BGSF, Inc.

Thank you for standing by. This is the conference operator. Welcome to the BG Staffing third 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 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 Terry McInnis, Vice President of Investor Relations at Bibicoff & McInnis. Please go ahead.

Thank you, Ariel. It's my pleasure to welcome you to the BG Staffing Conference Call to discuss Q3 and nine-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 of and Dan Hollenbach, Chief Financial Officer. A question and answer session will follow their prepared remarks. A copy of this morning's news release announcing the company's financial results, as well as the Form 10-Q, are available in the Investor Relations section on BG's website at bgstaffing.com. Our call today is being webcast live and recorded. A replay will be available later today on the company's website, and will remain available for at least 90 days following the call. 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. Additionally, the financial covenants in BG Staffing's credit agreement are based on adjusted EBITDA. These non-GAAP measures are intended to supplement GAAP financial information and should not be considered as a substitute for or 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 and Form 10-Q posted on the company's website. It's now my pleasure to turn the call over to Dan Hollenbach, Chief Financial Officer. Dan?

Dan Hollenbach Thanks, Terri. Good afternoon, everyone. Thank you for joining us today and for your support of BG Staffing. We had a very nice day in the market today. I'd like to start our call by taking a moment to acknowledge all of our talented team members at each of our BG Staffing business units for their hard work and their dedication to our company's continued success and our strong gross profit margins. Their contributions are vitally important, and we are truly 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 division, which operates in apartments via BG Multifamily. and in commercial buildings via BG Talent, our professional division, which includes our finance and accounting, IT and creative groups, and our light industrial division. Today, BG Staffing operates 78 branch offices and 14 onsite 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 reporting period, our company's strategy, how we are executing on our business plan, and the outlook for the current industry conditions. First, our Q3 results. Consolidated revenues for Q3 of 2019 were $79.4 million, up 3% from Q3 2018. Gross profit increased $803,000, or 3.8%, with gross profit percentage of 27.9, up from 27.7 for the third quarter of 2018. This continues a string of quarterly increases in gross profit percent. Net income for Q3 of 19 was 4.2 million versus 5.1 million in Q3 2018. 2018 was positively impacted by the recognition of a $1 million gain on contingent earn out and an effective tax rate at 21.3% versus 21.4% this year. Diluted earnings per share was 41 cents, sorry, versus $0.49 in Q3 2018, while adjusted diluted earnings per share was $0.52 versus $0.43 in 2018. Adjusted EPS was normalized for amortization, a loss on extinguishing the debt, the contingent gain, and the option cancellation tax impact last year. Adjusted EBITDA for the quarter was $8.3 million, or 10.5% of revenues in 2019, up from $8.2 million or 10.7 percent of revenues for 2018. And now for our year-to-date results. Consolidated revenues for the first nine months of 2019 were $222 million, up 3.3 percent from 2018. Gross profit increased $3.6 million or 6.2 percent, with gross profit percentage of 27.7 percent, up from 26.9 percent in 2018. Net income for 2019 was $10.5 million versus $12.7 million in 2018. Again, 2018 was positively impacted by the previous and discussed gain and an effective tax rate of 17.7%. Diluted earnings per share was $1.00 in a penny versus $1.32 in Q3 of 2018, while adjusted diluted earnings per share was $1.26 versus $1.33 in 2018. Adjusted EPS was normalized for the impact as described in the quarterly discussion. Looking at our business segment results, Q3 2019 real estate revenues increased $3 million or 11.1% to $29.5 million with talent contributing $1.4 million of the total. Gross profit increased $1.2 million or 12.1% to $11.3 million Gross profit percentage was 38.2% for 2019, up from 37.9% for the same period in 2018, and our operating income increased 11.4% to $5.5 million. Professional revenues for the quarter were $31.5 million, up $2.3 million, or 8% compared with 2018. Our IT division produced the growth, while our F&A group was down $1.7 million. Gross profit increased 154,000, or 1.9%. Gross profit percentage for the professional segment decreased to 26.2% from 27.8% in the prior year, primarily due to a decrease in placement revenue. Operating income was flat year over year. Light industrial Q3 revenues decreased to $3 million to $18.4 million, or 13.9% versus 2018. Gross profit decreased $571,000 or 17.7%. Light industrial gross profit percentage was 14.4% compared to 15.1% in 2018. Operating income decreased 24.8% to $1.2 million. Sell-in expenses increased approximately $629,000 or 5.4% over 2018, led by continued expansion and growth in our real estate segment up $656,000. Professional segment expenses were up 5.1%, or $238,000, and light industrial segment decreased $175,000, or 11%. G&A expenses increased $481,000, or 3%, due to increased spend in our IT and HR support units, as well as SEC-related costs. G&A expenses were 2.5% of revenues in Q3-19, which compared to 2.1%, for the third quarter of 2018. And now for year-to-date segment results. 2019 real estate revenues increased 7.1 million, or 10.9%, to 73 million, with talent contributing 3.8 million of the total. Gross profit increased 3 million, or 12%. Gross profit percentage was 38.4 for 2019, up from 38% for the same period in 2018. Operating income increased 10.4% to $12.5 million. Professional revenues were 93.4 million, up 3 million, or 3.3%, compared with 2018. Our IT division produced a growth, while F&A was down 1.8 million. Gross profit increased 1.3 million, or 5.3%. IT had growth, while F&A was flat. Year-to-date gross profit percentage for the professional segment increased to 27.1% from 26.6% in the prior year. Operating income decreased 4.7% to 6.2 million. Light industrial revenues decreased 3.1 million to 55.5 million, or 5.2% versus 2018. Gross profit decreased 669,000, or 7.6%. The light industrial gross profit percentage was 14.6% compared with 15% in 2018. Operating income decreased 11% to $3.5 million. Now turning to selling expenses, which increased 3.1 million or 9.4% over 2018, with real estate segment up 1.8 million or 13.1%, and the professional segment up 1.4 million or 10%. Light industrial segment expenses decreased 3.6%. G&A expenses increased $851,000, or 17.9%, due to increased spend, as previously discussed in the quarterly. G&A expenses were 2.5% of revenues in 2019, which compares with 2.2% in 2018. Our effective income tax rate was 23.3% for 2019, compared with 17.7% last year. Our expected rate going forward will approximate 25% due to changes in the mix of business in the states we provide services. Adjusted EBITDA for the first nine months of 2019 was $20.3 million, or 9.2% of revenues, compared with $20.7 million, or 9.6% of revenues, in 2018. Cash provided from operations increased $2.6 million to $14 million. We continue to generate robust operating cash flows as a result of our strong balance sheet, effective working capital, and solid earnings, allowing us to reduce debt, invest in technology, while at the same time returning capital to our shareholders in the form of a regular quarterly dividend, currently set at $30 per share, with an approximate yield around 6%. BG Staffing has now paid a dividend for 20 consecutive quarters. Our current debt to adjusted trailing 12-month EBITDA is a very low 0.8. I'd like to share a few observations about the overall economy before I turn the call over to Beth. The Commerce Department just reported that in Q3, U.S. GDP grew at 1.9% annualized rate, beating expectations of 1.6%. While there has been a drop in business confidence due to uncertainty, macroeconomic advisors were quoted in the New York Times last week saying, quote, The economy is not slowing into a recession, end quote. There continues to be expansion in hiring and consumer spending, and we are still seeing strong demand and have more orders than we have talent to fill. Further, this month's job report was very positive. I'm pleased to report that our transition to BMO Harris Bank for our treasury services is progressing smoothly. This completes my financial review, and now I'll turn the call over to Beth. Beth?

