BGSF Q1 2023 Earnings Call Transcript

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May 11, 2023

There are 6 speakers on the call.

Operator

Good morning, everyone. Welcome to the BGSF Fiscal 2023 First Quarter Financial Results Conference Call. After the speakers' remarks, there will be questions and answer a question. As a reminder, this conference call is being recorded now. I will turn the conference call over to Sandy Martin, Freeport Advisors.

Operator

Please go ahead.

Speaker 1

A. Thank you. Good morning, and welcome to the BGSF 2023 First Quarter Earnings Conference Call. A. With me on the call today are Beth Garvey, Chair, President and Chief Executive Officer and John Barnett, Chief Financial Officer.

Speaker 1

A question and answer session. As noted, today's call is being webcast live. A replay will be available later today and also archived on the company's Investor Relations page. Today's discussion will include forward looking statements, a which are based on certain assumptions made by BGSF under the Safe Harbor provisions of the Private Securities Litigation Reform Act a review of 1995. Actual results may differ materially from those indicated by the forward looking statements because of various risks and uncertainties, a discussion of the company's filings with the Securities and Exchange Commission.

Speaker 1

Management statements are made as of a replay of the call today and the company assumes no obligation to update these statements publicly even if new information becomes available in the future. A During the call, management will also reference certain non GAAP financial measures, which can be useful in evaluating the company's operations a discussion related to the financial condition and results. These non GAAP measures are intended to supplement GAAP a financial information and should not be considered a substitute. Reconciliations of GAAP to non GAAP measures are provided in today's earnings press release. A I'll now turn the call over to Beth Garvey.

Speaker 1

Beth?

Speaker 2

Thank you, Sandy, and thank you for joining us today for our Q1 earnings discussion. A In late April, we announced our acquisition of Arroyo Consulting. I'm excited about the strategic and high value addition to our offerings. A We believe that Aloyo strengthens our go to market cross sell efforts by providing current and future clients with cost effective alternatives a through nearshore and offshore IT resources. Extending BGSS delivery platform to include Latin America and India a strategic capabilities and expands our IT talent recruitment reach as well.

Speaker 2

Our teams are working well together and we believe that adding these deeper specializations a. A Turning to our quarter results. 1st quarter results were in line with our expectations for both professional and real estate. A as you can see in our release, the Professional segment benefited from incremental revenues related to our acquisition of Horn Solutions. A And we are excited about the cross selling and expanded wallet share opportunities it will provide.

Speaker 2

We are cycling against a tougher sales comparisons this year as our team is highly focused on pricing, spreads and overall cost structure as market dynamics evolve. A Since the Q4 of last year, we have seen longer decision timeframes in the selling cycle, which impacts our professional side. A However, we continue to see solid demand for ERP and cloud migration services, and importantly, we have consulting and managed service a specialties in POP Enterprise Wide Technologies. Today, we reported revenue of $75,300,000 a decline in the quarter, up 9.9%, and we also expanded gross margins to 35.6%. Delivery margin expansion was at the core of our professional growth a strategy as we journey from a staffing company to a high value consulting and managed services business, delivering expertise to our clients, a While also maintaining our solid margin profile in our real estate sector.

Speaker 2

Now, I will turn the call over to John. After he covers our financial results for the quarter, a I will come back and discuss our 2023 business outlook and provide comments on our strategic initiatives for this year. John?

Speaker 3

A Thank you, Beth, and good morning, everyone. As Beth mentioned, we completed and announced the acquisition of Arroyo Consulting on April 24. A the purchase price was $8,000,000 and provides for earn out payments up to an aggregate of $8,500,000 based on agreed upon performance targets. A We funded $6,800,000 of the acquisition price at closing with a total of $1,200,000 held back related to working capital adjustments a and partial security for any outstanding seller obligations. We will be thrilled if we pay the all in purchase price a $16,500,000 Turning to our Q1 results, total revenues were $75,300,000 a The Real Estate segment was up 9.6% compared to the prior year quarter and the Professional segment increased 10.1%, a which included incremental revenue from the Horned Solutions acquisition that closed in December of last year.

Speaker 3

Excluding Horned Solutions, the Professional a experienced headwinds due to 4th quarter project ends and lengthening timelines related to budgets and new project starts. A That said, project starts in the Professional segment began to rebound in late Q1. A We believe that companies in general will prioritize capital spending on ERP implementation and cloud migration work, a which aligns with our specialization. As Beth mentioned, total revenues for the Q1 met our expectations, a discussion of the discussion of the discussion of the discussion of the discussion of the discussion of the discussion of the discussion of the discussion of the discussion of the discussion of the discussion of the a Sales were up 38% over the prior year and continued with strong increases of 29%, 22% a and 14% respectively in quarters 2, 3 and 4. 1st quarter gross profit margins a strong quarter of the year.

