BGSF, Inc.

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

Thank you, Savas. It's my pleasure to welcome you to the BG Staffing Conference Call to discuss Q4 and year-end 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-K, 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 BGSF 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 BGSF 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 evaluations 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 BGSF's credit agreement are based on adjusted EBITDA. 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 a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please see today's earnings release on Form 10-K posted on the company's website. It's now my pleasure to turn the call over to Dan Hollenbach, Chief Financial Officer. Dan?

Thanks, Terri, and good afternoon to everyone. We appreciate your interest in BGSF. First, I'd like to address the recent stock market volatility and the decline in our stock price. As we're all painfully aware, the markets are being materially impacted by both the coronavirus pandemic and the oil production pricing and production issues. We do track our stock alongside many of our peers, and unfortunately, we have all been impacted negatively by the decline in our sector over the past three months. Despite strong job market growth over the last three months, we are diligently vigilant. I can't say that word. We are really working on monitoring the uncertainty in the market around the impact and the duration of the coronavirus outbreak. Our fiscal 2019 results do not include any material impact from the virus. The impact of the outbreak on the labor market will depend, among other things, on the length of time it disrupts economic activity. The effect over the next few months may be reflected in a drop in hours worked and reduced hiring. However, if the disruption continues longer, then the impacted companies are likely to reduce their workforce, including layoffs, especially those unable to work remotely. We've outlined these risks and uncertainties in our annual report on Form 10-K, filed earlier today. It's simply too early to have visibility about the potential impact from disruptions to the labor market and business operations. No determination of the impact on our financial condition or results of operations can be made at this time. We continue to be in close contact with our team members client partners, and field talent while watchfully monitoring this fluid situation. Beth will chat a little bit more about this later. We are pleased with the growth of BGSF's top-line numbers and our initiative started for 2019. And I would like to start by taking a moment to acknowledge all of our team members at each of our BGSF 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. We welcome our new team members at LJ Kushner and EdgeRock Technology Partners and are confident they will add to our growth story in 2020 and beyond. I'd also like to take a minute to congratulate Beth Garvey on the four awards she received since the end of Q3. Beth is recognized as the leader in the Staffing Industry Analysts, or SIAs, Global Power 150 Women in Staffing, also in DCEO Magazine's Dallas 500 Most Powerful Business Leaders in Dallas, Fort Worth, and was one of the Women of the Year honored by the Family Place Texas Trailblazer Award. Most recently, we are proud that Beth was also named to the SIA 2020 Staffing 100 list. Great work, Beth. We here at BGF appreciate what an outstanding job Beth does for us, and it's great to see her acknowledged outside of our company. As a reminder, BGF operates three segments, currently through 83 offices, 15 on-site locations, servicing 43 states and the District of Columbia. Our real estate segment opened seven new offices in 2019. Beth will discuss our plans for 2020 in her remarks. I will review our financial results for the fourth quarter and fiscal year 2019 before turning the call over to Beth for her comments on the reporting periods just ended, in addition to our company's strategy and execution, outlook on the current industry conditions, and our plans for 2020 and beyond. A more complete discussion of our 2019 financial condition and results of operations, including segment information, is included in our annual report on Form 10-K. And now for the numbers. Revenues for Q4 2019 were $72.3 million, up 0.4%, just under 0.5% from Q4 2018, while gross profit increased to half a million, up 2.6%. was up from 26% for the fourth quarter of 18. Both our real estate and professional segments had growth, led by our real estate group at 11.3%. Net income for Q4 19 was 2.7 million, or 26 cents per devoted share, compared with net income of 4.8 million, or 47 cents per devoted share for Q4 2018. Q4 19 included transaction fees and IT roadmap expenses $655,000 greater than last year. Additionally, Q4 2018 was bolstered by a $1.6 million gain on contingent consideration. Finally, our tax rate in 2019 was 28.8%, while 18.9% in 2018. Adjusted EBITDA for Q4 2019 was $6.3 million, slightly lower than $6.4 million in 2018. Adjusted EPS in 2019 decreased to $0.37 versus $0.41 in 2018, both impacted by the decrease in the light industrial segment contribution for the quarter versus last year. Turning to year-end results, revenues for 2019 were $294.3 million, an increase of $7.5 million, or 2.6%, compared with 2018. Both our real estate and professional segments had growth, led by real estate at 11%. For the year, gross profit increased 4.1 million or 5.3% to 80.7 million. And gross profit percentage increased to 27.4 compared with 26.7 last year. We reported net income of 13.2 million or $1.28 per downloaded share for 2019 compared with net income of 17.5 million or 179 per downloaded share in 18. 19 included transaction fees and IT roadmap expenses $647,000 greater than last year. Additionally, 2018 was bolstered by $3.8 million in gains on contingent consideration and an effective tax rate of 18% versus 24.5% for 2019. Our two acquisitions had combined revenues of approximately $43 million in 2019, none of which is included in our 2019 results. Adjusted EBITDA for the year was $26.6 million, or 9% of revenues, in 2019, compared with $27.1 million, or 9.4% of revenues, in 2018. Adjusted EPS in 2019 decreased to $167 from $179 in 2018, primarily due to the decrease in the light industrial contribution for the year versus last year, as well as increases in our home office support team related to HR and IT headcount that we added this year. Our SG&A expenses increased approximately 5.1 million or 10% over 2018 due primarily to our growth in real estate segment, which comprised 2.3 million of the increase, or 13%, consistent with the revenue growth and office expansion in that segment. We also had 721,000 related to the IT roadmap initiative started this year. A breakout of our SG&A by major group is included in the management discussion section of our annual report on Form 10-K. Our effective income tax rate was 24.5% for 2019, compared with 18% for 2018. Contributing to the lower tax rate in 18 was the deduction attributable to the cancellation of outstanding stock options held by our chairman in connection with the company's successful public stock offering in May of 18. We currently estimate a 24.5% effective rate for 2020. 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 operating debt 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, an approximate yield of 11% as of today's close. We have now paid a quarterly dividend for 21 consecutive quarters. Our debt to pro forma adjusted trailing 12-month EBITDA at the end of 2019 was slightly over 1 at 1.02. Adjusted for the EDGROC acquisition, debt to pro forma adjusted EBITDA trailing 12-month EBITDA, sorry, at year-end was 1.53. Explanations of our use and reconciliations of adjusted EBITDA net income as well as adjusted EPS are available in our latest annual report on Form 10-K and on our earnings release, both of which are available on our website. This completes my financial review, and I now turn the call over to Beth.

