BGSF, Inc.

Good morning, everyone. Welcome to the BGSF Incorporated Third Quarter 2021 Financial Results Conference Call. As a reminder, this call is being recorded. Now I'll call the turn over to Stephen Hoosier, Investor Relations, to provide instructions and read the State Hard Work Statement. Please go ahead.

Thank you, Operator, and thank you to everyone for joining us to discuss BGSF's Third Quarter 2021 Earnings Results. Joining me on the call is Dan Hollenbach, Chief Financial Officer. Beth Garvey, President and CEO, unfortunately has laryngitis and is unable to make this morning's call. However, she is going to do her best to join us for the Q&A session at the end. Dan will cover operational and financial highlights for this call. After Dan's review, 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. I now want to take a moment to remind you that today's discussion will include forward-looking statements, which 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 may 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, the quarterly reports on Form 10-Q, and other company 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 and time of this call. 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 also reference certain non-GAAP financial measures, which management believes can be useful in evaluating the company's operating activities and business trends related to financial conditions and results of operations. These non-GAAP measures are intended to supplement GAAP financial information and not be consistent in isolation as a substitute for or superior to financial measures calculated in accordance with GAAP. Reconciliation of non-GAAP measures to the most direct comparable GAAP measures are provided in today's earnings release posted on the company's website. With that, I'll now turn the call over to Dan Hollenbeck, Chief Financial Officer. Dan?