Speaker 3

We are now in the range of $1,500,000,000 in the quarter. From a segment perspective, a professional grew 130 basis points to 32.9 percent and real estate was up 150 basis points to 39.9 percent. A The margin increase in the Professional segment was entirely driven by the addition of Horn Solutions, a which has a higher gross profit margin profile than the existing professional business. A SG and A expenses for the Q1 were $23,200,000 UP 3,500,000 a Of the $3,500,000 selling expenses were $2,700,000 of the increase, a of which Horn Solutions selling expenses were $2,200,000 As previously mentioned, Horn Solutions has a higher gross a profit margin than the existing professional business. Foreign Solutions also has a higher selling expense as a percentage of revenue.

Speaker 3

A transaction costs were approximately $300,000 in the quarter and the remaining increase represents investments in people and technology. A As we messaged last quarter, operating results for the Q1 included a non cash charge related to the rebranding a and subsequent intangible asset impairment of trade names that we used in the business. During the Q1, we wrote off a tradename intangibles of $22,500,000 which negatively impacted net income by $16,900,000 a for $1.58 per share. Our non GAAP adjusted measures for EBITDA and earnings per share a slight impact of acquisition amortization, the trade name impairment charge and acquisition transaction costs. A Adjusted EBITDA for the Q1 was $4,300,000 compared to $3,900,000 in the prior year quarter.

Speaker 3

A adjusted earnings per diluted share was $0.16 compared to $0.23 in the prior year quarter. A The difference in adjusted earnings per share is largely driven by higher interest expense in the current quarter related to a Horn Solutions acquisition financing and higher interest rates. At the end of the first quarter, accounts receivable totaled $62,500,000 with days sales outstanding remaining consistent with the end of last year. A Our working capital ratio strengthened from 2.7@yearendto2.9 and our leverage ratio of funded debt to trailing 12 months a pro form a adjusted EBITDA of 2.6 times. We returned capital to shareholders in the Q1 via a cash dividend and announced our 34th consecutive cash dividend late last week.

Speaker 3

And with that, I will turn the call back to Beth.

Speaker 2

A Thank you, John. Last quarter, we talked about our 4 strategic initiatives for 2023, which included M and A growth, a rebranding project as well as process improvements and shared services, which I will address more fully on future calls. A I'm pleased to report that the branding of all our trade names to BGSS is well underway. We believe that one brand voice a may enhance our brand power, but even more importantly, we believe that it cuts out confusion in the marketplace. Going to market as BGSF, a single brand platform should be an enabler as we continue to expand our offerings on a global stage.

Speaker 2

The cost to transition to a single brand is minimal. A We continue to move forward with our technology efforts, moving from our go live with a minimal viable product focused on payroll and billing a discussion of the company's financial results. Commenting on our recent acquisition activity, a We are pleased and excited about our recent transactions with Horn Solutions and Arroyo Consulting. Both were cultivated over time and a strategically with our acquisition criteria, meaning the cultural and capabilities were right as well as the right financial profile. A We will continue to proactively search for deals that are accretive, add to our client base, talent resource footprint and or expand our expertise.

Speaker 2

A The pipeline continues to be active and M and A remains an important component of our long term growth strategy. A Based on our outlook for 2023, we expect to continue to see normalization of our revenue seasonality. A Q1 is typically a low point for a revenue standpoint for a normal year, and we are starting to see consulting projects ramp in the 2nd quarter. A Real estate is expected to grow this year and we anticipate some macro headwinds on the professional side, but expect our high value consulting business practices a and managed services to be resilient and grow in 2023. Finally, as John mentioned, we are up against difficult comparisons in the 2nd quarter a with revenues up 29% last year versus 2021.

Speaker 2

We remain realistic around the growth rates and will carefully manage expenses a With that said, we can open the call up for questions. Operator?

Operator

A a question. With our first question comes from Howard Harpoon from Taglich Brothers. Howard, your line is now open.

Speaker 4

A Congratulations. Nice start to the year, guys.

Speaker 2

Thanks, Howard.

Speaker 4

In terms of the recent acquisition a Yes. The recent acquisition of Arroyo, could you talk a little bit more about, I guess, their gross margin profile and if there's any a If there tends to be any seasonality in their business?

Speaker 2

A Their gross margin profile is pretty in line with where we are in the rest of the business. And as far as what we expect a There's not really seasonality. These are really project driven, type assignments that are pretty consistent. A So we haven't seen any seasonality in there.

Speaker 4

Okay. And a With that acquisition and the Horner acquisition, you talked a little bit about cross selling. What type of activity has just a started and what type of goals do you have over the next 12 to 18 months to, I guess, educate your own client base on what you could do for them?

