BGSF, Inc.

Thank you for standing by. This is the conference operator. Welcome to the BG Staffing Q2 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 then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Terri McInnis, Vice President of Investor Relations with Bibigoff and McInnis. Please go ahead.

Thank you, Gaylene. It's my pleasure to welcome you to the BG Staffing Conference Call to discuss Q2 and six-month 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 Q2 and six-month 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, and BG 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 calculated 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. It's now my pleasure to turn the call over to Dan Hollenbach, BG Staffing's Chief Financial Officer. Dan?

Thanks, Terri, and good afternoon to everyone. I'm pleased to welcome you to our call today. I would like to start by again taking a moment to acknowledge all our team members and 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 truly proud of the job they continue to do for us. BG Staffing provides contingent staffing services within three industry segments. Our real estate division, which operates in apartments, communities via BG's multifamily, and in commercial buildings via BG Talent, our professional division, which includes our finance and accounting, IT and creative groups, and our third division, light industrial. Today, BG Staffing operates 79 branch offices and 15 on-site locations, providing services in 42 states and the District of Columbia. After I complete my review of our financial results, I'll turn the call over to Beth for her comments on the quarter and six-month period just ended, on our company's strategy, how we are executing on our business plan, and the outlook on current industry conditions. First are Q2 results. Consolidated revenues for Q2 2019 were $73.9 million, up 4.1% from Q2 2018. Gross profit increased $1.7 million, or 8.7%, with gross profit percentage of 28.2%, up from 27.1% for the second quarter of 2018. The increase in gross profit percent was led by our F&A division of 8.9 percent over 2018. This continues a string of quarterly increases in gross profit percent. Net income for Q2 2019 was $3.8 million versus $5.2 million in Q2 2018. 2018 was impacted positively by the recognition of a $1.1 million gain on contingent earn-out, and an effective tax rate of 11.4% due to the favorable tax treatment of the option buyback agreement. Diluted earnings per share were $0.37 versus $0.54 in 2018, while adjusted diluted earnings per share was $0.44 versus $0.46 in 2018. Adjusted EPS was normalized for amortization, the contingent gain, and the option cancellation tax impact. Now for your debate results. Consolidated revenues for the first six months of 2019 were 142.6 million, up 3.5 percent from 2018. Gross profit increased 2.8 million, or 7.7 percent, with gross profit percentage of 27.6, up from 26.5 last year. The increase in gross profit percent was led by our F&A division, up 6.8 percent over 2018. Net income for 2019 was $6.3 million versus $7.6 million in 2018. Again, year-to-date results were impacted in 2018 positively by the previously discussed gain and effective tax rate last year of 15.2%. Diluted earnings per share was $0.61 versus $0.82 in Q2 2018, while adjusted diluted earnings per share was $0.75 versus $0.83 in 2018. Adjusted EPS was normalized for the impact as described in the quarterly numbers. Looking at our segment results, Q2 2019 real estate revenues, which continue to be from organic growth, increased 3.1 million, or 14.6%, to 24.4 million, with talent contributing 1.3 million of the total. Gross profit increased 1.3 million, or 15.6%, to 9.4 million, Gross profit percentage was 38.5 for 2019, up from 38.1 for the same period in 2018. Operating income increased 10.8% to $4.1 million. Multifamily has opened seven new markets in the last three quarters. Today, Multifamily has reached a milestone and operates 50 offices, and Talent has six offices, together serving 29 states. Professional revenues for the quarter were $31.1 million, up $1.2 million, or 3.9%, compared with 2018. Our IT division produced the growth while F&A was flat. Gross profit increased $713,000, or 8.8%. Although F&A revenues were flat, GP dollars increased 20.5%. Gross profit percentage for the professional segment increased from 28.1% to 28.1%. from 26.8 percent in the prior year. Operating income increased 5.9 percent to 2.2 million. Light industrial Q2 revenues decreased 1.4 million to 18.1 million or 7 percent versus 2018. Gross profit decreased 308,000 or 10.3 percent. Light industrial gross profit percentage was 14.8 compared with 15.4 percent in 2018. and operating income decreased 14.6% to $1.1 million. Our LI business slowed in Q2 due to the decline in use from three of our largest client partners. One