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spk07: Good morning, ladies and gentlemen. Thank you for attending today's BGSF Inc. Second Quarter Fiscal 2022 Financial Results Conference Call. My name is Jaquita. I will be your moderator for today's call. All lines will be muted on the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to your host, Sandy Martin, third-party advisors. Sandy, please go ahead.
spk00: Thank you. Good morning and welcome to the BGSF second quarter 2022 earnings conference call. With me on the call today are Beth Garvey, chair, president, and chief executive officer, and Dan Hollenbeck, chief financial officer. After the speaker's opening remarks, there will be a Q&A session. As noted, today's call is being 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 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 the company's filings and reports with the Securities and Exchange Commission. All risks and uncertainties are beyond the ability of the company to control, and actual results may differ materially from those indicated by the forward-looking statement. Management statements are made as of today, August 4, 2022, and the company assumes no obligation to update these statements publicly even if new information becomes available in the future. During the call, management will also reference certain non-GAAP financial measures which can be useful in evaluating the company's operating activities and business trends related to the financial condition and results of operations. These non-GAAP measures are intended to supplement GAAP financial information and should not be considered as a substitute. Reconciliations of GAAP to non-GAAP measures are provided in today's earnings release posted on the company's website. I'll now turn the call over to Beth Garvey. Beth? Thank you, Sandy.
spk08: Hello, everyone, and thank you for joining us. I'll begin today's call with a few operational highlights for the second quarter. Then I'll turn the call over to Dan to provide more details around our Q2 financial results, followed by an update to the company bonds of our enterprise-wide technology upgrade and discuss our pipeline, strategic needs, and M&A. We are delighted to again report very strong results, which continues to give us confidence regarding the U.S. labor market and client demand. The real estate segment led the way with an overall stronger demand environment. The professional segment, which includes IT and finance and accounting, reported strong double-digit growth over last year. We remain laser-focused on solving business challenges for our clients while growing market share with our well-aligned team. I also would like to provide a recent update on Momentum Solutions acquisitions. We cycled past the one-year anniversary in February, and we are happy to report that we have more than doubled revenues in Q2 versus the second quarter of last year. Regarding new markets this year for real estate segments, we successfully opened four of the six markets targeted for 2022, and we'll add the final two by the end of third quarter. A market is fully staffed. Our goal is to be cash flow positive within four to five months. So we are forecasting the new markets to be profitable in early 2023. According to a recent study released by the National Apartment Association and the National Multifamily Housing Council, there is a current deficit of 600,000 apartment homes in the U.S. due to underbuildings. The study also states that the U.S. faces a pressing need to build 4.3 million new apartments by 2035 to address demographic shifts and lingering pandemic impacts on the population and the broader economy. If significant investments are made in new construction for multifamily units over the next several years, this will support additional tailwinds for our real estate segment for years to come. With that said, I'll now turn the call over to Dan to discuss the company's financial results in more detail. Sam?
