BGSF, Inc.

Good morning, everyone. Welcome to the BGSF Inc. Fiscal 2024 Third Quarter Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star, then two. As a reminder, this conference call is being recorded. I will now turn the conference over to Sandy Martin, three-part advisors. Please go ahead.

Sandy Martin Good morning. Thank you for joining us today for BGSF's third quarter 2024 earnings conference call. With me on the call are Beth Garvey, Chair, President, and Chief Executive Officer and John Barnett, Chief Financial Officer. After our prepared 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 on the company's investor relations page at investor.bgsf.com. Today's discussion will include forward-looking statements, which are based on certain assumptions made by the company under the Safe Harbor provisions, of the Private Securities Litigation Reform Act of 1995. 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 with the Securities and Exchange Commission. Management statements are made as of today, and the company assumes no obligation to update these statements publicly, even if new information becomes available in the future. Management will refer to non-GAAP measures, including adjusted EPS and adjusted EBITDA. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release. I'll turn the call over to Beth Garvey.

Thanks, Sandy, and thank you all for joining us to discuss our third quarter earnings. I want to start by saying our comments today will be brief as we are still under a process of evaluating options related to the company's review of strategic alternatives. I look forward to discussing this more in the future when we have additional information to share. We will be taking operational questions on today's call. However, we will not take questions concerning the process. While the last 18 months have been a challenging operating environment for our industry and specifically for IT and professional services, we believe that our results are beginning to stabilize with more consistency and even recovery as evidenced by sequential sales improvements of IT consulting on the professional side. We also launched exciting lead generation technology in Q3 as part of an ongoing technology enhancement made possible by our investment into modernization of our tech stack. I'll discuss this more after we cover our results. In the third quarter, total revenues were $71 million, which includes almost $30 million in sales in property management and $41 million in sales for the professional segment. Broadly speaking, the property management sales increased due to typical seasonality as well as forward progression of a number of important strategic initiatives. On the professional side, revenues were under pressure during the third quarter sequentially and versus a year ago due to declines in the finance and accounting division. Excluding farm placement, BGSF's IT consulting sales represent the largest revenue category at almost 70% of quarterly revenues. During the third quarter, IT consulting sales were up slightly on a sequential basis compared to the second quarter. We are encouraged by the leveling off of revenues, and we believe if macro and industry pressures subside, we are more optimistic today that stability could turn into growth in future quarters. Although IT consulting stabilized and grew slightly in the quarter, the finance and accounting division was sequentially softer than the second quarter. Consistent with strength in previous periods, our managed solutions business experienced double-digit growth over a year ago, and 10% sequential lift compared to the second quarter. Managed Solutions continues to be strong growth business for BGSF based on our unique and differentiated services and solutions. After John walks through our detailed financial results for the quarter, I'll return with closing remarks. John?

Thank you, Beth, and good morning, everyone. As Beth mentioned, this challenging environment continues to impact our industry, and today I plan to highlight some of the areas of progress at BGSF. Third quarter revenues were 71.2 million versus 83.5 million in the year-ago quarter, and up sequentially by 4.5 percent. On a sequential basis, property management revenues reflect a seasonal lift with an increase of 15.9 percent from the second quarter of 2024. For the third quarter, revenue in our professional segment remains soft compared to the second quarter, and declined in line with competitors, down 12.9 percent versus the prior year period. As Beth mentioned, managed solutions continues to show strength due to new contract wins. More recently, we are seeing elevated PERM placement activity at the start of this quarter. Gross profit and margins in the third quarter were 24.3 million and 34.2 percent compared to 30 million and 35.9 percent in the year-ago period. Much of this 170 basis point margin pressure was primarily attributed to cost pressures impacting our clients and demand for our services and lower PERM placement, which carries a lower GP margin, and to a lesser extent, increased competition. Compared to the second quarter, gross profit margins declined by 50 basis points again, mostly due to dynamics in the property management segment. SG&A expenses for the third quarter were $22 million compared to $21.6 million in the second quarter and $22.7 million in the prior year's quarter. SG&A in the period included $526,000 in non-recurring fees associated with the strategic alternatives process. We continued to re-baseline costs and prudently manage spending in the quarter. Third quarter adjusted EBITDA was 3.2 million or 4.5 percent of revenue compared to 2.6 million or 3.8 percent in the second quarter. A nice sequential step up in both dollars and margins. We reported adjusted earnings of 10 cents per diluted share and improvement from 7 cents per share in the 2024 second quarter, which compared to 36 cents per share in the third quarter of 2023. We generated cash from operating activities for the first nine months of 21.2 million. Capital spend was 1.4 million for the nine months, which is primarily IT investments. Our debt to EBITDA leverage ratio was 3.8 times which is compliant with our new credit facility amendment terms included with our Form 10Q filing. With that, I would like to turn the call back to Beth.