Thanks, Dan. Good afternoon, everyone. Despite the volatility in today's choppy stock market, I'm happy you're joining us for our review in the 2019 operating results and our overall performance. I'm pleased to note that in 2019, organic revenue growth continued as we grew gross profit and successfully expanded our cross-sell efforts. I continue to be incredibly proud of the team's hard work, including the continued implementation of our technology roadmap and our successful market expansion with the addition of seven new offices in 2019, which helped to drive our success. I'd like to update you on the progress of our three 2019 initiatives, which we discussed in last quarter's call. As a reminder, they are the entry into the California market, our technology enhancement, and building a company culture supporting our overall values and corporate citizenship efforts. We opened our first BG Multifamily sales office in California late in Q1, and I'm happy to report that the business is doing well and continues to meet our targeted plan. Our 2020 goal is to open two additional offices in that state for the real estate division, and we are closely monitoring any kind of impact that coronavirus may have in the markets that we've identified. In addition, our IT expansion is on track with four of our specialty brands building in California as well. Our ongoing technology enhancement initiative continues to be on target. Of our 26 projects, we have completed 10 and have 10 in current production. The initiative with the biggest impact to our stakeholders is a new website that includes capabilities for applying onboarding, which will be going live at the end of this month, followed by the automated time card collection process that will be launching in June. This investment in leveraging technology will benefit our team in evaluating a wide range of significant metrics and processes. It transforms our performance, increases our value proposition, and drives operational efficiencies to lower our cost to serve. Also, we believe the efficiencies we gain will boost performance, improve the overall customer experience, and increase talent and client loyalty. Company culture and its role in our corporate citizen efforts also remains a focus. We strive to continue to build a people-centric culture with a moral compass to attract the best in the industry. Over the last 12 months, we have restructured our health benefits, resulting in a decrease in costs to the company, as well as to our team members. We rolled out paid maternity, paternal, and short-term disability, as well as two paid volunteer days a year so our team members can support the causes that are important to them. In addition, we are offering a tuition reimbursement plan supporting the team's education and certification efforts. In 2020, we're launching the BG Green Team to address environmental issues as well as the diversity and inclusion effort led by our VP of People. On the M&A front, even after making two acquisitions in the last four months, our pipeline is still very full and active. Staffing industry M&A activity in 2019, as reported by Houlihan Luki, saw a total of 144 staffing transactions, up from 139 in 2018. Our acquisition focus has remained in the professional segment due to the growth efficiency of our real estate division. However, if there were to be something that come up in California in the real estate sector, we would definitely take a look at it. On the subject of acquisitions, in December of 2019, we acquired LJ Kushner & Associates, a record leader in information and cybersecurity retained search. We've long appreciated the increasing demand for cybersecurity-related services across virtually all of our recruitment verticals. The addition of this operation supports our vision of the future and allows us to provide a more holistic solution to our client partners. We're in the early stages of an ongoing integration with the goal of building out a complementary consulting practice with this group. In February, we further extended our service offerings with the acquisition of EdgeRock Technology Partners, our 11th acquisition since 2009. EdgeRock is a leader in IT consulting and managed services and has a very strong internal training platform that will allow us to bring in top college recruits giving them training and a career path for the future. I'm happy to also report we are already appreciating many great synergies within this group, including early cross-sale activity. Turning toward our industry outlook for 2020, which the U.S. temporary penetration rate was 2% in December of 2019, above its average of 1.85% since 2000. The strong February job report noted employers added 273,000 positions before the coronavirus outbreak began to sweep the nation. The Labor Department reported last week that the unemployment rate fell to 3.5%, matching a 50-year low. Staffing industry analysts' job report from earlier this week noted that in February, temporary health services lost 3,300 jobs in the month, and the temp staff penetration rate slid to 1.93% in its lowest level since 2013. While no one can know the length or depth of this COVID-19 health crisis, I have confidence in our company and our team's ability to adapt and emerge from this emergency and the subsequent business and economic outcome. Notwithstanding these unknown consequences, my own very guarded optimism is supported by the healthy fourth quarter operating results, ongoing customer demand, and a vision for our company into the future. I'm proud of our team and very pleased that we reported 26.6% consolidated quarterly gross profit. Our 11th consecutive quarter was consolidated gross profit percentages in excess of 25%, which I'm pleased to point out is outstanding for our industry. We continue to make strides in our mission to build value and grow revenue while realizing benefits from cross-sales, growth in our new markets, our new acquisition partners, and our technology initiatives. And now I'll turn the call back over to the operator to begin the Q&A.