spk03: Thank you, Beth, and good morning, everyone. First, I want to remind you that we completed the sale of our light industrial segment late in the first quarter. As a result, our financial results discussed today are from continuing operations, and except where noted, exclude operating results for the light industrial segment for this year and last year. For additional details on the sale transaction, please refer to our form 8K filed on March 24th. Moving to our financial highlights from continuing operations. Strong momentum continued into the second quarter with total revenues up 29.1% to $74.1 million compared to 2021. By segment, real estate grew 41% and professional increased 22%. We continued to see better efficiencies in submittals, and while wage rates began to level out during the quarter, they were up 9% Q over Q. In addition to year-over-year improvements, both segments showed sequential growth between Q1 and Q2. Real estate revenues grew 15.7%, and professional segment revenues increased 3.5%. The professional segment 22 revenue growth over 21 was impacted by strong double-digit growth in finance and accounting, IT consulting, and managed services. We continue to see solid demand for digital transformation work and enterprise modernization products. As talent resources remain in high demand, our clients look for ways to enhance systems to automate processes and leverage less manual functions. Growth profit increased by 30.2% compared to the prior quarter, growing to $25.1 million, primarily due to revenue expansion and increased spread in both segments. As a percentage of revenue, toy gross profit increased 30 basis points to 33.8% compared to 33.5% in 21. Operating leverage and selling general and administrative caused to improve by 140 basis points to 26.9% of revenue compared to 28.3% a year ago. Edge DNA dollars increased 3.6 million or 22.3% which compared favorably to our revenue growth. Second quarter net income from continuing operations was $3.2 million, or $0.30 per diluted share, compared to net income from continuing operations of $2.6 million, or $0.25 per diluted share in the same quarter a year ago. As a reminder, last year's Q2 income included a pre-tax credit of $1.2 million associated with continued consideration recorded from an acquisition in 2019. Adjusted EBITDA for continuing operations for Q2 was $5.4 million or 7.3% of revenues compared to $3.2 million or 5.6% of revenues in 21. Our Q2 effective tax rate was 23.6% for 22. compared to 16% in last year's second quarter. Now turning to year-to-date results. Revenues for the first half were $142.6 million, up 33.1% from 21, while gross profit was $48.5 million, up 36.7%. Although selling general and administrative dollars increased 25.5%, they improved as a percentage of revenues, resulting in a nice operating leverage of 170 basis points. Net income from continuing operations for the first six months was $5.2 million, or $0.50 per value to share, compared to $2.3 million, or $0.23 per value to share, for the 2021 period. A reminder, the prior period included a $1.2 million pre-tax contingent consideration credit. Adjusted EBITDA for the first half of 2022 totaled $10.3 million, or 7.2% of revenues, compared to the prior year of $6.7 million, or 6.3% of revenue. Finally, the year-to-date effective tax rate was 22.7% for 2022, compared to 16.2% in the year-ago period. Turning to the company's IT investment roadmap. As we discussed last quarter, we expect significant productivity improvements and competitive advantages in our business from the IT platform upgrade, assuming a modest 5% efficiency and order fulfillment The projected payback period for the roadmap is approximately three years. Future IT spend will represent incremental enhancements to improve systems, provide a more robust platform to grow and scale our business, and that will provide further updates from our go-live launch in a few moments. Moving on to our financial position, the company's balance sheet is gone, and we continue to maintain a prudently conservative liquidity position. At the end of the second quarter, our accounts receivable balance was $50.1 million, up 4% compared to year-end, while days sales outstanding, or DSO, improved by six days from year-end. And our working capital rates have strengthened to 2.45 from 1.95 at year-end. That cap provided for operations was $1.2 million, a $3.6 million increase from 21. We utilized the proceeds of the sale of in-staff to pay down our debt, and our leverage ratio of funded debt to trailing 12-month EBITDA was 0.7x as of the June balance sheet date. Finally, the Board of Directors approved our 31st consecutive quarterly dividend at $0.15 per share in support of our strategic initiatives. Our solid balance sheet position and deleverage efforts are expected to continue to provide ample flexibility to fund our operations, while investing for future growth, as well as returning value to our shareholders through cash dividends I will now turn the call back to Beth.
spk08: Thank you, Dan. Now I'd like to provide you with an update of our strategic IT roadmap initiative. The company went live at the end of second quarter with our enterprise-wide CRM, HRIS, payroll, invoicing, and applicant tracking system. Although we continue to tweak back office interfaces, the operational modules are in good shape. As we discussed last quarter, we fully expect productivity improvements and competitive advantages in our business from this modernization project. Further IT spend will represent incremental enhancements to improve current systems, which provide us with much more robust platforms to grow and scale our business. Our pipeline continues to be active in both segments. We continue to win business in a challenging labor environment and credit our successes largely to the continued success of our cross-sell opportunities that allow us to solve our client needs across multiple business units, a commitment to communities and organizations supporting education and workforce, a robust structure around the redeployment of our extremely seasoned field talent, and a strong commitment to culture and success for all of our stakeholders. These distinct operational performance differences set us apart from the competition, and this makes us a best-of-class workforce solution model. Based on recent workforce stats and trends, if the U.S. experiences what the Wall Street Journal refers to as a full employment recession due to longer-term changes in the American labor force, our company is operationally well-positioned for this type of unusual or unprecedented period of our economy in the U.S. Turning to our continuing work on the M&A front, Deal flow continues to be strong, and although many of the potential acquisitions are U.S.-based, approximately 20% of the deals we are seeing are global. Given the geopolitical pressures and potential of global recessionary influences, we will be conservative in our approach, and leadership will continue to be patient and prudent in our evaluations. Our capital allocation strategy remains unchanged, and we will look for fair evaluations as we seek possible businesses that fit our long-term strategies. With that, we would like to open the call for questions. Operator?