lost business from their major customer, resulting in an initial 63% reduction in its staffing requirements. It's currently running at 62% of the previous volume. Two others brought in other suppliers to assist in their needs as a result of the tight labor market. and this eroded our share of those businesses. As a result, we expect 2019 light industrial revenues to be down approximately 10% year over year. Selling expenses increased approximately $1.4 million, or 12.3% over 2018, led by continued expansion in the real estate segment of $880,000. Professional segment expenses increased $577,000, or 11.8%, primarily a result of compensation adjustments in our commission plans driving the higher margin business. Light industrial decreased to $80,000, or 5%. G&A expenses increased $208,000, or 14%, due to increased spend in our IT and human resources support units, as well as SEC-related costs. G&A expenses were 2.3% of revenues in Q2 2019, which compares to 2.1%, for the second quarter of 2018. Adjusted EBITDA for the quarter was $6.8 million or 9.3% of revenues in 2019 compared with $7 million or 9.8% of revenues for 2018. And now for year-to-date segment results. 2019 real estate revenues increased $4.3 million or 10.8% to $43.6 million with talent contributing $2.5 million in total. Gross profit increased $1.8 million or 11.8%. Gross profit percentage was 38.5, up from 38.1 for the same period in 2018. Operating income increased 9.7% to $6.9 million. Professional revenues for the first six months were $61.9 million, up $692,000 or 1.1% compared with 2018. Our IT division produced the growth while F&A was flat. Gross profit increased 1.1 million, or 7%. Both IT and F&A had increases in gross profit dollars, with F&A growing 18%. Year-to-date gross profit percentage for the professional segment increased to 27.6% from 26% in the prior year. Operating income decreased 7.1% to 4 million. Light industrial revenues decreased 99,000 to 37.1 million, or 0.3% versus 2018. Gross profit decreased 98,000, or 1.7%. Light industrial gross profit percentage was 14.7 compared with 14.9 in 2018. Operating income was flat at 2.3 million. Turning now to selling expenses, which increased approximately 2.5 million, or 11.6% over 2018, With the real estate segment up $1.1 million, or 13.1%, and the professional segment up $1.4 million, or 14.9%, light industrial segment expenses were flat for the period. G&A expenses increased $481,000, or 15.5%, due to increased spend as previously discussed. G&A expenses were 2.5% of revenues in 2019, which compares to 2.3% in 2018. Our effective income tax rate was 22.8% for 2019, compared with 15.2% last year. Adjusted EBITDA for the first six months of 2019 was 12 million, or 8.4% of revenues, compared with 12.4 million, or 9% of revenues in 2018. We believe that adjusted EBITDA and earnings per share are useful performance measures and are used by us to facilitate 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 our 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 and earnings per share to net income are available in our latest quarterly report on Form 10-Q and in our earnings release, both of which are available on our website. Cash provided from operations more than doubled over 2018 to $9.2 million. 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 and invest in technology while at the same time keep returning capital to our shareholders in the form of regular quarterly dividends, currently set at $0.30 per share, with an approximate yield of 7.4%. BG Staffing has now paid a dividend for 19 consecutive quarters. And our current debt to adjusted trailing 12-month EBITDA is 0.7. I am pleased to report that we recently improved our liquidity and capital resources by refinancing our senior lending facility with a new group led by BMO Harris Bank, with Citibank and Independent Bank rounding out the syndicate. We are well positioned for growth with a $35 million revolver, $30 million of committed term loan, and a $40 million accordion. Additionally, we were able to reduce both our borrowing costs and treasury fees. We are excited to move forward with our new partners supporting our growth plan. Before I turn the call over to Beth, I'd like to acknowledge a few of our industry awards and achievements from the second quarter. Drew Perry, president of our light industrial division, was named one of the 40 under 40 by staffing industry analysts. The Dallas Business Journal included BC Staffing and its middle market 50 fastest growing companies. Our company was ranked number 103 in the 2019 list of Dallas-Fort Worth's 150 largest public companies. And finally, Beth Garvey has been named a Texas Trailblazer honoree by the nonprofit organization Family Place as one of only five DFW female CEOs of public companies. And now that I'm done bragging, I'd like to turn the call over to Beth.