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. Once again, to ask a question at this time, please press star 1. 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. Good afternoon, Beth and Dan, and thank you for hosting the call during a very challenging time for all of us here. I wanted to get a sense of what some of your clients are saying, what you're hearing from them, and what some of the responses that you may be contemplating or enacting as a result of, you know, kind of the environment that everybody is facing today.

Great question. When we first, this situation first started rearing its head, I immediately went into the team and started having them ask questions divisionally about what the impact would be. In the professional division, most of the clients we're hearing that they realize business has to continue to go. They are all very much open to working remotely. We have our largest client actually that just sent a notice out yesterday that said that they would be going remote next week and all of our people are going with them and they're supplying all the resources to be able to do that. In addition to that, We've been working with our IT department to be able to go in and be able to deploy resources, computers, printers, screens, along those lines, in the event we have people in the professional division that need to be able to, where we need to be able to supply equipment. So they are launched up and ready to go to be able to meet that need as well. In the real estate division, I talked to the division president. She feels like they will be fine because people, if they do have to be home, they're going to be home, and that's what they do. They hang out in their apartments, and so she feels like they're going to be fine from that sector. She feels like there could be some interesting things in the talent side for commercial buildings, but right now we have not seen anything along those lines. And then in the light industrial group, the only thing we're seeing right now is a little bit of slowdown from any of the supply chain that has come in from China. And what that has done is just resulted in some of our customers who typically worked a lot of overtime, they're kind of working normal hours right now while that supply chain gets ramped back up.