spk07: Absolutely. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. The first question comes from the line of Howard Hepburn with Tulish Brothers. You may proceed.
spk05: Congratulations. Great quarter, great first half. Thanks. Thanks, Howard. And on that note, is the momentum continuing into the third quarter As history tells us, the third quarter tends to be the strongest revenue quarter. Is that trend still intact as far as you can see?
spk08: I would say that we are very optimistic about where we sit right now at the beginning of August in terms of what the quarter is going to shape up like. Okay.
spk05: And how are you seeing the... I guess the balance between client requests, client orders, and the ability to recruit talent.
spk08: Well, recruiting is still our number one challenge that we have right now, but we are doing a really good job in being able to redeploy resources that we currently have so that we can make sure that we are fitting our clients' needs as well as the consultants' needs on both sides. And then we have very robust programs that we are working across the channels for referral programs to get people in the door and working with colleges and high schools and programs to get people that we can actually train up for the positions that we have. So there's been a lot of focus around those things and we are seeing some of the fruits of the labor that come out of that. A lot in the building phase on that. You know, I think I've mentioned before we've got to build the talent for tomorrow. Today's youth is tomorrow's workforce, and we're really kind of focusing in on how to make sure that we are training people up and upskilling them for tomorrow.
spk05: Okay. And in terms of multifamily too, you're able to find – enough talent and redeploy them, uh, to meet the demand, the ever-growing demand for that, uh, segment?
spk08: In both segments, Howard, we always have open positions that we haven't been able to fill. Um, that number, um, is, is less than what it was a quarter ago. Um, so we feel optimistic about that. But we always have open orders in, in both segments.
spk05: Okay. And in the press release you talked about, you know, I guess, uh, additional finding additional revenue streams do you have an example that you can describe on what you know you what you mean with uh finding additional revenue streams within the context of what operations you're doing um well we always are looking for different types of technology you know emerging technology that's coming out of the gates we look for different things within we're doing a lot in the municipality space right now so our team is really
spk08: kind of building on that, writing white papers and making sure that we are presenting it to different municipalities in different parts of the country. Our real estate division is looking at different things to help with the segment that they have in upskilling some of the talent that they have, which has been able to allow them to charge more for enhanced talent that comes with some skill sets that we train them. A lot of those things are just looking for opportunities and looking forward instead of waiting for things to happen. I mean, the teams go to conferences and look for avenues of up and coming things that may happen. I know we took our professional group to the National Department Association conference in San Diego this past year. That has never happened before, but what ended up coming out of that is the professional group was able to sit down with many different companies within the real estate segment and identify technologies that we are currently not in and start to try to build a platform around that.
spk05: Okay, that sounds good. And just lastly, any update on the move or entrance into Canada?
spk08: We will be opening Canada sometime before the end of this quarter. We're hoping by the end of August, to be honest with you.
spk05: Okay. That sounds good. And just keep up the good work, guys. Thanks.
spk08: Thank you.
spk07: Thank you. The next question comes from the line of Jeff Martin with Ross. You may proceed.
spk02: Thanks. Good morning, Beth and Dan. Hope you're doing well. Beth, could you... Doing good. A lot, but... Yeah, I taught a lot of places. I was curious if you could go into some detail on real estate in the context of where it is now. We're basically back to peak levels for the segment. If you go back to 2019, I think Q3 was the peak for that segment. How much room for growth do you think there is within existing locations versus opening up new markets? I would imagine that's fairly easily scalable, but just curious if you could kind of give us a sense of where the growth was coming from year over year. Was it more new markets or was it more existing markets?
