BGSF, Inc.

Thank you for standing by. This is the conference operator. Welcome to the BG Staffing First Quarter 2019 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star 0. I would now like to turn the conference over to Terry McInnis, VP of Investor Relations at Bibicoff and McInnis, Inc. Please go ahead.

Thank you, Savvy. It's my pleasure to welcome you to the BG Staffing Conference Call to discuss Q1 financial and operating results and a progress report on the company's business strategy. With me today on our call is Beth Garvey, President and CEO, and Dan Hollenbach, Chief Financial Officer. By now you should have seen a copy of this morning's press release announcing BG's Q1 financial results as well as the Form 10Q. If you do not have a copy of either, you can find it in the investor relations section on BG's website at bgstaffing.com. I remind you that this call is being webcast live and recorded. A replay of the event will be available later today on the company's website and will remain available for at least 90 days following the call. I would also like to remind you that our discussions today include forward-looking statements. These statements are based on certain assumptions made by BG Staffing based on and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The company's actual results could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties. including those listed in item 1A of the company's annual report on Form 10-K and in the company's other filings and reports with the Securities and Exchange Commission. All risks and uncertainties are beyond the ability of the company to control, and in many cases, the company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. These forward-looking statements are made as of the date of this call MBG staffing assumes no obligation to update these statements publicly, even if new information becomes available in the future. This broadcast is covered by U.S. copyright laws, and any use or rebroadcast of all or any portion of this conference call may only be done with the company's express written permission. During our call, we will discuss some non-GAAP measures, which we use for internal evaluation and to report the results of the business as useful information to management, our board of directors, and investors about our operating activities and business trends related to our financial condition and results of operations. These non-GAAP measures are intended to supplement GAAP financial information and should not be considered in isolation as a substitute for or as superior to financial measures circulated in accordance with GAAP. For reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please see today's earnings release posted on the company's website. I will now turn the call over to Dan Hollenbach, BG Staffing's Chief Financial Officer. Dan?

