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spk02: Good afternoon, everyone. Welcome to the BGSF Inc. Second Quarter 2021 Financial Results Conference Call. As a reminder, this call is being recorded. Now I will turn the call over to Hala El-Shabini, Investor Relations, to provide introductions and read the safe harbor statement. Please go ahead. Thank you.
spk01: Thank you. And thank you for joining us to discuss BGSS second quarter 2021 earnings results conference call. Joining me on the call today are Beth Garvey, president and CEO, and Dan Hollenbach, chief financial officer. After the speaker's opening remarks, there will be a Q&A session. As noted, today's call is being recorded and webcast live. A replay will be available later today and archived for 90 days on the company's investor relations page. Now for the safe harbor statement. Discussions today will include forward-looking statements which are based on certain assumptions made by BGSS based on and are made under the safe harbor provisions of the Private Security 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 the recorder reports on Form 10-Q 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 the call, management will reference certain non-GAAP financial measures. which management believes can be useful in evaluating the company's operating activities and business trends related to a 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 superior to financial measures calculated in accordance with GAAP. Reconciliations of non-gap measures to the most directly comparable gap measures are provided in today's earnings release posted on the company's website. I'll now turn the call over to Beth Garvey, President and CEO. Beth?
spk03: Thank you, Holla, and thank you to everyone for joining today's call. As much as we want for it to be behind us, the COVID-19 pandemic continues to affect us all personally and professionally. We have and will remain highly focused on our key priorities of serving our field talent and client partners while maintaining the health and safety of our team members. With that said, the majority of our teams have returned to the office on a hybrid basis as we continue to monitor the ongoing pandemic. Now moving on to the results. Second quarter finished strong, and our overall first half of 2021 results improved both sequentially and on a year-over-year basis. Our strategic restructuring efforts and ongoing improvement strategy are driving momentum across all of our business segments and positioning us for continued growth and profitability. We are still on target with our remaining IT roadmap projects, including payroll, HRIS, CRM, and applicant tracking systems. As we are able to return to some of our traditional ways of doing business, we believe virtual connections are here to stay, thus a hybrid approach combined with a digital transformation and innovative client and talent engagement will drive our sales and delivery engines. Beginning with real estate, results were better than expected given a slow start to the second quarter, but we continue to see progressive climbs in revenues during the quarter to finish with an impressive 80% increase. Our forward focus is on talent attraction and retention coming into the second half of this year as backlog starts to unwind in the real estate segment. Several market reopenings are taking place at a steady cadence. We are intently focused on optimizing our relaunches and establishing a centralized hub to support our regional markets to bolster collaboration in recruiting and placement efforts. We anticipate a strong return to normal in the beginning of 2022. As I mentioned earlier, our teams are in the office on a hybrid basis and are focused on capturing pent-up demand. I expect this process to be positive overall but do anticipate some lumpiness as we phase in new markets and manage through the labor shortages as well as new COVID-19 restrictions for the remainder of the year. Our professional segment performed well, with our IT consulting brands being the biggest highlight in the group, which exceeded the six-month targets. We've seen a nice rebound in finance and accounting, and our cyber business is tracking towards pre-pandemic levels. Infrastructure and development saw growth during the quarter, although at a slower pace, which continues to impact our results. Momentum Solutions, our latest acquisition, has brought many benefits to our business. New client introductions have taken place, and we are executing on numerous managed services opportunities, building a strong pipeline through cross-selling and strategic customers. Our cross-selling efforts are starting to ramp up through our cross-divisional 1BGSF approach and we are seeing solid contributions and wins from our strategic customer program. We saw a nice lift and start late in the quarter, however. We still have several of our client partners that have been slow to return. We expect this will continue to drive demand in the third and fourth quarter, and overall we are seeing strong demand for resources across all areas within the professional segment. Slide industrial continued to show strong growth, and demand remains high even though we continue to manage through industry-wide labor shortages. Although we typically see a softer first half followed by continued momentum in the second half of the year, primarily driven by holiday shopping, the strength continues and we are optimistic about our full year numbers in this segment. It appears the uplift from the significant shift to online shopping is not showing any signs of slowing down. Lastly, we continue to make good progress on our corporate responsibility initiatives, particularly in leadership training and community work. During the quarter, all senior leaders successfully completed a three-day inclusive leadership training. Our VIBE Council has identified next steps to support our D&I pillars for the remainder of 2021 and into 2022. In addition, we are seeing a lot of engagement across our teams through our employee recognition platform, and the Philanthropy Cloud is being well utilized. I'm truly excited about these important initiatives to not only strengthen our team and culture, but it also continues to support and build strong communities around us. As we continue to navigate these rapidly changing times, our diversified revenue model continues to be a key differentiator for BGSF. And with that, I will turn it over to Dan.