spk08: Thanks. Historically, it's been new markets, Jeff, but I think that we've talked about in the past that in the US, we're kind of getting to the end of the rope on how many new markets we can open. One of the exciting things with the new technology is how we're going to be able to segment the markets that we're in. So a Houston, for example, we will be able to take and instead of there being one salesperson there, we could actually have three salespeople there and we will be able to track activity a lot better. So we feel like in those cases, the growth will now start to come from existing businesses markets that we have open that we are allowing to put additional resources in to expand the growth there.
spk02: Okay, great. And then on the professional side, I would imagine IT is among the strongest. Maybe you could kind of segregate which areas are growing the fastest, which you feel have the most growth potential going forward.
spk08: I think that You know, we've talked about the success of the managed solutions, momentum solutions that we bought earlier. So that really leads all of our conversations now. So they do a really good job in being able to put us to a level to say we can project manage a plan, we can put our consultants up underneath that. And I think as we continue to build out the managed solutions program, it supports everybody in the IT infrastructure. So it's kind of one of those, you know, all boats rise situations, and it kind of starts with the momentum solutions game.
spk02: Great. Well, congratulations on getting your technology platform up and running live in Q2. It's a big deal. Just curious what kind of reaction you're getting internally. Are people relieved? Are they excited? Are they, you know, feeling more productive? That would be helpful. Thanks.
spk08: Well, it's only been five weeks, and so we did a lot of work in regards to change management to get ready to go live. So a lot of people knew what to expect going forward. We aren't seeing efficiencies yet. As a reminder, we told everybody we would be going in with a mentally viable product. We just wanted to be able to pay and bill and invoice. That was the most important part of what we needed to do. The efficiencies come after we get all that kind of situated. And I think there's something like 142 fast follow projects that we'll start layering in two-week sprints that allows us to be able to continue to build and get efficiencies out of it. And we expect that to start really seeing that in Q1 of next year.
spk02: Okay. And then final question. I was curious if you have noticed any change in the labor availability over the past 12 months. I would imagine you're starting to see people come back into the workforce that maybe had still been sitting on sidelines a year ago. Maybe you can comment on that.
spk08: There is some of that, Jeff. But part of it is there's such a shift that hasn't leveled out yet in regards to what the employee wants and what the employer wants. There's a whole group of employers now that are wanting people to come back into the offices There's a whole group of employees that are doubling down on the fact that they don't, especially now with the inflation and the price of gas going forward. So we continue to educate and talk to people and make sure that – I mean, it's a dance. We have to make sure that we're taking care of both sides. So in regards to are there more people, I think there are more people, but I think that we continue to come up against – challenges in making sure that we match the right talent based off of everybody's needs and understanding of how that works going forward. And I don't think that that is completely leveled out as what the future of work looks like in those regards.
spk02: Great. Thanks for sharing. Sure.
spk07: Thank you. The next question comes from the line of Brian Tesslinger for Alliance Global Partners. You may proceed.
spk06: Great. Thanks, guys, for taking my questions. My first question is, what was the impact on the margins over the last quarter or two based on the new systems implemented? And what is the near and long-term impact on your margin profile based on the efficiencies generated from this new system? And finally, on the new system, how might this help you with business development?
spk03: So on the first part, we just went live five weeks ago, so not quite sure we know the margin impact. As I mentioned sort of in my call, we're just sort of using just an optimistic estimate of a 5% efficiency, but as Beth mentioned, we'll probably start seeing those latter part of this year and certainly in the Q1 of next year. I'll let Beth answer the last part of it.