Thanks, Terry, and good afternoon, everyone. We appreciate your interest in BG Staffing. I would like to start again by taking a moment to acknowledge all of our team members at each of our BG Staffing business units for their hard work and dedication to our company's continued success and strong gross profit margins. Their contributions are vitally important, and we are very proud of the job they continue to do for us. As a reminder, BG Staffing provides contingent staffing services within three industry segments. Our real estate segment, which operates in apartments via BG Multifamily and in commercial buildings via BG Talent. Our professional segment, which includes our finance and accounting, IT, and creative group, as well as our light industrial segment. Today, BG Staffing operates 79 branch offices and 17 on-site locations, providing services in 44 states. Our 2019 plan was to open five new real estate offices, excluding the recent expansion into California, and we have already opened four plus our first location in California. Beth will talk more about our recent entry into California in her remarks. After my review of our financial results, I'll turn the call over to Beth for her comments on the quarter just ended and on our company's strategy, execution, and outlook on current industry conditions. Our consolidated revenues for Q1 2019 were $68.8 million, up 2.9% from Q1 2018. Gross profit increased $1.1 million, or 6.5%, with gross profit percentage of 26.8%, up from 25.9% in Q1 of 2018. Gross profit percent was up in all of our segments, Q over Q, and this continues a string of quarterly increases in gross profit percent. While Q1 is typically our softest period due to seasonality in our real estate and light industrial segment, we were also impacted by weather in all of our segments. Net income for Q1 2019 was $2.5 million, up slightly versus Q1 2018, and diluted earnings per share was $0.24 versus $0.27 in Q1 of 2018. Customer sentiment remains positive, and demand momentum was steady as we moved sequentially from Q4 into Q1 of 2019. Now turning to our segment results. Our real estate revenues, which continue to be from organic growth, increased 1.1 million, or 6.3%, to 19.2 million as we continue to scale this highest profit margin segment of our business. Gross profit increased 507,000, or 7.4%. Gross profit percent was 38.5 for 2019, up from 38.1 for the same period in 2018. Operating income increased 8.2% to $2.8 million. Talent contributed $300,000 of the revenue increase, and multifamily contributed $800,000. Today, multifamily operates 49 offices, and talent has six offices, together servicing 28 states. Professional revenues for the quarter were $30.6 million, a decrease of half a million, or 1.6%, compared with 2018. The revenue decrease was due to decreased volume in our IT group. Finance and accounting was flat, even with an $800,000 decrease from one client partner in 2019 versus 2018, a client we've discussed in previous queues. While revenue decreased, gross profit increased 411,000 or 5.2%. Year-to-date gross profit percentage for the professional segment increased to 27.1%, from 25.3% in the prior year, but operating income decreased 19.1% to $1.8 million. Light industrial revenues increased $1.3 million to $19 million, or 7.2% versus 2018, outperforming industry expectations. Gross profit increased $211,000, or 8.2%. Light industrial gross profit percentage was 14.6%, compared with 14.4% for the prior year period. Operating income increased 13.9% to $1.2 million. Turning now to selling expenses, which increased approximately $1.1 million, or 10.8% over 2018, due to continued expansion in the real estate segment, including $112,000 attributed to new offices and accelerated office openings in 2019. As mentioned, we have five set to open, and we've already opened four in the first quarter. Professional segment expenses increased $746,000, or 17.1%, primarily a result of compensation adjustments in our commission plans driving higher margin business. We continue to review our compensation plans. Light industrial segment increased $91,000, or 6.5%. G&A expenses increased $273,000, or 16.8%, due to increased spend in our IT and HR support units. Beth will discuss both of these strategic initiatives in her remarks. G&A expenses were 2.8% of revenues in Q1 of 2019, which compares to 2.4% for the first quarter of 2018. Our effective income tax rate was 22.8% for 2019, compared with 22.1% for 2018. And we currently estimate a 22.8% effective rate for the rest of the year. Cash provided from operations increased $1.8 million over the same quarter in 2018. We continue to generate robust operating cash flows as a result of our strong balance sheet, effective working capital management, and solid earnings. allowing us to reduce debt, invest in technology, and while at the same time returning capital to our shareholders in the form of a regular quarterly dividend, currently set at $0.30 per share, an approximate yield of 5.5%. PG Staffing has now paid a dividend for 18 consecutive quarters. Our current debt to adjusted $1.12 trillion EBITDA is 0.71%. Adjusted EBITDA for the quarter was $5.2 million, or 7.5% of revenues in 2019, compared with 5.5 million, or 8.2% of revenues in 2018. We believe that it's just as useful for performance measure, and it's used by us to facilitate a comparison of our operating performance on a consistent basis from period to period, and to provide a more complete understanding of factors and trends affecting our business. We also believe that investors, analysts, and other interested parties view our ability to generate adjusted EBITDA as an important measure of operating performance and that of other companies in our industry. Additionally, the financial covenants in our credit agreement are based on adjusted EBITDA. Reconciliations of adjusted EBITDA net income are available in our latest quarterly report on Form 10Q and our earnings release, both of which are available on our website. Now I'd like to turn the call over to Beth.

