hawaii contract, obviously, you're having some great success there at start-up. Congratulations on that. How should we think about the revenue growth rate in 2020?

I think that you'll -- we're not necessarily going to see the top line growth that we've seen in recent years. But what I think is exciting about our health care group is we do have some decent growth built in based on some of the contracts that are in place right now. We should continue to get better gross margins in 2020 than we saw especially in 2018 and even the first half of 2019. So we should see a little better growth in gross profit dollars than top line. And the business is very leverage-able at this point, so a lot of the gross profit growth, a good chunk of that drops to the contribution margin. We will be making a major investment in our school services division, taking some of that growth in the gross profit and reinvesting it in school services, which is something we really want to target for future growth, really beyond 2020 but -- because there's sort of a lagging impact in terms of that investment, in terms of what school year you're hitting. But we're excited to really try to roll out our school services to a lot more schools starting with the 2021 school year and beyond. That's a little bit more than you asked, but I figured I'd work that in.

That's very helpful. Then when we think about your Engineering business, congratulations on the growth there, fantastic growth over the last couple of years. How should we think about -- maybe if you could quantify your backlog in that business to some degree. And help us to appreciate when and to what magnitude we should start thinking about revenue growth in that line item year-over-year.

Yes. Sure.

I think the first quarter is flattish.

Sure. I mean backlog and specific backlog and pipeline numbers is something we've historically never disclosed and we're not really comfortable disclosing that now because there's so much variability in that, that we really don't want to start putting numbers out there because they can change pretty quickly. So it's just not a good practice to discuss that. But we are excited about the backlog and the pipeline in both -- in really all of our markets, T&D, process and industrial. We've seen some strengthening in our Canadian Power Systems group. And even our aerospace group, we've seen -- we have some nice opportunities in our pipeline. But the way we look at it around here is, until you've converted it to backlog, it's still just pipeline. So we're excited because we see some really nice opportunities, but we need to convert some of those really exciting opportunities from pipeline to backlog. As far as the top line revenue is concerned and you're trying to put a model together, I think looking at sort of incremental -- somewhat conservative incremental sequential growth is probably the best way to approach that in your model. We don't like to give specific -- really specific guidance, as you know. But we do believe we're going to see some sequential growth starting in Q2 and we think that we should continue to see that sequential growth from Q2 to Q3 to Q4.

And then, lastly, on the calcium chloride program, how should we think about the sort of total revenue contribution from Phase 1 -- or Phase 2, which is complete now and Phase 3? And then how should we think about that transitioning post Phase 3? And then how long is Phase 3?

Well, Phase 3 is going to be finished up sometime in the second quarter. That's the preliminary engineering. That's several hundred thousand dollars' worth of work. It's not a huge contract. All-in, the preliminary work will probably, once we complete it, we started it last year, we're probably roughly $1 million in pure services revenue. We don't know exactly what the opportunity is going to be once they start ordering equipment and once we start taking the preliminary engineering and actually helping them implement it in the factory itself. But it's probably in the range of $6 million to $10 million in the high end, assuming that there may be changes and additions in terms of revenue for RCM. And that should -- if construction goes according to schedule, which it often does not although this being a commercial enterprise, we usually see time lines fitting budget much more frequently with these types of projects. You're probably looking at completing the factory sometime towards the end of the first half of 2021. So you're probably looking at that revenue in the back end of this year and the front end of next year.

I do have one other question. I think you mentioned in the past that the Hawaii contract had about a total kind of award value of about $40 million, but there was somewhat of a jump ball with a few competitors included in that. How do you view the market share that you've possibly won to date of that $40 million? And how much of that $40 million has actually sort of been dispersed so far?

I don't know the answers to those questions, but I can speak sort of anecdotally on it, which is not much of the $40 million annual approval is being spent right now. We believe that if we're not the top RBT company in Hawaii, we're certainly one of them. We don't know exactly what our competition is delivering, but we know that we're delivering quite well on the contract. We know that our -- most importantly, our customers are happy with us. One of the things that we've been very successful in doing is actually finding supervisors and RBTs in the United -- in the Continental United States and sending them to Hawaii. Right now, the biggest limiting factor in growing that contract for not only us but our competition is finding the RBTs and implementing the plans for the kids. That can only happen so fast. So -- but we're very excited about the progress so far. We have approximately 60 RBTs out right now, and that's growing every month. We have about half a dozen supervisors out. And we think that's a really good number and something our client is really happy with. And we expect that to continue to grow. And we look forward to having this summer to recruit more and work with Hawaii to help them get more plans in place so that we can -- whatever we end up with in May, at the end of Hawaii school year, we're hoping to grow that a lot between the time that school ends in the end of May for Hawaii and then starts in the beginning of August.

[Operator Instructions] Our next question will come from Bill Sutherland.

Can you hear me? Are we good?

Yes, we can hear you.

Okay. Cool. The -- just real briefly on the IT group, the turnaround. A little more color on the piece of the business that you think you're getting turnaround and kind of how you're thinking about the growth trajectory for the group this year.