spk00: Thank you, Beth, and good afternoon, everyone. Thank you again for joining us today. This morning, we filed our Form 10-Q for the second quarter ended June 27, 2021, and I'll focus my remarks on key financial highlights. Second quarter revenues increased by 18.8% to $74.4 million, compared to $62.6 million in Q2 of 2020. Most notably, Q2 revenues benefited from a significant increase of 80.1% in real estate. Light Industrial also reported higher revenues, up 19.9%. While professional revenues were tempered with a 1.3% decline as the infrastructure and development group, down 24%, slowly recovers from pandemic effects of last year. Higher permanent placement fees of $1 million and an $800,000 contribution from the Momentum Solutions acquisition helped offset this decline in professional. As we noted last quarter, the professional segment did not experience the full impact from the COVID pandemic until Q3 of 20 due to large, long-term projects that were already in place. Sequentially, we saw momentum build with Q2 revenues up 9.9%. This was supported by a rebound in real estate with a 14% sequential increase, despite continuing labor challenges. We are seeing some pandemic recovery efforts start to take hold in real estate, though we could see volatility during the second half of the year as we work to secure talent and as market relaunches continue to come online. Professional increased by 16.2%, as our IT consulting group continues to perform well. We are quite pleased to see the tremendous success of our cross-selling efforts in professional, which represented a 16.4% of revenues in Q2 and 11.4% year-to-date. As a percent of gross profit, cross-selling efforts represented 16.4% in Q2 and 11.7% year-to-date. As mentioned, light industrial revenues increased 19.9% over last year, but were down sequentially by 5.4%. This was consistent with 2019. For the quarter, gross profit increased by 28.9 percent to 21.8 million compared to a year-ago quarter. As a percent of revenue, gross profit increased by 2.3 percent to 29.3 percent and benefited from a 310 basis point increase across our professional segment. Light industrial gross profit improved slightly and real estate was down slightly. SG&A expenses increased by $3.5 million, or 24.2%, primarily due to additional compensation in line with increased revenues and the addition of momentum solutions. As a percent of revenue, SG&A expense for Q2 was 24% versus 23% last year. A detail of SG&A for the quarter and for the year today is included in the MD&A section of our 10Q. Second quarter net income was $3.4 million, or $0.33 per diluted share, compared with a net loss of $4.8 million, or negative 47% per diluted share, in the same quarter a year ago. Of note, Q2-21 included a $1 million adjustment net of tax related to contingent consideration, and Q2-20 included an impairment of goodwill on certain intangible assets of $5.4 million net of tax, which was recognized in our finance and accounting divisions. Adjusted EBITDA was $4.8 million, or $0.33 per diluted share, compared to $3.3 million, or $0.16 per diluted share, in the same quarter last year. Turning to our six-month results, revenues increased by 4% to $142.1 million versus $136.7 million in 2020, and gross profit increased by 9.2% to $40.6 million. Higher gross profit contributions across our professional segment contributed to gross margin improvements to 28.6 percent versus 27.2 percent last year. Our effective tax rate was 16.1 percent for the six-month period compared to 22.8 percent in 20. Net income was 4.2 million or 40 cents per diluted share versus a loss of 3.3 million or negative 32 cents per share in 20. Both were impacted by the gain in 21 and the impairment in 20 as discussed. Adjusted EBITDA was $7.7 million versus $8.5 million in 20, and adjusted earnings per share changed to 49 cents versus 51 cents in 20. SG&A for the first half of 21 increased by $4 million, driven by compensation related to higher revenues, additional costs incurred from our EdgeRock and Momentum solution acquisitions, Additional software costs, these were all set by lower occupancy and transition fees. Overall, we generated strong gross profit margins and our liquidity position remained strong. DSOs at quarter end improved at 54 days versus 58 days at the end of 20. Leverage as measured by debt to adjusted trailing 12-month EBITDA was 2.3 at quarter end. We are pleased to see that the Board of Directors approved our 27th consecutive quarterly dividend, raising it 20%. to 12 cents per share. I will now turn the call back to Beth for closing remarks and a general outlook for the remainder of the year.