spk08: Yeah, in regards to Business Development, Brian, what it really does is it allows us to get rid of the noise between trying to find a candidate and getting them out to the customer faster. Before, we were having to go through multiple systems, we would have, you know, we had Bullhorn, we had eRecruit, we would, then you have to go to the job board, you have LinkedIn, you have Dice, you know, so the team was having to go to multiple places to find stuff. One of the fast follows we have is a tool that's going to be able to take all of that data and dump it into one, so when person needs, when our recruiters need somebody, they'll be able to grab it. The second thing it does is it allows our sales team to be able to move things faster, because if the recruiting team, right now, recruiting is a problem, right? We can get sales, but recruiting is there. So the recruiting team can move faster. It gives the sales team the ability to be able to go, we're faster to the market. We have a better candidate. We have this tool to be able to get us through the door. So it's kind of a marriage that works together, knowing on what side of the aisle you need to be. And I think that as we move through getting those systems in place, it really does reduce the amounts of steps and the amount of data that comes in for people to actually do their jobs.
spk06: Great. That's insightful. But looking at the first part of the question that's trailing, did you do it yourself? Did you have a third party do it? And what was the cost of implementation? I'm just trying to understand. I take it margins were marginally depressed or you had some sort of cost related to this that's going to go away.
spk03: So we started this three years ago, Brian, with an initial budget of around $10 million. We're probably closer to... $11.5 to $12 million on a total project. We had multiple partners helping us implement this. We essentially replaced every piece of software that we were using in the company. As Beth mentioned, we still have some add-ons to come on the latter part of this year. We'll continue to spend money to enhance the products not to the level that we spent this year primarily on third-party professional fees. We will see some efficiencies beginning in Q4 and into 23 on that.
spk08: So, Brian, we already started reducing the outside consulting partners that we had. We had several that dropped off last week. We have another group that will drop off this week. Our goal is to, in the next six weeks, get down to where any of the future builds are primarily being done on our team that we have internally, not having to use outside resources. We may have to use one or two every now and then, depending on what the add-on is. But our goal is already, well, we've already started to reduce, and our goal is to get to where we actually can do it with our internal staff.
spk06: Great. Last question I have is, you mentioned the company's position for a potential recessionary period. Are you beginning to see If you were professional staffing request, I'm just curious if there's any change in what you're seeing in terms of client behavior.
spk08: Our pipeline continues to be very, very strong. And one of the things that we did do this past quarter is we actually added a contracts person who's able to push our contracts faster than we were before. So if you talk to the teams, that gives them the ability to close deals faster. So we've got many, many things in the pipeline. We're not seeing things slow down at all in either segment. There's maybe a little bit of a slowdown in regards to if somebody's going to pull the trigger on making a decision on a candidate, but it's not significant. And the flip side of that is if a client slows down the process in making a decision on somebody, since it is still a candidate's world out there, the candidate just moves on. We can put them somewhere else. You have to move fast. And I think clients, if clients slow down, they're going to lose out. And I think that continues to be an education.
spk06: Great. Thanks, guys.
spk07: You're welcome. Thank you. The final question comes from the line of Michael Tackridge with Tackridge Brothers. You may proceed.
spk04: Good morning, Dan. Good morning, Beth. Good morning. Congratulations. Good morning. Okay.
spk01: Thank you.
spk04: A bunch of questions here. Okay. So first on the tech platform, if you will, whose name escapes me at the moment as a program. All right. So you're $12 million into it. You started three years ago. If I hear correctly, you got a three-year payback that we start seeing in the financials in Q1 of next year. So is it three? Yes, sir. That's correct. Okay. So three years from, so if I was throwing around, it should start adding a million dollars a quarter in EBITDA, if you will. How much? A million. A million a quarter. There's four quarters in a year, three years, three-year payback. Your math's good. Yeah, I was very good in math when I was a child. But if I hear correctly, it doesn't start until next year. Correct. Okay, good. Okay. All right, I'll take that in mind. Okay. Other assets doubled in the last six months. You want to speak to that?
spk03: Other assets. Hold on just a second.
spk01: Oh, yeah.
spk03: So that includes the receivable related to the sale of Insta. $2 million was deferred for a year.
spk04: And the rest of it, so that's $2 million.
spk03: Are you talking the other current assets? Yes. Other current assets rose. It's $4.7 at June and $2.3 at December. So $2 million of that. The other $400,000, I don't know that, Michael. I had to pull that detail. But $2 million of it is the receivable on the Insta.