Thank you, Dan. Good afternoon, everyone. I thank you for joining our discussion. I'm pleased with our operating results and happy to talk today in more detail about how well we are performing and the reasons why I'm thrilled about the runway in front of us. The outlook for our industry for the remainder of 2019, which is, of course, subject to normal seasonal patterns, remains optimistic, and both the present economy and labor markets remain positive for staffing overall. Our solid second quarter operating results support my continued confidence about the remainder of the year. I'm pleased to report the strong customer demand continues to drive our success, and is led once again by solid operational performance by our extremely capable teams in the field. I'm so very proud of them and glad to report 28.2% consolidated quarterly gross profit, our ninth consecutive quarter with consolidated gross profit percentages in excess of 25%, which is outstanding for our industry. We believe that our historic strong and steady revenue growth continues to benefit from our laser focus on the strategic priority of growing returns. We keep close tabs on our key performance indicators, which were our bill rates, our pay rates, our billed hours, and gross profit, always looking for continuous improvement on efficiencies to drive sustained value creation. We also pay close attention to our gross margin strengths with an emphasis on operational discipline, organic growth initiatives, and selective value-creating M&A. On the M&A front, we are known as a disciplined acquirer, and our pipeline remains very full and active. Literally every week, we evaluate opportunities for businesses that will add pieces to our client solution matrix. We're always looking for acquisitions that are accretive in both EBITDA and valuation. The most attractive targets we see are primarily in professional segments. As we've concluded, it's better to build growth than to buy growth in our real estate division. We're looking for acquisitions that expand our footprint into new geographic markets and or provide a new or complementary skill set that helps complete our talent offering puzzle. Our goal is for acquisitions to strengthen our cross-sell efforts across the country. The team is properly incented and doing a terrific job with cross-selling. I'm delighted to say that they're charged up and building traction. In 2017, cross-sells were zero. In 2019, 6% of our organic growth has come from cross-sells. Ongoing sales blips and contests are driving the momentum. On the operations side of the business, I feel very good about the early progress we've made in our three 2019 initiatives we launched in Q1. They are entry into the California market, technology enhancement, and culture. I'm excited to talk about the California opportunity. You may recall we prepared for entry into that market with the hire of our new VP of HR with experience in California to manage compliance as well as other responsibilities. Late in Q1, we opened our sales office for multifamily, and in Q2, I'm pleased to tell you that we are on target for that market. California, by the way, is the largest U.S. apartment market with 2.8 million units. For reference, Texas has approximately 2 million apartment units. According to the Wall Street Journal, demand for rental apartments reached a five-year high this spring, increasing 11% in Q2 year over year. Continuing our early momentum and expansion into California, our IT division has also secured consulting engagements with discussions underway for additional roles in Q3. We're looking forward to California making a more meaningful revenue contribution over the next 12 to 24 months. Now I'd like to update you on our technology enhancement initiatives led by our new CIO, Chris Loop, who is methodically implementing our 23 project technology roadmap. That roadmap is cloud-based and focused in three areas, reduced cycle times to fill orders and onboard new talent, improved operational efficiencies through automation, and scalability and security leveraging cloud solutions. Our investment in this vital initiative will transform our performance and is expected to increase our value proposition, lower our cost to serve, improving several key areas, including leveraging new technologies for efficiency, drive incremental revenue, and boost overall performance and increase talent and client loyalty. Chris and his team are doing an amazing job with multiple projects already underway. We are expecting to start seeing values later part of 2019 and especially in 2020 and beyond. We are building an integration layer with other enhancements being plug and play, providing adaptability for future changes as we invest in innovation to support the company now and where we will be five years from now and beyond. Our three-year tech program is budgeted for approximately $9 million. Approximately 45% of that will be CapEx and 55% will be OpEx. We are benchmarking a goal to achieve 10% of operating efficiencies. We think this is an achievable goal as many of our larger competitors have already begun technology initiatives with one reporting recruiting efficiencies of 11%. These initiatives will drive improved productivity and strengthen our delivery system from top to bottom. We reiterate prior guidance that the cost of implementing these efficiencies will also impact comparative earnings over the next two years. I recognize that these exciting and important technology tools will help our company grow and stay competitive, and I promise you that we won't lose sight of the fact that we still are in the people business. Technology certainly is a vital enhancement of that process. The feedback we obtained from our candidates and client partner surveys made it clear that speed mixed with personal interaction from our teams resulted in the most engaged talent resource and enhanced client experience. Company culture is a subject that's close to my heart, and I want you to know that it's also a big priority for me as well as my team. We look to attract the best in the industry and know from experience that a positive culture supports a work-life balance and invigorates and engages the team to help build a robust organization, one that we are all very proud to be associated with. We like to think that our competitive edge is our people-centric culture. That foundation infuses all of our programs and initiatives and encourages prospective candidates to want to choose us and our culture. If you haven't already done so, I invite you to visit our active social outlet media of LinkedIn, Facebook, Twitter, Instagram, you name it. We seem to be there. And our marketing team does a very good job in making sure that we are very visible. Last quarter, I talked about the recent completion of our strategic plan. It was an incredible experience. We interviewed and learned so much from our client partners, our field talent, and our team associates. One of the many great outcomes was that we identified areas of growth for our teams through financial segmentation of the business. We're now using divisional scorecards with roadmaps to the overall company goals. That allows our entire team to see a clear path for the future. I can tell you that this invaluable feedback and the roadmap have reinvigorated us all. Our passion is to enrich the lives of those we serve by connecting talent and opportunity so that they can fulfill their life's mission. I'm very proud of the role we play towards those goals. We contributed to livelihoods of the temporary and contract workers for whom we currently issue an average of 6,800 weekly paychecks, paying close to 30,000 people annually. Not only are we in the people business, but we are in the purpose business. After all, it all begins with a job. We're going to keep on looking to identify areas across all three of our segments in which we can provide added staffing services, and we will continue to invest in incremental growth activities. I'm looking forward to needle-moving initiatives from cross-selling revenues, growing the business in our new California market, finding new acquisition partners, and reaping so many exciting benefits from our technology initiative, all as we continue to resolve to build value and grow revenues. I'll now turn the call back over to the operator for the Q&A section.

