BGSF Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 8 speakers on the call.

Operator

Morning, everyone, and welcome to the BGSF, Inc. Fiscal 2023 Third Quarter Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, this conference is being recorded.

Operator

Now I would like to turn the call over to Sandy Martin, 3 important advisers, please go ahead.

Speaker 1

Thank you. Good morning and welcome to the BGSF 2023 Q3 earnings conference call. With me on the call today are Beth Garvey, Chair, President and Chief Executive Officer and John Barnett, Chief Financial Officer. After our prepared remarks, there will be a Q and A session. As noted, today's call is being webcast live.

Speaker 1

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 materially differ 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.

Speaker 1

These non GAAP measures are intended to supplement GAAP Financial information and should not be considered a substitute. Reconciliations of GAAP to non GAAP measures are provided in today's earnings press release. I'll now turn the call over to Beth Garvey. Beth?

Speaker 2

Thank you, Sandy, and thank you, everyone, for joining us today for our Q3 earnings discussion. Our performance for the Q3 reflects continued progress on our long term strategic initiatives. Our goals are to grow through organic and inorganic revenues and by diversification actions through higher value and specialized offerings in both segments. Property Management Solutions and our professional consulting and project work continue to enhance consolidated gross margins and company's return profile. Our Q3 performance reflects this progress with sales growth of 6.3% that resulted in total revenues of 83,500,000 We grew by 8% in the Property Management segment and 5% in the Professional segment despite pockets of weakness, mainly in the ERP related consulting area.

Speaker 2

The effects of the economic uncertainties and the high interest rates of 2023 continue to cloud our industry and create a choppy demand environment. We believe that our unique offerings across our two segments as well as good diversification of clients in the end markets position us well in this environment. Our strategic investments in people, process and technology over the last 3 years have given us more stability and capabilities to succeed than 3 years ago. The Professional segment is in the early stages of realizing benefits from recently added or acquired workforce solution competencies. This includes our nearshore and offshore capabilities from the acquisition of Arroyo Consulting earlier this year.

Speaker 2

Our full suite of professional services and solutions includes our acquisitions, has strengthened our go to market value delivery proposition. This includes added global IT resources and capabilities with AI capabilities, Projects and Customer Solutions. With that, I'll turn the call over to John to cover the detailed financial results.

Speaker 3

Thank you, Beth, and good morning, everyone. 3rd quarter total revenues grew to $83,500,000 up 6.3% from the prior year quarter. The Property Management segment, all organic, continued to show strength and grew revenues by 8.2% in the 3rd quarter. This growth was on top of 34.1 percent revenue expansion in the Q3 of last year. This translates to cumulative 2 year revenue growth of over 42% compared to 2021.

Speaker 3

Seasonal apartment turnover make ready demand in the second and third quarters continues to advance the Property Management division. The Professional segment's quarterly revenues increased by 5%, driven by recent acquisitions. Organic sales and professional declined by 20.6% in the 3rd quarter versus the prior year quarter. The Q3 was going up against difficult prior year comparisons that was aided by macro tailwinds driving up sales by 14.9% in the prior year quarter. Sales softness in this year's Q1 was primarily related to staff augmentation placements and technology implementation starts.

Speaker 3

We are benefiting from new service and solution offerings from our acquired businesses and we are pleased to have invested in these differentiated businesses that offer nearshore and offshore IT capabilities and higher end finance and accounting solutions. The 3rd quarter gross profit margins expanded to 35.9%, up from 35.7% in the prior year quarter. Property Management gross margins were 39 Property Management permanent placement was relatively flat on a sequential quarter basis, but was up against tough comps from the prior year quarter. The Professional segment gross margins were 33.2%, up 130 basis points due to the acquired businesses and continued shift away from Low Margin IT Placements. SG and A expenses for the Q3 were $22,700,000 essentially flat compared to the Q2.