Thank you, Dan. Good afternoon, everyone, and thank you for joining us today. As you can imagine, I'm very pleased with our solid operating results and overall performance and continue to be optimistic about the runway in front of us. I'll begin my comments by noting at the end of Q3 marked one year since I stepped into my expanded role as President and CEO. When I look back over the last 12 months, I'm very proud of my team's accomplishments, which include early success in initiatives identified in our strategic planning resulting in increased gross margin percentages, the development and launch of our technology roadmap that will have a positive impact on our internal and external stakeholders, our overall year-over-year organic growth, our expansion into five new markets in real estate, as well as our footprint in California in our professional and real estate divisions. And lastly, our continued success in our cross-sell efforts across the company. I'd like to talk about the progress we're making in our three 2019 initiatives we launched late in the first quarter. Our entry into the California market, the technology enhancement, and building a company culture supporting our corporate citizenship efforts. I'll start with the opportunity that California represents for us. Since we opened our first BG Multifamily sales office in California late in the first quarter, I am pleased to say that to date we have met our targeted plans in this new market and are very satisfied with the progress. You may recall that meaningful growth typically starts to come from new multifamily offices at the end of year one and carries into years two and three. It's interesting to note that the national average for new housing permits issued for multifamily homes from 2006 to 2018 is 35%. In three California cities, Los Angeles, San Francisco, and San Diego, the average number of permits in the same period of time was 64.5%. We believe this information supports our decision that the expansion into California will continue to provide opportunities for revenue growth and expansion into the state. To say I'm enthusiastic about our ongoing technology enhancement initiative is an understatement. We have nine of our 23 projects in production, with many of those client and talent-facing initiatives going live in early Q1 of 2020. Our decision to make this investment is important for many reasons, as it transforms our performance, increases value proposition, and lowers our cost to serve. In addition, the efficiencies we will gain will drive revenue, boost performance, and increase our talent and client loyalty. In a business environment where technology continues to transform companies, I believe this investment will support the company now and build the platform needed to continue to innovate in the future, positioning us to be for continued market share expansion. However, our focus remains clear. We are in the people business. Technology certainly is a vital enhancement of that process. It is evident to us that speed mixed with personal interaction from our teams results in the most engaged talent resource and enhanced client experience. Company culture and its role in being socially responsible corporate citizens also remains a focus. We strive to continue to build a people-centric culture with a moral compass that attracts the best in the industry. This focus is derived from the belief that a job starts a ripple effect that transforms lives, organizations, and communities that we have the honor to serve. On the M&A front, our pipeline remains very full and active. As a disciplined buyer, we are always looking for acquisitions that are accretive to both EBITDA and valuation as well as provide an opportunity to expand our footprint into new geographic market or provide a new or complementary skill set that helps to complete our suite of talent offerings. Moving on to our industry outlook for the remainder of this year, which is always subject to normal seasonal patterns, we remain positive, as both the present economy and labor markets remain strong for staffing overall. The American Staffing Association recently released its findings that since the Great Depression, staffing industry growth up 3.8% has consistently exceeded GDP growth up 2.2%. My continued confidence about what we see for the remainder of this year and next year is supported by our robust third quarter operating results and our vision for our company in 2020 and beyond. Again, I'm very proud of our team and very pleased that we reported 27.9% consolidated quarterly gross profit, our 10th consecutive quarter with consolidated gross profit percentages in excess of 25%, which, by the way, is outstanding for our industry. I feel very good about the positive momentum in the operations side of our business. We continue to pursue our resolve to build value and grow revenue as we realize the benefits from cross-selling revenues, growth in our new California market, potential new acquisition partners, and the many lucrative benefits from our technology initiative. And now I'll turn the call back over to the operator for question and answers.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. Once again, to join the question queue, please press star, then one now. Our first question comes from Jeff Martin of Roth Capital Partners.