spk03: Thanks, Dan. I'm pleased with how the entire company continues to execute and rise to the occasion. We continue to manage the key areas of our business with out-of-the-box thinking, flexibility, and being able to adapt quickly to our changing macro and operating environment. We focus our attention on cost efficiencies, strategic realignment, key cross-selling strategies, and digital investments into the business that are paying off to bolster future growth and profitability. We are seeing a recovery in real estate, higher margin activity in professional, and light industrial demands remain strong. On the M&A front, we remain highly engaged with our broker partners, seeking the right acquisitions to augment our organic growth. The M&A landscape has started to slow as valuations continue to increase, but we expect to see a resurgence in activity in the second half of the year. As always, our focus is on geographic and brand diversification into new or complementary high-growth areas that are synergistic to margin enhancement, quickly accretive to EBITDA, and are a strong cultural fit. In summary, we are seeing positive impacts from our strategic changes in each segment, continued momentum from pent-up demand, and positive outlook across each one of our business units. As always, I'd like to thank all of our team members for continued hard work and dedication in building long-term shareholder value. With that said, I'll turn the call over to the operator for questions.
spk02: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Jeff Martin from Ross Capital. Please go ahead.
spk04: Thanks. Good afternoon, Beth and Dan. Hope you're doing well. Hey, Jeff. I wanted to get a sense... Some good things. I wanted to get some detail around the reopening of various markets within real estate. How many markets total, if you could remind us, and how many of those are open and maybe give us a sense of the cadence throughout the second quarter and maybe through July in terms of market reopening there.
spk03: If you recall, we had 18 markets. multifamily markets that had paused in 2020 and six commercial. And today we have reopened eight of the multifamily and three of the commercial.
spk04: Okay. And then with respect to the unwinding of pent-up demand, how would you characterize how far along we are either in a percentage basis or a baseball analogy. Maybe what inning are we in in terms of servicing that pent up to noon?
spk03: Well, I'm not a baseball fan, so I'm not sure. Same on you. I know, I know. But I do like basketball. Well, I would not say we're where we want to be in real estate yet. I think that we are... doing very well in the professional segment. I think wide industrial, you know, everybody's having issues right now with finding talent. We still have somewhat of a mixed bag in real estate, but we are seeing a daily increase in their headcount, which is super positive. So we think that there are things opening up there. We are also seeing things in the real estate segment where they are starting to do events again And as a reminder, that division is very face forward. So they are very much part of their sales arm is being in front of the customer and going to these association events. And we are seeing some of those to pick back up. So we're optimistic about that. But if I was to put it in baseball, we may be in the – I don't know that we've made it to the seventh inning stretch yet.
spk04: Okay. Thanks for taking the stab at that. Did I get it?
spk03: Yeah.
spk04: You did. You nailed it. When you reference anticipated lumpiness in real estate for the balance of this year, what exactly do you – I know what you mean by that, but what are the sources and remedies to that lumpiness?
spk03: Part of it is going to be how quickly we can get these markets opened. And also as a reminder, getting a market open is hiring a salesperson in there. And sometimes it can take them 60 to 90 days to really get their feet wet to get things moving where we need it to be. So it depends on how quickly they get engaged. And then the other part of it is, you know, as we're starting to see some of this COVID resurgence with the new Delta variant come back, we are seeing a little bit of hesitation in some areas as well. So that kind of lumpiness is we're just sitting back to anticipate what that's going to look like for us.
spk04: Sure, sure. Okay, that makes sense. And then is there anything you're doing strategically to combat the tightness in the labor market, particularly with light industrial?
spk03: We're doing a lot. We're doing a lot of education. We do have some resources to be able to do market surveys for our customers and educating them on what the moving prices of what they need to pay people. For example, if I look back to the beginning of the year, overall the pay increases have really started to move. For light industrials, they're up year over year by a dollar. But in July, they're up almost $2. And so going in and really educating our customers on here's what's happening around you, and if you want to be competitive, here's what you're going to need to do. And we're really seeing some of our customers jump on that, as well as offering sign-on bonuses. We have a couple customers that are doing bonuses as they start, and then another bonus at the 90-day mark. And so a lot of creativity on that side, but a lot of it is education on our side. in feeding our clients what information they need to be competitive.
spk04: Okay, great. And then could you remind us, in terms of the spend on the technology roadmap, I think we've got a good sense for the balance of this year, but what does that look like next year?