Thank you. We'll now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You'll 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 then 2. We'll pause for a moment as callers join the queue. Our first question is from Beth Martin with Roth Capital. Please go ahead.

Hi, this is Sarah Schuster on behalf of Jeff Martin from Roth. Beth, congratulations on your award. And hello, Dan. Thank you. In terms of your three-year strategic plan, while it's still relatively early in the first year, are you seeing any immediate efficiency gains, particularly in terms of automation and efficiency gains in recruiter resources? And are there specific segments, professional, real estate, and light industrial, that are benefiting or stand to benefit more than others?

It's still early right now, so we have not started to see some of the rewards that we plan to get out of this. If you recall, in Q1 was when we put together the plan, and we are just now making decisions about the partners that we're going to be partnering with and getting staffed up to make sure that the initiatives are rolled out the way we need them to be rolled out. As far as divisions who we think is going to stand and reap the most benefit, I believe the real estate division is going to – It's going to be life-changing for that division. I think they're going to really see the best bang for the buck from what we get out of that, which is great since it is our fastest-growing and largest gross margin division.

Thank you. There was a small but noticeable tick-up in permanent placement in the quarter, at least versus the second quarter of 2018 in professionals. Is that something that BG is more focused on, or is that just part of the variability of PERM over the course of the year?

A lot of it has to do with where we are right now. The more companies are starting to offer PERM positions over a temporary position just because of the shortage of talent. So people are moving into going in and realizing that people want to actually have a job. So we're seeing a tick up in that area. It's usually in our F&I group and not necessarily in our IT group, but that's usually where we see the most activity in that area.