Thanks. Good afternoon, Beth and Dan. How are you? Hi, Jeff. Beth, I was wondering if you could get – I'm glad to hear it. I was wondering if you could give kind of an update by segment in terms of your growth outlook perhaps for the next 12 months or so, if there's specific contracts coming on board, if there's, you know, shifts in seasonality or any other factors that would be helpful for those of us that are trying to model out the growth for each of the segments going forward.

Sure. I would say that we will continue to have, you know, kind of the historical growth that we've had in the real estate division. We've identified our targets for next year, and we've already started to prep work on the months that we would want to get those new operations open. So I would say that, you know, they are going to be steady and strong as they always have been. Light Industrial is not having their best year this year. However, they had a stellar year last year, but that's kind of what Light Industrial does. And so they kind of flatline. We expect them to stay in their 1% to 2% growth range, which is kind of what the industry expects of them overall. And then in our professional division, the technology division is just hot right now. They have got so many wonderful cross-sell initiatives going, new technology drives. The team is really expanding and leading the professional side with the higher-end type of business. So going in and asking people if they're doing an SAP or a Workday And then following that with the cross-sell, because once you do an implementation in software, it usually affects reporting, which usually affects finance. So they have gotten in their groove right now on how to make sure that they are continuing to get the cross-sell going. But it is amazing to see how technology is really, really growing in our divisions right now. They're really having a great year, and I don't see that stopping anytime soon.

Okay, great. And then on the M&A side, are you focused primarily on professional still with that or are there other areas you're looking at?

We still are focused on professional. You know, if we had something come up in California that maybe was in the real estate sector, we would consider it. But for the most part, it's easier for us to open up a sales office in those markets than it is to buy something there. So I would say all of our efforts are in the professional side, and we really don't focus on the light industrial side as far as M&A activity.

Okay. And then on the real estate side, I think your target was to open five new offices this year, which you've done. Are there any above and beyond that that could come on before the end of the year, and what's your plan for 2020? Okay.

We don't have any plans between now and the end of the year. And Jeff, I think I know the number, but I don't want to be quoted on it for offices for next year. But it will be a minimum of five.