Speaker 3

Non recurring transaction fees for the quarter were $149,000 3rd quarter adjusted EBITDA was $7,900,000 or 9.4 percent of revenue, which was sequentially higher in terms of dollars and margin percentage than the 2nd quarter adjusted EBITDA of $7,500,000 or 9.3 percent. We reported adjusted earnings of $0.36 per diluted share compared to $0.37 per share for the 2nd quarter, which was lower primarily due to the impact of more interest expense this quarter. We are prudently managing our balance sheet focusing on working capital efficiencies. We have continued to pay down debt. Our bank covenant ratio of funded debt to Trailing 12 months pro form a adjusted EBITDA increased to 2.5 times from 2.3 times as the reduction And in debt did not offset the decline in pro form a adjusted EBITDA.

Speaker 3

We are in the process of refinancing our credit facility. We have a great group of banks committed to participate in the refinancing and we are working through the details to get an agreement executed. We maintain a disciplined approach to our capital allocation strategy that includes growth investment, debt pay down and consistent capital returns to shareholders through our quarterly cash dividend at an annualized yield of approximately 6.4%. Although we will continue to review the acquisition pipeline, we have no immediate plans for acquisitions in 2023 for early 2024. And with that, I would like to turn the call back to Beth.

Speaker 2

Thank you, John. Like most businesses, we continue to navigate and manage through changing market dynamics this year. We remain bullish on the company's prospects Based on the significant progress of our strategic repositioning over the last several years, which includes higher value consulting, managed solutions And a growing property management platform. We are truly unique in the workforce solution space. Although our stock has traded down and it's mostly in line with the industry.

Speaker 2

We believe that we are better positioned for future growth, higher gross margins and meaningful cash flow generation, leading to long term shareholder value. We have made significant progress and changes in both segments and believe we are well positioned for profitable growth. In Property Management, we have expanded across the U. S. In Canada over the last few years that are still small from the market penetration perspective compared to the addressable potential.

Speaker 2

The National Apartment Association expects added capacity with approximately 4,300,000 new apartments planned to be built by 2,035, and we plan to significantly benefit from this industry growth. On the professional side, we are partnered with the world's leading technologies according to Gartner's 2023 cloud ERP report, which includes Workday, Oracle and SAP to name a few. We also provide other high value IT consulting, finance and accounting, managed solutions and offshore IT engineers building AI projects Our transformational plan to build a strategic workforce solutions business with 2 growing segments accelerated in the most recent years. We plan to continue to make prudent decisions as we continue to build an enduring company that creates sustainable long term shareholder value. Looking into Q4, despite continuing difficult comps, we expect the Professional segment to stabilize somewhat.

Speaker 2

We plan to continue to focus on our strategic initiatives this to expand our business, improve profitability and generate cash flow. Our businesses are not recession proof, but we believe that they The segments in the diverse markets positions us to be more resistant to typical down cycles compared to others in the staffing industry. For the remainder of 2023, we expect to see normal seasonality in our property management and growth in the Professional segment driven by our acquisitions. I want to thank the entire BGSF team for their diligence and hard work in supporting the company's expansion plans, acquisition integrations and profitability progress this Finally, it is with great sadness that I share the passing on Tuesday of former Chairman of the Board, President and CEO, Alan Baker. Alan was a person of integrity and a forward thinking leader who dedicated over a decade of his life to helping shape the fabric of our company.

Speaker 2

His impact extends beyond BGSF, leaving an indelible mark on the industry and his legacy is marked by steadfast Commitment to excellence and a passion for driving success. I know that many of you knew him, so I wanted to share this with you today. For details on the memorial service, Please go to dignitymemorial.com. Before we open the line for questions, I wanted to mention that we will be presenting at Southwest Ideas Conference in Dallas on November 15. With that, operator, I would like to open up the call for questions.

Operator

We will now begin the question and answer session. The first question comes from Jeff Martin from ROTH MKM. Please go ahead.