Speaker 2

A I think from the Horn Solutions perspective, they have a lot of accounting finance managed services offerings, which we didn't have a And so those are things that actually fit very well into our profiles as we go in and implement an ERP system on the techs a on the IT side and then move it over into the accounting reporting side. So, that's a very good fit for us from a cross sell perspective. A And then in regards to Arroyo, we've had customers for several years and really more so recently a They ask us for near shore, offshore capabilities so that they can get cost effectiveness out of it. And so this has been a highly what's the right word? Popular with what our cut when we've gone to market just a In the baby 2 weeks we've had it now.

Speaker 2

So, there is a lot of energy around the fact a They want this business out there. So our customers are already very pleased that we made that acquisition.

Speaker 4

A Okay. And within the real estate segment, the growth that you're seeing, is it a Is it from expanding within your existing customer base or are you or new customers? What kind of a breakdown, I guess, would that be between that is propelling growth in that segment?

Speaker 2

A Our customer base pretty much remains consistent. There's a lot of buying and selling. So we are seeing some things where one of our customers a Got bought by another customer and so there's moving in those areas, but there's still relatively the same customers that we have. But the growth is really around a The markets that we opened, it's starting to get some traction, as well as we've talked about in the past that there's a Markets around the U. S.

Speaker 2

That are starting to really start to rebound the way they want that they were pre COVID and then there's other markets that are a little bit a So you can't lay a blanket statement across real estate that the whole segment is coming back. It just depends on where the markets are

Speaker 4

and what they're doing. A Okay. And just one final one for me. With the Arroyo acquisition, will there be a little bit of a bump up a in G and A costs, transaction related costs from Aloyo in Q2?

Speaker 3

A There will be some costs in Q2.

Speaker 4

Okay. A Okay. Okay. Congratulations and keep up the good work guys. Thanks Howard.

Operator

A thank you, Howard. We have our next question comes from Geoff Martin from Roth MKM. Jeff, your line is now open.

Speaker 5

Thanks. Good morning, Beth and John.

Speaker 4

Good morning. Good morning.

Speaker 5

Beth, the Arroyo transaction appears highly strategic. A I want to get a sense of the potential to scale that business. I would imagine if you've got strong demand from your clients and they've been asking for it for years, a You're probably going to have a lot of demand there. How do you see the growth potential for Arroyo? And how easy is it to scale that business?

Speaker 2

A Well, I had the benefit of I just returned from Colombia to visit with the partners down in Latin America. And a They have got a model that allows them to be able to train people up pretty quickly. So we are being very a strategic on how we go roll that out so that our customers are calling, wanting the business, but we have to make sure that we successfully a Grow the business at a pace that is successful for everybody. But they do have people in the wings ready to go and our customers, our a Professional team right now is in the process of getting ready to do a introduction and sales blitz across our current customer base in the next couple of weeks a to talk and introduce Arroyo to the client base we have right now. So again, it's going to be a balancing act, but the initial out of the gate comments that we've had from customers, has been extremely positive.

Speaker 5

A Great. And then you mentioned you're seeing good demand in ERP, consulting and managed services. What percentage of the business given you

Speaker 2

a We don't have that a We don't have it broke out that way, Jeff, at the moment. I know that there's some efforts in trying to be able to a start to push those things out as we get more involved in our system. But right now, we don't track it based off of what the offerings are.

Speaker 4

A

Speaker 5

Okay. And then could you you touched on it a little bit in your prepared remarks in terms of a financial and accounting side of professional projects coming back on, starting up. In terms of just pure finance a What's your outlook in terms of year over year growth or comparisons as we progress throughout the year for that part of Professional?

Speaker 2

I believe they'll stay in line with what our industry is saying. John and I were a Talking this morning about whether or not our industry has reset what the growth expectations are. So I haven't had a chance a Go in and look what they are, but we do expect them to stay in line. There will be some growth in them, but I don't know if it will be at the pace we originally thought it was going to be at the beginning of the year.

Speaker 3

A Okay.

Speaker 5

Great. And then based on comments over the last couple of calls on the real estate a side of the business, the commercial has been a bit more choppy and isn't necessarily a Right for growth currently. Maybe just give us an update with where the commercial side of your real estate segment is tracking?

Speaker 2

A I think they're still where they have been. I mean, they're again, it's pockets, pockets a success, but it just depends on the market. I know that they have, slated to try to open 2 new markets this year on the commercial side of real estate, a But we're seeing consistency with what we've had talked about in

Speaker 4

the last couple of quarters.

Speaker 5

That's it for me. Thank you.

Speaker 2

Thanks, Jeff.

Operator

A. Thank you, Jeff. We have no further questions on the line. I will now pass back to the management team for closing remarks.

Speaker 2

A Thank you all for your time today and we appreciate all your continued support. We look forward to updating you on our 2nd quarter results in a few months. Have a great day. A

Operator

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

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BGSF Q1 2023
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