Well, Brad mentioned life sciences, which has performed the best of the groups. But really, it's been pretty much across-the-board turnaround. Our HCM business has performed well. Our Long Island consulting group has performed well. The staffing groups have performed well. We've really seen a nice recovery. We're doing well in Puerto Rico, which is amazing, a year-plus out from the disruption there with the hurricanes. And we've seen that business come back. And that business was, frankly, on its knees not that long ago and now it's performing very well. So we've seen a nice turnaround across-the-board. The executive leadership team there, Mike Boyle and several of his direct reports, have done a really nice job with that business. In terms of the growth next year, we're excited about it. As you know, we don't like to give specific guidance in terms of what we think we'll see next year. I mean we're not -- we're certainly not sitting here and projecting significant top line growth next year, but we do think it will grow. We do think we'll continue to see a strengthening, or maybe solidifying is a better word, of the gross margin. We saw a nice -- really nice gross margin in Q3 and Q4. We saw a nice gross margin year-over-year. I don't know that we're always going to be in the 27s because, certainly, if large-scale opportunities present themselves at slightly lower margins that we think are going to be accretive to EBIT margins, we don't turn those opportunities down. But we -- absent bringing in something big in the 20s or the high teens, we think we'll continue to see margins in the 26% to 27.5% range. So we're certainly excited about that group. They had a nice 2019 and we're ready for their encore performance in 2020.

Yes. I mean just what kind of is the trigger for the question? Is it you sequentially kind of leveled out last year on revenue and just wasn't sure what would be the factor that would cause you to start to move up out of the $8.5 million range that you've kind of been in?

Yes. I mean, I think there are several ways to do that. And I don't think we're going to see any -- we're not going to see any kind of giant lift from $8.5 million in the immediate future, but we continue to add new clients. The most important thing is to add recurring revenue if you want to see growth, and we're working hard on adding recurring revenue as opposed to discrete project revenue. And we've had a combination of both in 2019. In terms of the quarterly revenues, I think modest sequential growth is probably a good assumption as far as your model is concerned.

Okay. And I'm curious, you talked about where you've gotten recurring revenue as a percent of total for IT.

That's not something that we're ready to discuss at this time.

Okay. But it's been improving is what you're saying?

Yes.

Okay. In the press release, Kevin, you've put out the goal of exceeding $10 million in operating cash flow this year. Provide -- if you could provide a little color on that, kind of how you get there, that'd be great.

Sure. Sure. Well, for one, we finally were able to get our 2019 paraprofessional bill rate increase approved by New York City effective January 1 and through the end of December. That amounts to $4.2 million. We've got it approved. I mean it was verbally approved a long time ago and then it was approved at a meeting, a New York City meeting, in September. But some of these things take a long way to wind through the approval process at New York City. So -- but it was officially approved and stamped in February, and we received the money in February. So that's a $4 million permanent, which should be a permanent reduction to our AR. Obviously, there's always AR issues that come up from quarter-to-quarter that you might not expect. But assuming no changes between Q4 and Q1, that's a $4 million reduction in our receivables and that will go straight to paying down debt. So that's a Q1 event that's already occurred. We also expect to get our arbitration results sometime in the second quarter. And I'm basing that on the fact that the arbitrator has verbally stated that he expects to render a decision on all 3 of the projects sometime in the second quarter. So we're hoping to have that sorted out by the time we announce the first quarter, which will be sometime in early May. We expect a positive impact to cash flow from that. And then, of course, we expect positive impact to operating cash just from our earnings and managing our balance sheet in the normal course of business.

What's the range of possibilities on the arbitration resolution?

Well, the range is pretty high. We have $14 million on our books as of the end of December, and we believe we're going to get all of that.

So you're exceeding $10 million by quite a bit if things go the way they should. Okay, that's great.

Yes, yes. It's -- certainly, I have to be careful obviously because until you get an arbitration decision, you don't have it. And I don't know what the -- and once that decision comes through, I don't know what the timing of the payment is going to be. But we believe that we're going to collect all of that money and it's going to be sometime in the not-too-distant future. And if those events occur, you're going to see a pretty massive and quick reduction in debt, which is something we're laser-focused on. We're not happy with our balance sheet right now. We're not happy with where the debt is. Certainly, we want some level of debt but not the level where we are right now.

So the use of the cash you're going to get coming in is mostly going to be debt reduction, also reinvesting in certain businesses like your -- the school service expansion and I suppose there'll be some cash required for -- as you pivot in Engineering, those opportunities...

Yes, I think that's a pretty good assumption. I mean, look, priority number one is reducing debt. Priority number two is reinvesting in the business. Certainly, at every single Board meeting, we discuss our capital structure and whether we want to consider investing in the capital structure. Certainly, with where the stock is right now, I'm sure the Board will want to consider buying some stock if everything comes through the way that we expect it to. And we also have conversations going on with some interesting acquisition candidates. So the menu for the capital decisions is something you could write out yourself pretty easily. But certainly, paying down debt is priority number one.

There are no more questions in the queue.

Thank you for attending RCM's fourth quarter conference call. We look forward to our next update in May.

Ladies and gentlemen, you may now disconnect.