Speaker 4

Thanks. Good morning, Beth and John. My condolences on Alan Baker. Sad to hear that. Wondered if you could dive a little deeper on the ERP consulting trends that you're experiencing now And the technology innovation starts being pushed out, delayed or not happening.

Speaker 4

How large of a piece is That of the professional segment and maybe just kind of give us a sense of how the progression trend there Has occurred over the quarter and into first half of fourth quarter? Thanks.

Speaker 2

Thanks, Jeff. The 1st 2 months of the quarter really was slower. We started to see a little bit of activity pipe Coming in September, which was helpful. But we've been talking about starts in the ERP area being pushed pretty much all year. Companies still have the need to be able to do it.

Speaker 2

They are just a little bit nervous on when to pull the trigger on those things. So we are hopeful that the Activity we started to see in September and little bit of life back into October will translate into a better 4th quarter Or at least for

Speaker 4

that. Yes, great. And then the business is much different now than it even was A year ago with Arroyo and Horn, maybe could you give us an update of some of the progress since you've acquired those two businesses? What strategically has changed and how you position the business now versus 1 or 2 years ago?

Speaker 2

Good question. I would say that the one thing we have always tried to do through our acquisitions is to make sure that we can continue to add Offerings to our customers that they have asked us for. We've talked in the past, we have the ability to be able to help somebody Pick a software, we have the ability to help customize it, to get reporting out of it, which encompasses all of our teams, You take it from selection to the IT group to the accounting group and that circle has been a strategic Path for us for many years. What do we need to do to make sure that we don't break that circle? And I think the 2 acquisitions with Horn and Arroyo kind of helps with that last Peace from the Finance and Accounting Group.

Speaker 2

We did not have managed services in that F and A world and that has proved started to prove out to be very beneficial for us. And then the near shore offshore opportunities, we've talked about that over the last quarter that we had not in the past year had Any conversations with our customers who didn't ask us if we were considering that. So as those two companies get integrated in the organization and the sales teams And get more aligned and being able to cross sell those efforts, we expect those revenues to increase and grow and actually make Our customers won't have to go outside of, but can continue to keep all the business with us.

Speaker 4

Yes, yes, great. And then you referenced Q4 for professionally, you expect it to be up year over year mainly from the acquisitions, but kind of an improvement On the core organic, maybe give us a sense of what is driving that improvement on a sequential basis, because I'm looking Last year, you still grew double digits in professional year over year. So it's not necessarily an easy comp, but it does get a little easier.

Speaker 3

Yes, sorry, a couple of things to comment. 1, if you are looking at last quarter and you're going to do last year Q4 and you're going to do a comparison to this year Q4, which everybody will be doing, including me, sooner than later. We did have 14 weeks In the Q4 of last year versus we'll have our typical 13 weeks this year in Q4. So when I think when we talk about the Q4 and what we're expecting or what we're seeing so far, It's kind of aligned with we're adjusting the prior year for that extra week And our expectations based on a comparable weak quarter, right? So I think we are Seeing we did see some daylight in September for our core IT group, our core professional group.

Speaker 3

We hate to say that 4, 6 weeks means stabilization, But we have seen that level off on a sequential week basis. And we right now looking at how that Performance has been. We are optimistic that the 4th quarter is going to continue along those same lines With typical seasonality. So if you look at our business, you look at the last 2 years, it's tough to see the seasonality. 1, because we were in a very aggressive growth market in general and 2, we had that extra week last year.

Speaker 3

But if you go back before that, right, you'll see that there is seasonality in the Professional segment, not as much Is what you would see in the property management segment as we have really high demand in 2nd and third quarters. But we do have holidays and a little more vacation that hit The Q4.

Speaker 4

Great. And then last one if I could. Could you talk on what you're seeing out there in In terms of wage rates and the trends, are you seeing increased competition on wage or any other factors Competitively or on a rate basis that's worth noting?