Thank you, Dan. Good afternoon, everyone, and thank you for joining our discussion today. Our first quarter operating results, particularly revenue and gross profit growth, coupled with the promising runway before us, support my confidence about the remainder of 2019. The staffing industry outlook for 2019, subject to normal seasonal patterns, is optimistic, and the present economy and labor market remain positive for staffing overall. Strong customer demand continues to fuel our success and is led by solid operational performance by our management teams in the field. We are proud to have reported 26.8% consolidated quarterly gross profit, our eighth consecutive quarter with consolidated gross profit percentages in excess of 25%. We believe that our historic strong and steady revenue growth continues to benefit from our laser focus on the strategic priority of growing returns, which benefits our shareholders with sustained value creation. Our focus remains on achieving increasing margins, which we continue to do through focused operational discipline, organic growth initiatives, and selective value creating M&A. Our goal is to seek acquisitions primarily in the professional segment that will expand our footprint into new geographic markets or provide a skill set that helps complete our talent-offering puzzle. We feel this provides an ease of use for our client partners offering a total solution to their staffing needs. We are a disciplined acquirer, and our pipeline remains very full and active. Each and every week, we evaluate opportunities for accretive businesses that we believe will complement both our existing market exposures and our diversification strategies. In addition, this strengthens our cross-bill efforts around the country as this effort continues to build momentum with 5% of our organic growth in Q1 coming from cross-bill. On the operations side of our business, we've made meaningful progress in Q1 on our 2319 initiative, which as a reminder, we're getting into California technology enhancements and culture. So starting with California, I'm happy to announce that in Q1, our real estate BG multifamily division entered the California market, which is the largest U.S. apartment market with 2.8 million units in the state. In addition, our IT division secured its first start in California with a start date of next week. As discussed last quarter, we brought on a new CIO at the beginning of the year. With his help, we have developed a technology roadmap focused on three things. reduced cycle times to fill orders and onboard talent, improved operational efficiency through automation, scalability, and security leveraging cloud solutions. The investment is meaningful and is expected to leverage new technologies for efficiency, drive incremental revenue, boost overall performance, and increase talent and client loyalty. By focusing on making it easy for our new talent to apply and onboard, we are going to improve our ability to fill our customers' orders faster with the best candidate available. We are putting technology in place that responds to feedback from recent surveys of both talent and clients who want ease of engagement along with speed. We've identified opportunities for improvement in our operations teams by automating routine tasks such as payroll time for collections, candidate pre-screening, and consolidating our middle office systems from prior acquisitions. The time we save by eliminating manual and duplicate data entry will allow future growth while leveraging operational efficiency. Finally, by utilizing proven cloud-based technologies for our communications and data centers, we will improve our ability to scale quickly, improve analytical data, and reduce risk of downtime and emerging security threats. We presented the roadmap at our recent board meeting and received approval for a three-year estimated spend of $9 million, of which approximately 50% will be capitalized and 50% will be increased operating expense. Before any operational efficiencies, this could impact diluted EPS by $0.06 per quarter for the next year and $0.04 in year two of implementation. Some of our larger competitors have already begun this initiative with one reporting recruiting efficiencies of 11%. While these are important tools to help our company grow, we focus our attention on the fact that we are in the people business. While technology enhances the process, recent candidate surveys tell us that speed mixed with personal interactions from our team results in the most engaged talent resource. Company culture remains a priority for us as well. Our goal is to attract the best in the industry, and we believe that a strong culture that supports a work-life balance and engages the team in overall direction of the company builds a stronger organization. With that said, we spent Q1 completing our first-ever strategic plan. Although there were many pieces of the process, from interviewing client partners, field talent, and our team associates, we were able to identify areas of growth for our teams through financial segmentation of the business. The outcome resulted in divisional scorecards with roadmaps to the overall company goals, allowing the organization to see the roadmap for the future. I'm so proud that we play a role in contributing to the livelihoods of more than 3 million temporary and contract workers who work in America's staffing companies during an average week. In 2018, BG Staffing averaged 6,600 paychecks a week, resulting in paying close to 30,000 people. Not only are we in the people business, but we're in the purpose business, as it all begins with a job. For the remainder of the year, we'll continue to proactively identify areas across all segments in which we can provide additional staffing services, and we will continue to invest in these incremental growth activities. We anticipate revenues from cross-selling, our entry into the California market, as well as technology enhancements will be needle-moving initiatives in 2019 and beyond. And now I'd like to turn the call back over to the operator for the Q&A session.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star 1 on your telephone keypad. You will hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star 2. We will pause for a moment as callers join the queue. Our first question comes from Jeff Martin with Roth Capital Partners. Please go ahead.

Thanks. Hi, Beth. Hi, Dan. Hey, Jeff.

Hi, Beth.

Beth, I was wondering if you could elaborate on that last comment, your first ever strategic plan. What were some of the high-level things that came out of that, and over what time frame do you expect to start to implement some of those things?

We put it together. We kind of ended up getting our results back towards the end of April. We put together a three-year plan on how that would work for us. Technology being the biggest piece of that, the rest of the organization kind of will run through some operational efficiencies and being able to go in and build a roadmap for people to have a plan for growth within the organization. but truly we feel like it's going to be in the third quarter when we start to see some results from technology. As we unfolded everything, we really realized that's where the majority of the attention needed to go. So we see results coming in Q3.

One of the biggest tools we got from it, Jeff, was the ability. So we did an NPS study, if you're familiar. NPS. NPS, yes.

Net Promoter Score.

Net Promoter Score study. And we now have a tool where we can link the Net Promoter Scores with the profitability of our customers and tell our operational people where to target those customers who not only are profitable but also love us, which, of course, are all our customers. But, you know, we can now segment it literally into nine different sectors. If nothing else, that was one of the best things we got out of this.

That sounds encouraging. I was wondering if you could – Elaborate a bit on the California market entry in terms of opening the first office. I believe you said that's kicking off the first engagement next week. What are some of the lessons learned in the process, even though it's very early, but some lessons learned to this point and any expectations in terms of maybe four or 12 months, what kind of contribution you're expecting from that market?

