Bgsf, Inc. Q1 FY2022 Earnings Call

Good morning, everyone and welcome to the BGSF Inc First Quarter Fiscal 2022, Financial Results Conference Call. As a reminder, this conference call is being recorded. Now, I will turn the call over to Sandy Martin, Investor Relations to provide instructions and read the Safe Harbor statement. Sandy, please go ahead.

Thank you. Good morning, and welcome to the BGSF first quarter fiscal 2022 earnings conference call. With me today are Beth Garvey, President and Chief Executive Officer, and Dan Hollenbach, Chief Financial Officer. After the speakers' 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 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 today, April 28th, 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 management believes can be useful in evaluating the company's operating activities and business trends related to the financial condition and results of operation. These non-GAAP measures are intended to supplement GAAP financial information and should not be considered as a substitute for financial measures calculated in accordance with GAAP. Reconciliations of non-GAAP measures to the most directly comparable GAAP measures are provided in today's earnings release posted on the company's website. I'll now turn the call over to President and CEO, Beth Garvey.

Thank you, Sandy. And thank you to everyone for joining us on today's call. I will begin today's call with a few comments regarding the recent sale of our Light Industrial segment announced March 1st, 2022, and review operational highlights for our first quarter results. Then I will turn the call over to Dan to provide more detail about our Q1 results and the Company's financial position. Finally, I will come back to discuss our 2022 strategic initiatives, including an update as it accompanies the enterprise-wide CRM, HR, payroll, and workforce management software platform upgrade. On March 21st, we closed on the sale of our Light Industrial segment for $32.3 million, which equates to a valuation of 7.5 times buyer-adjusted EBITDA. As I mentioned last quarter, this divestiture fully aligns with management's long-term strategic goals of expanding our higher-margin businesses and growing into new revenue streams within our Professional and Real Estate segments. The completion of this transaction allows our teams to concentrate on Professional IT consulting, build on momentum we have with our project-based opportunities and managed services, and make programs for further development of our Real Estate segment. Despite continued macroeconomic pressures in 2022, we are confident in our ability to grow market share and expand these businesses significantly over the next several years. Turning to the quarter's results, we experienced growing momentum that improved sequentially throughout the quarter. First-quarter revenues exceeded our expectations in both segments, expanding by 37.8% over a year ago. The important realignment that we made in both segments during the pandemic are continuing to produce the desired results. Also, we're very impressed with Momentum Solution's business. Although this was a small acquisition, the growth trajectory is excellent. We are optimistic and confident about the future opportunities in the Real Estate segment. We will continue to carefully monitor labor shortages as well as inflation, with a total addressable market for the U.S. backing projected to grow to over $163 billion in 2022. We believe the company is well-positioned to continue to gain market share and meet or exceed our full-year goals in both the Professional and Real Estate segments. In Professional, our business pipeline is effective, and we are securing deals in IT consulting and managed services for this segment. We expect continued benefit from cross-selling and intentional broadening of our geographic reach. Given the strong performance in the fourth quarter from pent-up demand showing up with budget spending at the end of the year, we are pleased with the continued strength in 2022. Turning to the Real Estate segment, our teams continue to execute well on our strategic partner programs, as well as moving forward on new market expansion, recruiting, and direct hire placements where areas of strength that we believe will continue to experience tailwinds in the current year. With that, I would now like to turn the call over to Dan to discuss the company's financial results in more detail.