Speaker 3

I don't think there would be anything to note there specific.

Speaker 4

Okay. Thanks, John and Ben.

Speaker 2

Thanks, Jeff.

Operator

Our next question comes from Howard Halpern from Taglich Brothers. Please go ahead.

Speaker 5

Congratulations guys on navigating a tough environment. First question is regarding, I guess, the property segment. How many offices do you currently have open and what's the plan going forward in terms of opening new or splitting existing locations?

Speaker 2

I believe we are right at 64 markets in the property management sector at this point. But I would say that It's always we would love to double down and open up quickly, but that cost that's a P and L hit. So we manage those costs to make sure that we can Grow effectively and also not stress out the teams as they open up new markets. But as you know from our prior history, we've always opened up new markets Every year. And now that we have the new sales force marketing, territorial mapping tool that we've been able to utilize, We anticipate that's going to allow us to really penetrate into these larger markets a lot better than we have been able to in the past.

Speaker 5

And in terms of, I guess, finding people to complete Your customers request, how is that going in terms of educating, I guess, the potential People who will be deployed to your customers and what are you seeing in terms of that?

Speaker 2

Finding talent is not as big of a problem as it had been in the past. But I think we've talked about this in the past. We strive to be a leader and attract the best talent and we do that through relationships. And so We have a very big referral program within our organization. So if somebody is working for us, we ask them to bring their friends along and have found that to be probably our number one Creating tool.

Speaker 5

Okay. And are there any additional internal technology projects that you are working on or Is most of it now just maintenance and just making sure everything is tightened up from what you've done in the past year or 2?

Speaker 2

As a reminder, we went live with the technologies on the MVP. So we they all were basics. We wanted to make sure that we could pay and bill right out of the gate and that it wasn't disruptive To our consultants or our customers. And so we now have moved into the efficiency side of it. So less things in regards to getting it Actually implemented and cleaned up and more things into the efficiencies and we're starting to see that move as well.

Speaker 5

Okay. So we should and that should impact Maybe the Q4, but really next year we should see some of that on the P and L line?

Speaker 2

We've already started to see that internally. We track the contribution to overhead by employee and I think we had a target of Getting 9% efficiencies. So we've hit that this last quarter. But keeping in mind that our Q3 is our highest Quarter in revenue, we're going to wait to see what happens in December to see what how it stabilizes. But that's far from we've been pleased.

Operator

Our next question comes from George Melas from MKH Management. Please go ahead.

Speaker 6

Thank you, hi Beth and John. Congrats on the good results in a tough environment. I have a very general question, Which is you did this rebranding. I think it's already quite a few quarters ago. How do you manage the business Now that you have that and what does that enable you to do?

Speaker 2

Great question, George. Thank you for asking it. So we did that in 2nd quarter, we what it allows us to be able to do is, we had 13 different ways we communicated out to The public based off of the 13 different brands that we had. Centralizing that and having it all changed over to BGSF, we have had our Social presence increased triple at this point and sometimes at 5 times what it was before depending on the platforms. That allows us to be able to do more targeted campaigns, to be able to attract customers and candidates.

Speaker 2

I believe we had a report out this week that some of those initiatives have reported and we allow our customers to come in directly into the platform now to Supply orders should give us an order and we've had 70 orders in the last few weeks have come in through the website because of the things that we've done. So all about attraction of the candidate as well as the customer and we track that very, very closely to see how the initiatives are working within the new Florence.

Speaker 6

Okay. And then from a P and L sort of from a reporting perspective, You had I can't remember if these brands had separate P and Ls. Clearly, at one point, they did. How do you manage that in the professional

Speaker 3

segment? George, we're actually internally, that's right. Traditionally, when we made acquisitions, quite often there was an earn out attached to it. And so we internally, we did keep it as a separate P and L. Now with acquisitions aside from Arroyo, which is really kind of different than what our traditional IT business is, Right.