Thank you, Stephen, and thank you to everyone for joining today's call. I'll begin with a review of our operational highlights and segment performance. I will then discuss our financial results in more detail before wrapping up the call with some closing remarks. Overall, as we reflect on our third quarter and the first nine months of 21, our momentum is best defined as progressive improvement across the board. Our team members in all three segments have done an exceptional job of elevating our client and talent engagement to unlock new opportunities through our realigned sales strategy, optimized and strengthened leadership structure, and digital transformation. Our remaining IT roadmap projects are set for an April 2022 launch with new payroll, HRIS, CRM, and applicant tracking systems. We look forward to the expected benefit from greater process efficiencies and to providing a better foundation for our teams to work across a single source of truth. Moving to our results, we are pleased with our third quarter performance having posted both sequential and year-over-year growth across our key financial measures. In fact, the third quarter is a continuation of both top and bottom line sequential growth in each of our quarterly results for the 21 nine-month period. Additionally, cross-selling efforts are gaining further momentum and becoming a solid contributor to our results. Third quarter consolidated revenue increased 15% compared to the 2020 quarter. with net income up significantly by 80%. More detail on the numbers shortly. Turning to segment highlights, we continue to see positive trends across our end markets, with real estate showing progress from a market recovery and pent-up demand. During the quarters, the CDC eviction moratorium expired, with rent relief funding slowly funneling through but has a long way to go. We are taking a measured approach to market relaunches in real estate, while managing through the tight labor market. Vacancies in the multifamily real estate market are at historic lows, and demand for new inventory is at an incredible high, both of which lead to increased demand for labor in the market. We are accelerating and improving our recruiting efforts through our talent acquisition group, which is focused on new initiatives to attract, incentivize, and retain field talent. We are also making tangible progress with our move to a centralized operational hub that includes training and ongoing employee development. Market outlook and sector tailwinds remain positive, but we expect the segment to continue at a slow and steadily improving pace. Professional benefited from an increase in permanent placements and strong activity in our IT consulting division. Overall, we saw sequential strength and solid performance across our professional divisions. Year-over-year IT consulting, accounting and finance, and LJ Kushner drove most of the growth as we are seeing high demand from cloud transitions within IT consulting and accounting and finance. While infrastructure and development has been slower to rebound, we expect to see improvements longer term. RFP activity with strategic clients is robust, with active discussions taking place for our higher margin managed service projects. We are pleased to see a productive sales pipeline taking place as well. While Light Industrial is managing through an increased wage pressure Amid labor shortages, the team performed well, reporting a solid quarter compared to 20. Results were essentially flat year over year. However, we were working on a solid opportunity pipeline going into a seasonally stronger holiday season for warehouse logistics and fulfillment needs. We are seeing a mix of clients adopting increased pay rates to attract candidates. In some cases, we are the primary workforce solutions provider, given our ability to fill placement orders. As a reminder, we have an extremely high client retention with over 70% of our relationships being on-site managed programs. Demand remains extremely high, and we are focused on finding creative ways to combat the labor shortage. We are a stronger organization now with an even more agile team than we were prior to the pandemic. Equally important, through the significant transformative efforts and investments in technology, we are well-positioned to keep building on our brand, and client partner strengths to maximize the long-term success of BGSF. And now for the third quarter financial highlights. We filed our 410Q for the third quarter ended September 26, 2021, yesterday afternoon, so I'll focus my remarks on key financial highlights for the quarter and nine-month period. Consolidated third quarter revenues increased 15.1% to $82.4 million. We had notable revenue growth in real estate, up 29.4%, while professional posted a 15.7% increase. Real estate benefited from market relaunches and a turn toward overall market recovery. The professional segment benefited from higher permanent placement fees and a $1.1 million contribution from our Momentum Solutions acquisition, partially offset by a decline in our infrastructure and development group. IND is seeing a slower recovery pace from pandemic effects. Light industrial revenues moderated and were down slightly, 0.8%, against a strong Q3 2020 comparison that benefited from peak online ordering activity during a pandemic environment. On a sequential basis, momentum continued with consolidated Q3 revenues up 10.7%. From a segment breakdown, all three segments showed progressive improvement, with real estate up 16.9%, while professional revenues increased 8.9%. Cross-selling efforts continue to make a meaningful contribution in professional, which represented 22% of revenues in Q3 of 21 versus 7% in Q3 of 20. Light industrial continued at a good pace with a 6.9% sequential gain. We are moving into our historical seasonally strong fourth quarter for light industrial, with warehouse and logistics demand on the rise to the holiday season. However, labor shortages and supply chain issues may dampen results for this quarter. From a margin perspective, consolidated gross profit increased by 25.1% to $24.7 million. As a percentage of revenue, gross margin increased 2.4% to 30%, penetrating from higher gross profit in our professional segment up 250 basis points and increased real estate contribution up 108 basis points. Light industrial was also up slightly. SG&A expenses increased by $3.6 million, or 24%, due to additional compensation in line with higher gross profit and the addition of momentum solutions. As a percent of revenue, consolidated SG&A expense for Q3 was 22% versus 21% last year, a comparison accorded to date SG&A is provided in the MD&A section of our 10Q. The effective tax rate was 19.4% versus 22% last year. Third quarter net income increased $4.6 million, or 45 cents per diluted share, compared with net income of $2.6 million, or 25 cents per diluted share, in the same quarter a year ago. Of note, Q321 included a $1 million gain net of tax due to a contingent consideration adjustment related to our 2019 LJ Kushner acquisition. Adjusted EBITDA was $7 million or $0.43 per diluted share compared to adjusted EBITDA of $5.5 million or $0.35 per diluted share in the year-ago period. For the nine-month period, revenues were $224.5 million, up 7.8% year-over-year, while gross profit was $65.3 million, an increase of 14.7%. Higher gross profit contributions across our three segments drove a 180 basis point gross margin increase to 29.1% versus 27.3% last year. Our effective tax rate was 17.9% versus 25.4% for the nine-month period. Net income was $8.8 million, or 85 cents per diluted share, compared to a net loss of $0.8 million, or negative 7 cents per diluted share, in 2020. 2021 included a $2 million adjustment net of tax due to a contingent consideration adjustment related to the L.J. Kushner acquisition. And the 20-period net loss included an impairment of certain intangible assets and goodwill of $5.4 million net of tax, recognized in Q2 of 20 in our Finance and Accounting Division. Net income before the impact of the impairment was $4.7 million. Adjusted EBITDA was $14.6 million versus $14 million in 2020, and adjusted earnings per share increased to $0.92 versus $0.82. Our SG&A expenses for the nine-month period increased by $7.6 million, primarily due to compensation related to higher gross profit, reopening of real estate locations, and additional costs associated with our recent acquisitions. A comparison of year-to-date SG&A is provided in the MD&A section of our 10Q. We continue to prudently manage our cash flow and strengthen our balance sheet and overall liquidity position. Our debt leverage improved with a debt to adjusted trailing 12-month EBITDA of 2.1 at quarter end. We are pleased to see the Board of Directors has approved our 28th consecutive quarterly dividend of $0.12 per share. We continue to maintain strong financial flexibility while executing our strategic plan, evaluating opportunistic acquisitions, and successfully navigate changing market conditions, which we believe will allow us to emerge stronger. Overall, we are tracking well toward a solid finish. Throughout 2020 and the first half of 21, we were keenly focused on cost efficiencies, strategic realignments, cross-selling strategies, and key investments into the businesses. Moving forward, we are stepping up all efforts to accelerate growth across our diversified client base, brand solutions, and markets. The industry outlook is supporting a strong recovery in the coming year, and we are positioned well in high-growth sectors. The latest SIA September 2021 report is forecasting record growth of 16% for staffing solutions overall in 2021. With the surge in professional talent needs and IT growth factor for this sector is forecasted at 11%. Strategically, we are executing well, making key investments in our people and infrastructure. Our team is empowered to deliver the absolute best client service and provide critical support to our talent partners. On the M&A front, we continue to evaluate opportunities and remain engaged with our M&A partners. The current activity levels remain slow, but we continue to seek the right partner that provides 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. We continue to be grateful to our entire team for their passion and diligence in maintaining exceptional levels of service. With that, I'd like to open the call for your questions. Operator?