Okay. Okay. Does this disrupt your ability to continue with your IT improvement plan? Do things unfold at all or are you able to continue to move forward with that?

Right now, no. But I think that a lot of these things that we're doing in the technology side will help reinforce us if we do end up having to go full on work from home. So a lot of those things right now help support that initiative, and I think that there's no reason for us to stop at this point.

We will look at initiatives that have not started and determine whether we can, depending on what happens over the next two to three or four months, whether we can push those out to the level at cost. It's part of an initiative that Beth is leading. now and especially over the next couple days with our leadership team.

We've gone through with all of the leadership teams saying, hey, you know, this is where we are today, but, you know, worst-case scenario, how would you respond? And so we're putting together a business continuity plan right now and how we would respond to something in the event that it becomes a little bit more severe.

Okay. And then in terms of... Capital availability and capital allocation, could you, Dan, give us a sense of what is available on your credit facility today? And two, if there's a potential scenario that the board may reevaluate dividends versus share repurchases given the stock's recent declines?

Yeah, so currently we have $15 million available on our revolver. We have $20 outstanding on a $35 million revolver. Just got confirmation from the bank today that they will support us in this endeavor. We have not had discussions with the board concerning the ongoing dividend or any share back opportunities. We do have restrictions within our credit agreement on buybacks. So that would have to go by the bank first. Okay. Okay.

Great. Thanks for answering my question. You bet.

Thanks, Jeff. Our next question is from Michael Taglich with Taglich Brothers. Please go ahead.

I just want to say, Beth, great job, and I'm looking forward to your work your way through this crisis. See you all, hopefully, in May. Thanks. Thank you, Mike. Thank you, sir.

Our next question is from Howard Halpern with Tegledge Brothers. Please go ahead.

Good afternoon, guys. In terms of the acquisitions, could you, I guess, talk a little bit about what you saw as the strategic importance to those? And also, if you could just say, how does that fit in the gross margin in the professional segment going forward?

Both of them are very accretive to the margin. The cybersecurity group, they're 100% since it's direct hire kind of retained search. That definitely is going to give us a higher margin boost. That was something, as we've talked about in the past, we really wanted to get into the cybersecurity world. Dale Kushner has an incredible reputation in the industry, and the leader of that group has relationships with some of the top CISOs in the nation. And so we feel like as we continue to build that out and start to support him up with some consulting labor underneath it, that there's some great... for that group in the future. As far as EDGROC goes, EDGROC is similar to American Partners in Extrinsic in the fact that these are people who are technology experts, so they run a higher margin, and they actually float out throughout the U.S. So we looked at them. We looked to see if we had any customers that we would share that would make it kind of not something that would be appealing to us. But what we found is there were very few customers that we shared, which really gave us an opportunity to kind of balloon out and blossom that support of that expert-type IT consultant person.

Okay. And at the end of the year, how many offices and multifamily talent combined did you have?

At the end of the year? Hold on. Hold on.

Hold on.

We're right at 50 at the end of the year. Yeah. Okay. We have 50 multi-family branches and six talent offices.

Okay. And the expansion in Q1 adds one to that. And then are you – planning on expanding talent offices, or are you just all going to let that grow from where it currently stands?

We've opened two new offices already in multifamily this year, and I'll let Beth talk about that.

We have scheduled for 2020 four new offices for talent and six for multifamily. Okay.

Okay. And just lastly, in terms of, I guess, the acquisitions and, you know, the borrowing, what is the interest rate now combined with the term loan that you have?

We're, on the last reset, probably weighted average about 4%, so rough numbers. Okay.

Okay, well. It will clearly go down next time we reset, so yeah. Right. Yeah. Yep.

It's tied to LIBOR, correct? A good portion of it's tied to LIBOR, and our liquidity is tied to Prime. Okay. Okay.

Keep up the good work, guys.

Great.

Thanks.

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

Hey, Beth. Hey, Dan. Congrats on another good quarter. Thanks, Carol. Sticking with the multifamily office, and I certainly am curious about talent as well, but sticking with the multifamily, is my memory correct? It takes about 18 months for those to get sort of ramped up to either 90 or 95 or 100 percent?