Thank you, Beth. And good morning, everyone. Before I walk through first-quarter results, I will add some commentary on the sale of our Light Industrial segment. Late in the first quarter, we completed the previously announced sale for approximately $30.3 million in cash, plus an additional $2 million due at the one-year anniversary in March 2023, and any working capital adjustment. The net proceeds were used to pay down debt, allowing us to invest in the business for growth. As a result, our financial results are from continuing operations, and except where noted, exclude operating results for the Light Industrial segment for all periods presented. For additional details on the sale transaction, please refer to our Form 8-K filed on March 24. Moving to our financial highlights from continuing operations. As Beth mentioned, first-quarter revenues were strong, growing 37.8% to $68.5 million compared to the year-ago quarter. The Real Estate segment expanded 39% and the Professional segment increased 37%. Momentum from last year carried into the first quarter, with positive impacts from better efficiencies and improved pricing, both quarter-over-quarter and sequentially. The Professional segment was positively impacted by strength in finance and accounting and IT consulting, ERP, and Cloud pricing projects, as well as the continued ramp up of the 2021 acquisition of Momentum Solutionz. Gross profit grew by 44.5% compared to the prior-year quarter, to $23.4 million, driven by revenue expansion, increased rates in Real Estate, and a 46% increase in placement fees. As a percent of revenue, gross profit increased 160 basis points to 34.2%, compared to 32.6% in the year-ago period. Operating leverage in Selling, General, and Administrative costs improved by 200 basis points to 28.8% of revenue compared to 30.8% last year. SG&A dollars increased $4.4 million, or 28.8%, which compared favorably to total revenue growth. Professional segment cross-selling continued to be strong and represented 24% of revenues and gross profit in '22, which is up from 5.4% of revenues and 6% of gross profit in '21. Sequentially, strong momentum carried into '22 for Professional with Q1 revenues up 5.8% from Q4 2021. Real Estate, following an exceptionally strong Q4, was down 5.4%, better than the 2018-2019 decline of 8.7% and the 2021 decline of 14.3%. First-quarter net income from continuing operations was $2.4 million or $0.22 per diluted share, compared to a net loss from continuing operations of $212,000 or a net loss of $0.02 per diluted share in the same quarter a year ago. Overall net income was $15.5 million or $1.48 per diluted share and included a $12.2 million net of tax gain on the sale, and $922,000 in net income from discontinued operations compared with $712,000 or $0.07 per diluted share in '21. Adjusted EBITDA from continuing operations was $3.9 million or 5.7% of revenues compared to $1.3 million or 2.6% of revenues in '21. Our Q1 effective tax rate was 25.3% in '22 compared to 16.8% last year. As we discussed during our year-end call, 2022 represents the third year of our company's IP investment roadmap, overhauling all of our IP infrastructure, culminating with an enterprise-wide CRM, HR, payroll, and workforce management software platform. We expect significant productivity improvements and competitive advantages in our business from this platform upgrade, and assuming a modest 5% efficiency in order fulfillment. The projected payback period for the roadmap is approximately three years. Future IT spend will represent incremental enhancements to improve systems, providing a more robust platform to grow and scale our business. Moving to our financial position. The company's balance sheet is strong, and we continue to maintain a prudent and conservative liquidity position. Our working capital ratio increased to 2.02 from 1.95 a year ago. After we pay down debt, our leverage ratio of funded debt to trailing 12 months adjusted EBITDA from continuing operations was 0.8x as of March balance sheet date. Finally, the Board of Directors approved our 30th consecutive quarterly dividend payment of $0.15 per share in support of our strategic initiatives. Our balance sheet position and deleveraging efforts are expected to continue to provide flexibility to fund our operations while investing for future growth, as well as a return to our shareholders. I will now turn the call back over to Beth.

Thanks, Dan. Although this industry can be a leading indicator of a U.S.-based recession, we offer now that short-term inflation trends may be a net positive for our industry due to labor inflation that translates to higher pricing in certain cases. We will continue to remain cautious on our outlook and our teams will stay resilient as we look for changing trends in the labor market. Our goal is to gain market share through high-value customer service and flexibility during this period. Last quarter, we discussed our IT infrastructure investments, which included our plan to launch the company-wide CRM, payroll, HR, and workforce management platforms in late March. In mid-March, we were within a week of finalizing our work but decided to delay the system go-live to ensure that all mission-critical elements were fully tested and operational. As you may know, the implementations that involve payroll must be cut in at the beginning of the quarter. Therefore, our new projected go-live will be at the beginning of Q3. In doing this, we used the extra time to include several phase 2 enhancements, so the system implementation in late June is expected to include a much more robust version of the system module. Regarding future M&A activity, we continue to work with an active amount of deal flow and we plan to carefully evaluate how a potential acquisition fits into our strategic growth initiatives to augment the company's organic growth plans. As we have discussed in the past, we do not need to chase deals, and we will continue to be patient and opportunistic in our evaluation. Our capital allocation strategy has not changed, and we will watch for valuations that meet our criteria in 2022 and into 2023. With that said, we would like to open the call up for questions.

Thank you very much, Beth. Kindly please only ask one question and one follow-up, after which you may rejoin the queue. Our first question is from Brian Kinstlinger from Alliance Global Partners. Brian, your line is open. Please go ahead.

Great. Thanks for taking my questions. Quickly in the last comments, Beth, your balance sheet is much stronger, but also the environment has a lot of pros and cons right now. Maybe, how are you thinking about M&A? Is it a high priority or low? And then you talked about valuation. Are valuations right now in line with what the Company's goals are when you look to pay for acquisitions?

Hi, Brian. I'm doing well, thank you. Our M&A strategy is currently not a top priority. We feel comfortable with our position, especially considering the uncertainties in the world. We're not actively pursuing M&A opportunities, but if a particularly attractive deal arises, we would evaluate it. Regarding valuations, I'll let Dan address that since we are observing the current trends.

We were looking at deals in the latter part of last year. We had noticed that they were up a half to one turn from pre-COVID numbers, in that range that we typically consider, around 5 to 10 million EBITDA companies.