Speaker 3

We view that in really IT and then Finance and Accounting segments. Now that we have added Horn and we will internally, we will start looking at the business from a How's IT, traditional IT, how's traditional finance and accounting and then how is Managed services performing specific to both IT and finance, but really managed Services in total as that becomes also a bigger part of our business.

Speaker 6

Okay. That's really interesting. Great. And there it seems like the property management was extremely strong. It seems like it's your best quarter ever And it seems to be continued momentum there.

Speaker 6

What makes it so successful? Because at one point, it felt like It was decelerating a little bit and now it's really back on track and doing very well.

Speaker 2

Well, George, They really decelerated during COVID. They got hit very, very hard. But that team is an amazingly engaged team and they really Great things within the industry. As a reminder, they won the National Supplier of the Year, for NAA, which is Amongst all suppliers to the Apartment Association. So this team shines bright and they That is a relationship business in whole and the team does an amazing job in making sure that they are Offering solutions to our customers and it turns into results in revenue.

Speaker 6

Sounds good. Thanks, Alex.

Speaker 2

Thanks George.

Operator

Our next question comes from Mike Taglich from Taglich Brothers. Please go ahead.

Speaker 7

Good morning, Beth. Good morning, guys. Again, obviously, condolences on Alan, terrific guy. Most of my questions have been answered. If I'm looking at Adjusted for the acquisition as of the beginning of this year, if I put Arroyo And obviously Horne was already in it.

Speaker 7

What would my 9 month EBITDA number be, the adjusted EBITDA number?

Speaker 3

We don't separate out all the way down to EBITDA. I guess that's the short answer.

Speaker 7

Okay. How much money do you expect to spend over the next year or so Opening new offices for the Real Estate division.

Speaker 2

We're in the budget process right now. And As in the past, we've always opened up we've always budgeted maybe 6 ish and then ended up doing more. We really are doubling down on this territory mapping in the larger markets. The early signs is that's going to be super successful. So that's probably a really good question for next quarter when we have a better idea of how we're going to be able to penetrate those markets that we're currently in.

Speaker 2

Just keep in mind, as a reminder, we'd have one salesperson in Dallas and there's like 15,000 apartments here. And one person can't do that. So with this territory mapping tool, we'll be able to take several more salespeople and have a Higher touch value to these customers and get out there more often. So we think that we're going to get major benefits from that. And we launched it in Houston and have already Started to see a little bit of movement in the right direction on that.

Speaker 2

So I think next year is going to be a little bit more of opening offices as well as penetration into the markets that we're already in.

Speaker 3

Right.

Speaker 2

And the fact that we can do that, the better we are. And it's everybody's goal to go fast And make sure that we do it successfully.

Speaker 7

If you had to guess, so if I'm hearing you correctly, Better staffing some of the existing offices to flush out the market opportunities in the area, Right. It's going to be, if you were spending money on growth initiatives, would that be 70% versus open up another 5, 6 offices, Which would be 30 or I mean what are your thoughts on that, but I want to get a feel on how much cheaper is that? And obviously you don't have to open up an office, it's there.

Speaker 2

We none of these places have offices. No, there are no brick and mortar. When we open a market, it's a salesperson. So this is all people. There is no offense associated with that.

Speaker 2

So it's a matter of whether or not we're going to hire 10 sales people, whether or not that's 2 new markets and eight People in existing markets that we're in, it's just what we have to do from that perspective. But, it's really just about Being able to manage through that. And like I said, we are just starting the budget process right now, and I'll be able to better answer that a little bit later.

Speaker 7

All right. Thank you.

Speaker 2

Thanks, Mike.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Beth Garvey for any closing remarks.

Speaker 2

Thank you, Scott. Thanks for your time today and we appreciate your continued support. As always, we are available for follow-up calls And we look forward to updating you our 4th quarter results in March. Have a great day.

Operator

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

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