Thank you. The real estate segment had a handful of markets with somewhat recent sales hires and certain offices. How are those offices performing and what is your outlook for the real estate segment from both a commercial and a multifamily point of view?

We are all fully staffed now. I believe our growth in the first quarter was right at 6%, right? And in Q2, we were 14, 15 years. So we're back up to where we actually live in that area. So we're back up to the levels that we normally experience. I think we can continue to see double-digit growth out of that group in both the real estate side and as we're getting more traction under the commercial side.

Thank you. And then one final question. Can you please provide an update on the new market initiative in California in terms of staffing up? I know you mentioned it a little bit on the call, but client wins and growth expectations for that market over maybe the next 12 to 24 months?

We are on a real estate side. We are running from a FTE standpoint exactly where they thought they'd be three months into it, four months into it. So we're very pleased with that activity. As for the growth pattern, we don't talk about that. Try not to give any guidance, particularly at that level. But as you've been following us for years, generally the growth starts to come out of those offices at the end of year one into year two and year three. And then we expect at some point to expand into that, to expand the California market.

Okay, thank you very much.

Once again, if you have a question, please press star, then 1. Our next question is from Howard Halpern with Taglich Brothers. Please go ahead.

Congratulations on a nice, solid quarter, guys.

Thank you, Howard.

I think this goes back to a little bit from last quarter, but how has the progress been on the different cross-selling opportunities, especially within the professional segments?

You know, I think our cross-sell initiatives are one of the most exciting things we have going in the professional brands right now. They really are starting to break down all the silos. They all know what other people do. They're having meetings every day now where they're talking about different services in different areas that we can help our customers grow. The last, I thought it was really pretty exciting, the last sales list they did a few weeks ago, the professional brands actually sold all BG services, including line industrial and real estate. So everybody's getting on board now, and the momentum just keeps going. I mean, like I said, they are having major meetings, you know, every day in conversations with our customers. It's pretty exciting.

Okay. And in terms of the commercial real estate, I guess you had talked about the sales cycle prior. That's still about the same. You're still sort of in the middle of that process of gaining significant traction, I guess, in that business? Yes.

Correct. And also in that division, to the earlier question, we see that division really high in perm as well. These are engineered people, people that are higher quality. So they have a lot of perm in their area as well. So the sales cycle is slower than what it is in multifamily. More people want to take a look at a resume. They want to have some time to look at it. So They're adjusting to that, and again, we had to teach people how to use this in the multifamily side, and we're having to teach people, since we're kind of inventing this commercial strategy, we're trying to teach people how to use this in that area as well. So they're doing a really good job. They moved into their first standalone office. They got big enough and strong enough that they moved out of the multifamily office, so they moved last month into their own operational, like I guess what you would call it, their headquarters for their little division. Right. And their hubs are starting to grow. They'll have everybody supporting everybody across the U.S. located in Houston.

Okay. And one final one from me. With the new credit agreement in place, you know, what would you anticipate – the quarterly interest expense to be approximately in the second half, excluding, I guess, the one-time charge.

Yeah, so we'll have a one-time charge just north of $500,000 in third quarter for the old existing fees. But we've got about 150 basis point reduction in our overall cost. It's now a structured thing based on leverage. And then we expect probably beginning in the fourth quarter to start benefiting on the service fees. And we expect that number to probably decrease by 30% to 40%. But we won't have the whole transition to Treasury done until early September. Okay.

And the pay down of debt will still be, you know, slow and steady as you're going forward? Slow and steady absent an acquisition. So, yeah. Okay. Okay, guys. Keep up the great work.

Thank you so much. There are no further questions at this time. I'd 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 hope you can tell that we take great pride in our people and our purpose. Every day we try to drive and make a positive impact and deliver appealing returns to our shareholders. Our vision is to become a national leader in staffing and impact our communities by unleashing the power of connecting people to opportunities and transforming lives. I'm looking forward to reporting more progress to you next quarter as we continue to drive towards our three-year goals of generating $500 million in revenue and 10-plus adjusted EBITDA. Have a terrific rest of the day.

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