We are not currently examining the M&A sector closely. However, if a remarkable deal presents itself, we would consider it. Regarding valuations, I will allow Dan to address that since we have observed they are occurring at certain valuations. We were exploring deals in the latter part of last year and noticed they were up about half to one turn from pre-COVID figures, within the range we usually consider, around 5 to 10 million EBITDA companies.

The amount of it was about ten times.

For that, it would be my next question. As I follow a lot of IT services firms, digital transformation seems to be driving excess demand, and there's obviously also a shortage of employees that's increasing pricing as well. So, I guess I'm wondering what percentage of your professional services is IT staffing, and is that the primary growth opportunity for your company in 2022 on the professional services side?

Yeah. It's probably about 95% IT and yes, that's where our growth is. Our F&A group does a wonderful job, sort of provides opportunity to cross-sell within our existing client base.

Great. Thank you.

Thank you. Our next question is from Howard Halpern from Taglich Brothers. Howard, your line is open. Please go ahead.

Congratulations, guys, on the great quarter.

Thank you, Howard.

The momentum that you talked about seeing within the quarter has that continued so far in the first month of the new quarter?

We're not seeing a slowdown, Howard. Things are holding steady, which we're very happy to see.

Okay. And are you seeing or have you begun to see the opportunities? I think last time you talked about expansion into the Canadian market. Have you seen any opportunities there?

We are still on target to go into Canada in July.

In July. Okay. And just one last question. Are you back to where you were in the number of Real Estate offices open? And again, if you can reiterate what the plan is to open new offices.

We are back to our pre-COVID numbers and we had targeted six new markets for this year.

Okay, thanks.

You're welcome.

Thank you. Our next question is from Jeff Martin from Roth Capital Partners. Jeff, your line is open. Please go ahead.

Thanks. Good morning, Beth and Dan. I apologize, I hopped on the call late. Part of your prepared remarks and your questions, maybe a little bit redundant, but could you characterize the strength of your Professional services during the quarter? What were the specific drivers? Is IND coming back and how has the sales pipeline and conversion versus ramp-up projects been progressing?

We just have a very strong Professional sector right now in the IT world, and IND is definitely coming back with speed. We have seen some momentum in the first quarter and going into the second quarter. There is a lot of deal flow right now, and the sales team has got a very strong pipeline. They are closing deals left and right and that’s exactly where we wanted to see. I think a lot of that has to do with our strategic initiatives that we implemented last year with aligning all of the sales teams within the verticals, and they're just really a well-oiled machine right now. They're being very, very effective.

Great. And then, Beth, congratulations on your Industry Award, by the way.

Thank you.

I was just curious if you could give some perspective on the real estate market. How far back to normal levels and if there's anything within real estate that is different now versus pre-COVID that is beneficial to the model?

They're back to their pre-COVID numbers and actually tracking higher, which is great. There are a few new revenue streams that we've been able to tap into, and those things are starting to develop nicely. The team is really managing their pricing, which is helping to drive the increased margins. Everyone is just really solid right now.

Thank you. We have a follow-up from Brian. Brian, your line is open. Please go ahead.

Great. Thanks. That was the last quarter we talked about it, and maybe I missed it. But talk about your ability to fill open positions, and how that's improving or getting harder compared to maybe a quarter or two ago, and how are you incentivizing people that come aboard?

There is no doubt, it's a tough market right now, but the team does a great job of making sure that they understand when an assignment is going to end, so they can line them up for a new one. It’s easier for us to continue to redeploy the people that we have than to try to find new talent. We’re always trying to pay attention to keep new people that are in high demand to stay onboard. We do a lot of things to try to build those strong relationships with the consultants and move them through the pipeline, so they always know we have opportunities for them. Redeployment is key, and we work really hard on that. Our teams do a great job reaching out through associations to try to get new talent in the door as well.

I guess just one last follow-up. Is hiring an inhibitor to growth right now? What I mean by that is, could you hire more? Is hiring more than an issue or a challenge? Would there be a higher growth rate right now if you could close that gap? And if so, by how many points?

Well, we do have several open orders right now, and if we could bring those gaps down, I think we could probably generate more revenue. I was on the call yesterday with our division President for the Real Estate Group when we were talking about open orders, and they have a whole campaign that they are working on right now. We’re hoping to see that open order number go down, and we are working diligently to make that happen.

Great. Thanks, guys.

Thank you. We have no further questions, so I'll hand it back to Beth for any closing remarks.

Thank you for joining our call today, and we appreciate your continued support. We look forward to updating you on our second quarter results in August. Have a great day.

Thank you, everyone, for joining today's call. You may now disconnect your lines. Have a lovely day.