I will say that we put together a California task force and they were quite amazing. So we brought on a new HR person in January as well as our new CIO. All of the efforts were going into getting into California in a safe way from a compliance perspective. We entered with multifamily at the end of March. And as of this morning, they had five people out working. And then the IT division has their first person that's actually supposed to start tomorrow. We feel like this is going to be such a huge opportunity for us. We have had many, many of our current properties or management companies, if you recall, management companies own several properties across the U.S. So we've had many management companies wanting us to go to California. So we've spent a lot of time getting the word out that we're there. So we feel very encouraged about the fact that when people are asking you to be there, we see the growth is going to be quite strong for us.

A little too early probably to gauge growth. May have a little better idea three months from now.

Okay. And then in regards to the real estate segment in general, it's up 6.3% year-over-year in the first quarter. Okay. Would you characterize that as up against the tough comp, which was up almost 38% year over year in Q1 last year? And where do you think that the growth potential, what level of growth are you expecting from real estate? I was thinking it would be more in the 10% to 15% range.

We actually had seven markets that were without a salesperson in Q1. That was unusual for us. So we are now fully staffed in that area. So that kind of led to some of the downturn from what we expected. I think that your projections of what you thought are probably safe. We do know that they had struggled with getting some of their markets covered.

And what does that do to you? Is that attrition related or is that new offices? Some of them might be new offices where you haven't staffed them yet. Help us understand why seven markets would go without a salesperson.

Some of it was promotion. So we had some turnover where we gave people an opportunity to move to a different market, which left the market uncovered. So we still were able to fill jobs from the recruiting hubs that we had, but we didn't have active salespeople for a period of time. So the other part was, you know, as Dan said, we did escalate our openings for multifamily in the first quarter. So we opened four already, and we only have one more left for this year that was part of our budget. So that was part of the picture as well.

Got it. Okay. I'll pass it along. Thanks, guys. Thank you.

Our next question comes from Howard Halpern with Tatledge Brothers. Please go ahead.

Thank you. Congratulations. Nice, solid quarter to start the year. The four openings and the entry into California, that is really, at least on the real estate side, that should impact top line results in the second half of the year. Is that correct? Yes.

Yeah, second half of the year, particularly and probably more so into the first quarter, second quarter of next year.

Okay. And in terms of, you know, you talked about the impact of, you know, executing your technology roadmap plan and such. When is that really going to kick off? And could you talk a little bit about how it might ramp, at least in the first couple quarters?

We had a little bit of spending in the first quarter. That and building our infrastructure in the HR side had a little bit of an impact on earnings per share number. As I said, we got approval last week. Our IT CIO is in the process of putting together the project sort of map and when we're going to start those. So we would expect spending on that to begin probably within the next two to three weeks. We do have two resources in here now that has started that, what we call the middle office sort of infrastructure build. We call it Source of One Truth, which will be our database for extracting management data.

Okay. And in terms of the professional development, professional services, you know, gross margins are really good in the first quarter. Is that general area above that 26% into the 27% sustainable going forward?

We think so. You know, we've been pushing our sales force and recruiters to fill higher margins. We incent them to fill higher margins. And we're getting a little bit of a boost because the firm placement market remains very positive. And we don't, you know, with two and a half million more job openings and fillings going on right now, we don't see a softness in that.

Okay. And one last one in, I guess, commercial real estate. What is, I guess, the run rate for the year, and is it really going to be more in the second half of the year that we'll see the impact of the revenue in that division?

Yeah. They're at a run rate of $5 million plus. Okay. So, yeah, I think we'll continue to see an uptick in that as it gets more mature. And as that market, that group does a better job of educating that market in what we do. Okay.

Thanks, and keep up the great work, guys. Thank you.

Thank you, Eric. Our next question is from Daryl Davis, a private investor. Please go ahead.