spk03: Well, I think that we keep talking about being a roadmap, but the roadmap was to get us with a foundation. So I don't anticipate that there'd be a lot of change in what our percentage of spend will be for IT technology. I think it'll just fall into different buckets. But we had such technology debt to get us where we needed to be that when we go live with all of our new technology in April, That will just be getting the foundation where we need to be. After we get that done, then we get to start building on top of those things. And we're a little bit behind in that part of it, but we had to get the foundation done as well. So I think the buckets will fall differently, whether or not it be in CapEx or have a P&L impact. But I still think we'll kind of be in that same kind of area of what we're targeting on that.
spk04: That's helpful. Thanks for taking my question. Sure.
spk02: Thank you. The next question is from Howard Halpern from Taglik Brothers. Please go ahead.
spk06: Congratulations on a great quarter, guys.
spk00: Thanks, Howard.
spk06: I guess go back and reference, I guess from last quarter, you talked about there being close to like 1,200 openings between the two different subsidiaries. Has that eased at all, or is that still at that level?
spk03: It's come down some in the light industrial side. The benefits, the extended unemployment benefits in some of the markets has been helpful. So we have seen it drop on the light industrial side. It's dropped a little in multifamily, but not as much as we would like for it to have in that area. But we are seeing a little bit of movement down on that.
spk06: Okay. Okay. I guess can you talk a little bit about, I guess, the gross margins in the quarter were really, really solid. Is that attributable to, you know, the acquisition, some of the cross-selling, and is that momentum going to be able to be held together going forward in professional services?
spk00: Yeah, so part of it was helped slightly by momentum. It's got a a wonderful gross margin percent up in the upper 40s. So that helped a little bit. A million dollars increase in firm placements. That flows through at 100%. The larger portion of the business being in the consulting side, which has a higher margin, also contributes to that professional switch. So real estate, while it was down a little bit, probably more a mix of business than pricing. based on what we heard yesterday from the division president. Okay.
spk06: Okay. And can you talk a little bit about how the cross-selling program is going? It's obviously picking up sequentially, but how do you see that continuing as we move forward?
spk03: I think part of it, Howard, has come from, you know, we started to cross-sell, you know, in 2018. I think we had 1% of our business in 2018. It was right at... due to cross-sell. But when we kicked off this year and decided to do it cross-divisionally, we started to see a lot of different things along those lines. So one of our biggest customers in real estate now has several resources there that are out of our IT group. And we didn't have that cross-divisional sale going on. So we've talked about it in the past about what were our targets, we wanted our targets to be. It was really the professional division tossing it to the professional division. So the IT group giving it to the F&A group or the cyber group giving it to the IT consulting group. But now that we've got the 1BGSS launch, I think we haven't set a new target for what we wanted it to be, but we are seeing there's a lot of momentum. And the divisions are doing an amazing job in working together and understanding each one of the business units right now We have the division's presidents get together, you know, once a month, and they talk about, you know, who they're talking to and what they're doing. And it's just really served as an eye-opening experience for everybody in the organization. So it's been fun to watch.
spk06: And how much has you talked about getting, you know, that technology foundation started in April? How much of that is helping that process along? And how is that going to help? you know, leverage costs, I guess, or expenses as we move forward into next year.
spk00: So, Howard, let's make sure, the investing in the infrastructure, how is it going to help benefit?
spk06: Is that infrastructure going to help with the cross-selling process and will it eventually help with operating efficiencies as we get further down the road in the next couple of years?
spk03: Yeah, so let me – I just came out of – I don't know if you all heard all that noise when we first started, but we have 20-some people here that is in IT, and we had meetings kind of doing report outs on what's happening in the system. So we decided to go with Salesforce across the organization for our CRM and ATS. We're going to build our back office applicant tracking system. But what it's going to do is we're building it wide open. So instead of us having three different segments where people don't know where the customers are or where the – Consultants that everyone across the organization will be able to have visibility into that that's going to be a game changer in many many ways So we think that you know if somebody goes into the system and says hey, I know somebody I see you're working on X customer, right? I know somebody there. Let me hook you up so we think that that's going to be very significant in the future and then as far as the efficiencies we think because we'll be able to speed the processes along and We will have the ability to be able to get people placed a lot faster and tighten that time between the time that they apply to the time we actually get to bill for them. That will shorten, and then that will help build our efficiencies and profitability.
spk06: Okay. Okay, guys. Keep up the great work. Thank you.
spk02: Thank you. Once again, if you wish to ask a question, please press star, then 1. Your next question is from Brian Kinzinger from Allianz Global Partners. Please go ahead.
spk05: Hi, Beth. Hi, Dan. How are you? Thanks for taking my question. So sorry, I joined late, so I hope I don't hit the topics you already answered. But it sounds like trends have gotten better in light industrial for hiring, but maybe not so much in professional and real estate. So as you look in your crystal ball, Beth, and you – When do you think hiring eases in professional and real estate, and what are the triggering events that you think will be the catalyst to improved hiring trends?