Okay. Fair enough. And then last question is on the California market. Sounds like you're off to a good start there. What should we expect maybe in 2020 or if it's worthwhile looking out beyond that in terms of its contribution to the overall growth of BG staffing?

I still think we're too early, Jeff. We're only in one location. We're looking at sort of some growth patterns right now. But I think we'll have a little better answer when we talk to you in the March, April, whenever we talk to you again. Okay, great. Well, thanks for taking my question. Yeah, it's too early. Sounds good, Dan. Thanks.

Our next question comes from Howard Halpern of Tegledge Brothers.

Congratulations, guys. Thanks, Howard.

Thanks, Howard.

In the professional services, I mean, you talked about how the technology, you know, IT division is sort of red hot now. Is that going to help drive the gross margin going forward?

It has up to this point in the professional division. We have seen higher margin business than that. And as there's a shortage, as there continues to be a shortage of people out there, you know, the talent that we are placing is actually driving a lot of that, especially some of these technologies that are really being implemented, such as a Workday or there's a new technology called OneStream. Those resources are in very big demand right now. So we've got resources now on our side who are just, you know, they're like the progressive pricing tool, name your own price. So they're doing great, and they're just saying, if you want me, you've got to pay for me.

Okay. And you seem very happy, and you expect even more cross-selling opportunities to come throughout the whole company?

I'm excited. I'm very happy with the way that we have done our cross-sell efforts. In the month of August, we hired a strategic account manager, and all he is doing right now is basically targeting our bigger customers who potentially have businesses across the U.S. where we're only in one of their locations. entire job, and we've put three of our key people up underneath him, is to be able to go in and identify strategic accounts and growth opportunities across the professional division for Crossbell. And he's already had some, you know, right out of the gate has had some pretty good activity and some great meetings out of it. So we're feeling really good about that.

Okay. And one last one about, I guess, BD Talents. Is it still a little bit early in the process, and are you still seeing pretty long sales cycles to get into where you want to be?

We are seeing a longer sales cycle, and one of the things that we find in that is that in each city that we go to, it's not like they have a universal national account MSA that we can sign. So if you go into like a CBRE, it's not like we can go to one place and have the door open for us in all their markets like we can in multifamily. So they're finding that they're having to go in and negotiate contracts in each market that we go to, which slows things down a bit. I will give Dan and his team kudos on that because now that they've been looking at those and we understand that those are coming, they really are pushing those out quickly and making sure that we have redlined and tried to get them moving as quickly as possible. It really is a different sale, and it's more of a hybrid-type growth between a professional and multifamily-type style. And they're still navigating through the waters on that, but I still think that it's a very viable growth platform for us.

Okay. Well, keep up the good work, guys. Thank you. Thank you.

Our next question comes from Louis Moser of Maffax Investors.

Yeah, hi, good job. Excellent job. I know I haven't had any stock in the company until today in the digital earnings report. Thank you. I was just wondering, you're welcome, where your emphasis is going to be, where you're going to spend the most money, in which division? You mentioned technical as being outstanding. Is that where you're going to put more emphasis in your efforts and dollars versus the other couple of divisions? And if so, how successful do you think you can be in that area?

Yeah. So I think there's two sides of that. I think as Beth previously discussed, our M&A dollars if you will are going to be focused in the professional world which would be i.t and finance and accounting our expansion dollar so opening new offices will be in our real estate division so um the company doesn't have that much visibility because of the low volume it does every day however

I noticed because I follow your type of size companies over the years that if the word gets out that you people are doing as well as you seem to be, you get much more attention to your stocks. Do you do conferences and attend various venues that enable you to promote the company and do you do anything in terms of adding to your analyst roster?

We do. We've probably done 10 or 12 conferences this year, and that with Terry, what do you think, a couple hundred investors?

It's been a busy year.

So, yes, we do. We do do that. We're on the road often. We've done a couple – non-deal roadshows as well to introduce our stock to some new investors. So we are working on it.

One of the interesting things I find about the company is the level of dividend payment, which in today's market seems to be very difficult to obtain. So I would think that with the proper publicity, you could get... many more new shareholders. So that's why I asked you that question as to what kind of exposure you're trying to promote for the company. And that's it. Thank you.

We appreciate the input.

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, Ariel. And thanks to all of you for joining our call today. We've made significant progress this year, and I am enthusiastically waiting for a positive outcome to see what the next year holds for us. We strive each and every day to deliver returns to our shareholders and move forward with our vision to become a respected national leader in staffing. We look forward to talking to you guys next quarter. Thanks again for joining us.

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