spk04: Okay. We have a $2 million receivable on that. We have – That's most of the increase. Right. Okay. Well, other in total was $11.3 million up from $6.6 million. So $2 million of that $11 million is in-staff, right? Receivable. So I'll go against that.
spk03: That'll go into... You're looking at the summary and the earnings release? Yeah, I'm looking at the actual balance sheet.
spk04: Yeah, it's all I got in front of me. I'm sorry.
spk03: Yeah, deposits actually came down $1 million. Other assets are flat. Deferred taxes are down $1 million. Right of use are down $1 million. Pre-pays are down $500,000, and receivables are up $2 million. So I can provide you an analysis, Michael.
spk04: We can talk offline about that.
spk03: Okay.
spk04: Yeah, yeah, yeah. Okay. All right. A couple more questions. Just so I understand, the real estate offices, how much of an expense hit do we take in the quarter, if you will, from the new offices?
spk08: Well, keep in mind, in real estate, we don't call it an office. It's a market because the market consists of a person. So we hire a person to go do sales in that market. So worst case scenario, it's a person and a half because we have to have a recruiter that starts out. So they're probably in a quarter there. You're going to make me – I don't want to say because then I'm going to tell everybody why I pay everybody.
spk04: Okay, okay. Well, that's fine. That's fine. I'm just wondering about the – So it's a person and a half, Mike. Okay, so my next question then is if you would spend a little bit of time talking about – we're going to be done with offices in the United States of America within 12 months, okay? I'm summarizing what I heard, if you will. And then you talk about growth by adding people in offices, which probably is more accretive. Do you want to talk about the opportunity you see there and what investments need to be made and what the payoff is, if you will? Should we go from one person per office to five, or what are your thoughts on that?
spk08: I don't know that we've Completely understand what the answer is on that. And part of it is we don't know exactly what the efficiencies we're going to get out of the system. For example, right now, a market consists of a person that does sales and a person who does recruiting. So a minute ago, when I answered you that it would be a person and have to open a market, I'm making the assumption that I'm going to get a half a person efficiencies out of the new system, right? So if we go through and add three salespeople in a Houston, I only need one and a half recruiters to support those three sales people. So we're trying to build that out right now. And part of that is we didn't have the ability in the old system to be able to really go in and say what does in real estate. In professional, we had it. But in real estate, we did not have the ability to be able to say what each person produced. So in the new system, we are going to be changing the model to be able to understand what what each person produces, and then we'll be able to build that out and know what deficiencies we get in that as well as what the potential new revenue would be going forward.
spk04: Okay. Last question, M&A. Your BG's current trading just up 6x EBITDA. If I look at what a pretty conservative estimate what the EBITDA should be this year. Okay. And you've got your best quarter coming ahead of you and and the best half coming ahead of you, okay? Are you seeing M&A at multiples that are creative to that or no? And also qualifying with the quality of the business?
spk08: Multiples are all over the board.
spk03: We've seen... So looking in the IT world, which is primarily where we've been focused, we've seen multiples... reasonable multiples in the seven to eight ish range, maybe eight and a half ish range. Uh, we, we did declined a bit on a few that were in the 10 to 16 range. So.
spk04: Okay. So I, I guess so. So, uh, do you feel, uh, with, what are your thoughts about our multiple versus everybody else's?
spk03: Well, uh, I, I believe that the industry multiple overall is down. I believe that we are a turn or two less than the industry. And I believe the multiples for some of the companies that are for sale, pardon the expression, are crazy. All right.
spk04: Well, okay. All right. That's all I've got. Thanks. Great quarter. I'm looking forward to a strong second half.
spk03: Thanks.
spk07: Thank you. I would now like to pass the conference back over to Beth for closing remarks.
spk08: Thank you, everyone, for your time today, and we appreciate your continued support. We look forward to updating you on our third quarter results in a few months. Have a great day.
spk07: That concludes the BGSF Inc. Second Quarter Fiscal 2022 Financial Results Conference Call. Thank you for your participation. You may now disconnect your line.
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