spk03: I think that's kind of backward, Brian. We're having a harder time in light industrial and in real estate. Professional, we're not having as much of a problem. And we've identified a lot of it in the real estate sector just as pay rates. So it really is about getting these pay rates right. because the candidates, they're king right now, and they're able to drive up costs, and we're having to continue to educate our customers on how that looks, and I think that that's just something that I don't see going away in the very near future.
spk05: So it's essentially convincing the real estate customer they're going to have to pay a little bit more, which right now they might be a little bit reluctant towards given the The moratorium, given the difficulties they're facing, but maybe once that eases and maybe President Biden doesn't step in, maybe that would be the time that they might accept and could afford a higher pay rate. Is that right?
spk03: I think that our customers are open to it all right now. We have not had much pushback from our customers when we give them data. So when you go around and say, here is what a maintenance tech a year ago would cost you $18 an hour, and now it costs you $22 an hour, and we go to the management company and tell them that they're going to have to pay more. So it is an education side of it. And as far as the moratorium goes, yes, we do feel that there's going to be some purse strings that end up getting loosened on that. But again, keeping in mind that there was $46 billion in rental assistance that was put out there, but there's only been $1.5 billion of that spent. So there's still a lot of money out there that's not hitting these management companies to give them the relief. So it's pushing that out there. And until that starts to break free. But I will tell you that the Department Association itself is super bullish on the fact that they think that they're going to be able to, now the moratorium has been lifted, if they don't put it, I think there's, as of yesterday, there were some communities that were talking about putting it back in based off of the Delta variant. So there may be some pockets where the moratorium ends up getting placed back in. So we're watching that.
spk05: And then the light industrial side, is it still pay rates? And as we come to the end of increased unemployed benefits, is it just that they're used to making so much more for doing so little? Is that how we should think about it? And so it's kind of going to take time to reset their expectations. I mean, how do you think about that?
spk03: I think that's part of it, but I don't know if you heard the number I gave earlier. Year over year, the light industrial pay rates have gone up from our KPIs by $1, $1.08. But in July itself, the pay rates went up $1.93. So we're seeing big pushes just in the last month, you know, for those pay races to increase. And I just, you know... The problem right now is we get people in, we get them a job, and then their next-door neighbor client goes in and says, oh, we just did a dollar increase. And so we have a lot of hopping. We have a lot of people that are hopping around because they can. And so they'll start at one company, and then they change jobs for 50 cents more. So we are seeing a lot of that happening. So it's just a matter of trying to stay ahead of it.
spk05: Lastly, on M&A, I don't know if you talked about it at all, if you had questions, but I take it. Obviously, other staffing firms are facing the same obstacles you are. So can you talk about your thoughts and strategy in the near term in M&A? And then from a valuation standpoint, are private valuations generally very high or are they generally very low given the current environment?
spk00: So we are seeing activities. We saw about 24 deals in Q2. You know, word on the street is from our M&A partners is that Q3 should be a little bit more active as Q2 rolled off of everybody's trailing 12 numbers. In the deals that we've had discussions with over the last couple, two or three months, and remember, we sort of play in that 5 million EBITDA range, plus or minus. We've seen multiples up a turn or so from a year ago, a year and a half ago, so.
spk05: Okay. And your reluctancy is that price point?
spk00: No. Our reluctancy is making sure that it's a product that will add something to the basket that fulfills our customer needs, that culturally it's a fit.
spk03: i don't think we've had a reluctance i don't i we haven't seen anything that we found interesting and you know if we if we go back to 2019 and 2018 we were standing anywhere between 75 and 100 deals a year and you know in some of those years 2018 we didn't do any acquisitions and you know so it just has to be the right deal so i don't think there's a reluctancy i think that we're just very intentional about it we haven't seen something that's really inspired us sorry reluctancy was the wrong word i
spk05: I could have chosen my words better, but that's all my questions. Thanks. I didn't say baseball, though.
spk06: That's true. That's true.
spk02: Thank you. Thank you. This does conclude our question and answer session. I would now like to turn the conference back over to Beth for any closing remarks.
spk03: Thank you, Rachel. We appreciate you taking time to join us on our call today and appreciate your continued support. We look forward to updating you on our third quarter results in November. Stay safe and healthy. Thank you.
spk02: Thank you. This does conclude our conference for today. Thank you for participating. You may now disconnect.
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