Yes. That's a good memory, yes. Correct. Okay.

And I'm trying to remember, you said there was how many in 2019? And again, just the multifamily. Was there seven? There were seven. New openings? Yes. And then I want to say, if we go back to like Q4 of 18, wasn't there like two or three more? And I know this is going back in time, so you may not have it off the top of your head.

They've averaged anywhere between... They've averaged anywhere between five and nine a year. And just depending on, you know, the need. I mean, if you recall, a lot of the expansion in real estate and multifamily has to do with a property manager who's been promoted to a regional manager who's been promoted to a district manager and then takes us with them. So there's a lot of that that kind of goes on with that. So I think from that perspective, we usually try to target five a year, and we usually exceed that based off the clients asking us to go with them.

Yeah, Darrell, in 18, they spend four new locations and split three offices.

Gotcha. Okay, I'm just trying to get sort of a feel of when they roll up to be – where you, where we hope. And, Beth, you had said that so far so good in California. I know you've come up with some targets and maybe you have a low-end target and medium-end target and high-end target, but so far so good on what the newer offices are contributing, especially in California?

Yes. You know, they probably started out a little bit slower than what we anticipated, but when they finally got their feet really planted firmly, they've done a really, really good job. Exceeded what we thought.

Very good. That takes care of my questions. Thank you. Thank you, sir.

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

Good afternoon, Beth and Dan, and congratulations for all the work that you've done. It seems like companies are in good hands in these trying times. Thank you, John. You have a question on the real estate side. Can you just give us a little bit more color on the multifamily versus the talent side? maybe on what some of the trends were in the fourth quarter. I just sort of plugged in a few numbers from the K in my model, and it seems like everything was quite good. The growth was, I think, 12% in the quarter. Margins were strong. But give us a little bit more color also maybe on built hours rate and kind of how things developed there. Sure.

Not quite sure what you're asking for, George.

I apologize. Yeah. No, I'm just trying to get some color on the real estate side, maybe talking about multifamily versus talent, how the two are faring, what you're seeing in the talent side because it's so new. And I'm trying to understand some of the trends related to I know revenue was up roughly 12% in the quarter, but how much was billed hours, how much was rate, how much was the contribution from talent? Anything you can give us that helps understand that key segment.

Don't have it at my fingertip, but I could certainly follow up with you if that's okay.

Okay. Okay, that's it.

Okay. George, I will add that the real estate, the multifamily group really is strong in the day-to-day temporary side of it, whereas the talent side has got a stronger presence in direct hires. So they have a higher margin. So they kind of complement each other in those areas. And then Dan can get you the specifics around that separately.

Okay. So maybe make me just ask that again. I think you said you're planning to open four offices for talent in 2020. That suggests that you're comfortable with the model and the execution of the model if you are opening four offices. Maybe tell us a little bit about what you've learned in 2019 and how your vision of that business has evolved during that period of time.

Well, if you recall, Charity Ellis took over that division back in April of last year. And since then, we've combined the management team where we had talent kind of run by itself and then multifamily ran by itself. So what Charity has done is gone through and take it because there's many, many lessons that you learn in the multifamily side that can be taught in the talent side. So we now have a management team that crosses both sides. of the brands. And that's been very helpful. We've identified some things that we feel will be helpful being able to give them a little bit some support that they didn't have before. And we also believe that, you know, one of the things that they've learned is, you know, if they go into a market that we need to be in a city that has, I think it's I think it's six stories for it to be a market that makes sense for the talent group when you're talking about commercial buildings. So the expansion is not as many places because we've learned that, you know, it doesn't make sense if there's not the right type of buildings there. Just like when we go in and expand the real estate in multifamily, we know how many units make sense for us to be in there. So those are the things that we're learning right now. But I think the biggest change that we've seen in this past year is has been the fact that we now have shared management between both of the brands, and I think that that's going to help support and prop them up to be able to move forward.

Okay, great. Thanks for that.

There are no more questions at this time. I would like to turn the conference back over to Beth Garvey for any closing remarks.

Thank you, and thanks to all of you for joining our call today. As we close the books on a productive 2019, I'm looking forward to updating you in May with our Q1 results. Have a great rest of your day.

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