Hey, Ben. Hey, Daryl. So congrats on another great quarter. As we've seen from so many of your domestic peers this earnings season, it's common to extend your gross margins in 2019, but it is uncommon to grow top line organically. You all did both, so way to go. Shifting from micro to macro, let me ask both of you for some context. On the tightness of the labor market, hopefully you're comfortable giving macro opinions here. And I'll read this so I don't forget anything. Over the decades, cyclical companies like those in the staffing industry see substantial swings in valuations based on where we are in the so-called economic cycle. Poor valuations, similar to what we've seen the staffing industry battle with since last summer, are assessed when investors fear a pending recession and cycles pass. I've seen staffing companies slow their revenue growth in the latter portions of expansion and into recessions caused primarily by depleted demand. But that is not what's going on today. Today we have slow and negative growth for staffing companies caused by depleted supply. Has the leadership team of BDSF seen anything comparable to this situation historically? Personally, I don't see an imminent recession. I hope that is a very hard event to sense. I sense an incredibly hot job market with low inflation and improved productivity, which spells a continued expansion in my book. Yet investors and staffing companies price the industry as if we are closer to a precipice than an ascension. By the way, I'm not complaining about that. Again, do you have any experience with similar circumstances historically? What are your macro thoughts? And, of course, your macro thoughts can play a big role when contemplating acquisition.

Wow, that's a lot. We would agree with you immensely on the fact that we are not feeling a softness in the market. Demand is incredible. Both our real estate, all three of our segments run with unfilled orders because of talent acquisition walls, I would call it. And as we go to industry events over the last three or four months, it's the same thing. Talent acquisition and keeping up with technology are the biggest hurdles that all of us are facing. So we live in that world of either too many people and not enough orders or lots of orders and not enough people, unfortunately, for the industry. We're at that other side of lots of demand and talent acquisition shortages. There's a slide that we used in our investor that shows open jobs versus filled jobs, and that's what I mentioned earlier. There's currently a $2.5 million difference between job availability and job filling.

And that was just updated at the end of April. So it's the biggest gap ever. So it's widening.

People aren't working today. They either can't work. don't want to work, or they're in the wrong place because there's a job opportunity for them. But you're right. The industry as a whole, when there's a hint of a slowdown or a recession, gets taken to the cleaner.

Listen, I'm not complaining at all about the lack of acquisitions. I trust your judgment, and I don't want you to overpay. But Is it the case that insiders in the industry who otherwise sell their companies see the hot and dark market and they're asking for too much, whereas investors like me fear the inlet recession and we price it too low? Is that delta happening?

You know, we've seen a couple that have demanded a premium. We've passed on those. Like I think we mentioned, we saw 99 opportunities last year. Some of them, we talked more deeply about a few of them. Some of them were priced what we consider to be reasonable with multiples that we've paid in the past, and some of them were at a premium to that, and we've elected not to go that route.

I ran into someone in advance not too long ago who has a lot industrial, and he has got people talking to him at seven times. And I was stunned that anybody would talk to him for seven times. So I think to your point, you know, there are people that are willing to do it, but we aren't going to be one of them.

Gotcha. Oh, thanks. Thank you.

Our next question comes from George Milas with MKH Management. Please go ahead.

Yes, hi, good afternoon. Thanks for taking my question. I think, Beth, you talked about the increase in IT spend over the next three years, and I just want to make sure I understood the numbers, and maybe I can ask some additional color. Did you say there was $9 million over three years?

That's correct.

Yes, sir. Okay. Great, so it's roughly $3 million per year, or is it spread equally among those three years, or is it... It's more front-loaded.

So we feel year three will just be major people getting in the training aspect of it, so it is more front-loaded.

Okay, okay. And how much are you spending right now on IT? And that incremental spend, can you sort of break it down into is it some of it is going to be custom software development or are you purchasing various applications? Try to understand where you think that $3 million is going to go. Thank you.

Yeah, so there's internal development. There's external software purchases. That's the CapEx part of it. And then there's bringing in resources to help develop processes and procedures around managing all of those projects. Because we've identified 23 different projects that need to occur over the next three years, primarily in the next two years, if we want to stay competitive in this market. To give you an idea, in year one, the total of the $9 million is about $5 million of that will be spent in the first year, about $3.7 million in year two, and then $1.2 million in year three. Hopefully, that adds up to $9 million. We currently spend $1 million plus in our IT and our current CapEx budgets. It's about a million a year. Part of that will be diverted over to cover the CapEx side of this. There were things in there that we won't need. For instance, we have money budgeted for servers, and we're going to the cloud, so we won't have to spend that money. Does that help?

This concludes the question and answer session. I would like to turn the conference back over to Beth Garvey for any closing remarks.

Thank you, Operator. And thanks to all of you for joining our call today. I look forward to reporting our progress to you as we continue to drive forward our three-year goal of generating $500 million in revenues with a 10-plus adjusted EBITDA. Have a great afternoon. Thanks.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.