Thank you, John. I'm pleased to share that we successfully launched our advanced lead generation engine in the third quarter. This technology now drives our sales funnels for both divisions. Although still in early days, this targeted engine generated almost 400 marketing-qualified leads, and 171 self-qualified leads in the quarter, which translated into more than $1 million in booked revenue. We know that by strategically harnessing data-driven insights, generative AI, and leveraging marketing automation, we are able to streamline lead acquisition and enhance conversion rates across both divisions. This is an important strategic initiative that we had envisioned with our IT roadmap investments made in 2022 and 2023. We know that this milestone demonstrates our commitment to BGSF digital transformation, client engagement, and delivering value through cutting-edge workforce solutions. Both segments have seen pockets of strength and have demonstrated either stability or forward progress, especially in managed services, near-shore, offshore AI, and software engineering solutions, as well as firm placement in the professional segment this quarter. Recall in the spring that we hired Hitesh Talati, a Deloitte veteran, as BGSS SVP of Strategy and Innovation on the professional side. Hitesh's focus has been on large strategic customers and on bringing consolidated packages with wallet expansion initiatives to our solutions-based offering. Together, we have successfully secured several proof-of-concept engagements, as well as platform design sessions by starting with clients' tech stack, and building a custom framework for solutions for their business. These engagement discovery sessions facilitate a discussion of risk and pros and cons to properly scope technological innovations into the organization's ecosystem. This consultative approach to technology allows our team to whiteboard and properly scope for the best solutions, which leads to comprehensive statement of work for our professional team. Not surprisingly, September was the highest IT revenue and gross profit month for the year and the highest IT contribution to overhead since October of 2023. We know that our relentless work can and will build momentum as supply will begin to turn. We also know that accessibility and responsiveness to our clients and prospects through continued improvements of our digital tools is empowering our sales teams across the company to capture and convert leads faster. and ensuring our clients have swift access to the right talent solutions is our number one priority. Also, we know that getting past the election with lower Fed interest rates will eliminate some distractions and obstacles from key decision makers. Using our lead generation technology, we are actively working to accelerate property management business. We also continue to target properties using the strategic territory mapping to drive sales teams' performance and increase customer relationship touch points. We continue to sign partnership agreements that place BGSF on a short list of preferred vendors for owners and property management companies. We will work hard to earn business based on premium services that deliver exceptional, trained, and skilled talent. We continue to believe that there is a backlog of repairs and capital improvements in most multifamily communities due to prolonged period of higher interest rates and cost of capital, as well as recessionary pressures. As macroeconomic pressures ease and our business complete their budgeting prop cycles, we expect to benefit from better project and business flow throughout 2025 and beyond. Also on property management side, our SVP of sales, Andrew Hill, is leading sales teams, and his experience coupled with our enhanced efforts around sales training and development are improving the speed and effectiveness of the sales team's onboarding and training efforts. Speaking of training, we continue to invest in talent by internally training property management candidates in all areas, including leasing, maintenance, and groundskeeping. We want clients to see and experience differentiated skill sets and experience of our trained workforce. We know that this industry is dynamic, and we are staying in front of innovation and markets with expanding industry apartments, luxury communities, and commercial conversions to residential. This is especially important given the notable shortage of housing today and shortages forecasted throughout North America. Our BGSF leaders and their teams continue to foster culture of adaptability and resilience. Our discipline sales and marketing efforts are pursuing a robust process of defining target markets, enabling new technology, understanding our audiences, optimizing our sales process, therefore gaining competitive advantage in the short term and the long term. We also continue to read baseline expenses and make careful spending decisions. We are relentlessly focused on sales, profitability, and cash flow. I appreciate your time today and want to again thank our employees, clients, partners, investors for their support and belief in BGSS's vision for the future. Now we'd like to open the call for operational questions for the analysts about our business. Operator? Operator?

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Tyler Enlen with Roth Capital Partners. Please go ahead. Hi, Beth. Good morning.

Good morning.

Good morning. Hi, I'm filling in for Jeff. Morning to Beth and John. So my first question was the demand for property management has been impacted by budget constraints in the recent past. Has the past pent-up maintenance demand materialize and can provide an update on your territory mapping initiatives and property management with respect to the ability to differentiate from the competitor?

So, I'll take the first question. We don't think that pent-up demand has shown up yet. When we look sequentially at the business from Q1 to Q2, We think that's kind of the low point for the kind of demand depression related to all the expense pressures that they're feeling. So, our growth there that we would typically see was moderated. We still saw an uplift, a typical seasonal uplift, but it wasn't what we expected. And then really, while we were at a lower level year over year, right, what we saw Q2 to Q3 was right in line with what we would historically see dollar-wise from a lift from seasonality. And we didn't see any more than what you would normally expect. So that leads us to believe that there is quite a bit of pent-up demand out there that is going to come through at some time.

Awesome. Perfect. That was very helpful. And my second question was, last quarter, you were cautiously optimistic about a potential lift in the professional segment. So, was project wins exceeding project ends? Did that momentum carry through in the third quarter? And were there any timing issues that may suggest fourth quarter maybe see a nice sequential improvement?

We did see... Uptick in the third quarter, especially late in September for the professional group. Again, we have had a great uptick in wins outpacing our ends. So there were many new things that may have gotten pushed a few weeks that kind of made them go into October, but so far we've had pretty good traction in the right direction from what we expected.

Very nice. And then my last question was, Do you have a timeline on when the strategic alternatives review is going to end?

We don't at this point. We continue to work diligently to move forward on that, but we don't have a timeline right now.

Perfect. Thank you, guys.

Thank you. Thank you.

Again, if you have a question, please press star, then 1. At this time, there are no further questions. I will turn the call back over to management for any closing remarks.

Thank you, Debbie. Thank you for your time today. We appreciate your continued support, and we look forward to updating you with our fourth quarter results in March. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.