Good morning, everyone. Welcome to BGSF Inc. Third Quarter Fiscal 2022 Financial Results Conference Call. My name is Bailey, and I'll be the moderator for today's call. As a reminder, this conference call is being recorded. Now I will turn the call over to Sandy Martin from Three Part Advisors. Please go ahead.

Thank you, and good morning, everyone. Welcome to the BGSF third quarter 2022 earnings conference call. With me on the call today are Beth Garvey, Chair, President and Chief Executive Officer; and Dan Hollenbach, 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 also archived on the company's Investor Relations page. 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. 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 SEC. Management's statements are made as of today, November 3, 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 operations related to the financial condition and results. 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?

Thank you, Sandy, and thank you all for joining BGSF third quarter 2022 earnings call. I am pleased to report that the momentum we experienced in the first half of 2022 continued through the third quarter. We reported record revenues for the third quarter totaling $78.5 million, up 22.3% year-over-year. Our Professional segment accounted for 58% of consolidated revenues with notable strength primarily on the IT side with business investments continuing in cloud migration, ERP selection and implementations. We also experienced growth in our managed services and consulting areas. Our Real Estate segment continues to expand and accounted for 42% of revenues. As we discussed last quarter, the multifamily industry is significantly underbuilt in the National Apartment Association and National Multifamily Housing Council estimate that 600,000 apartment homes are needed today in the U.S. It is also estimated that the U.S. is underbuilt by 4.3 million units by 2035, which has been accelerating primarily due to the pandemic and further demographic shifts. People today in all ages and categories are choosing to live in apartments, and multifamily housing has become a desirable solution for long-term housing. These strong tailwinds have contributed to BGSF's market leadership position in the multifamily industry over the last couple of years. We recognize that long-term pent-up demand exists, and we are seeing strong new demand for apartments and build-to-rent single-family housing communities across North America. Our real estate division is strategically focused across the U.S., opening in six key markets this year, including our recent expansion into Canada. Finally, recall that we experienced unseasonably strong real estate segment performance in Q4 of 2021. We believe this activity was driven by pent-up demand that started during COVID lockdowns, coupled with landlord spending again. Last year's strength creates tougher comparisons for us in the fourth quarter of this year. With that said, I'd like to turn the call over to Dan to walk through our financial results in more detail for the quarter, then I'll wrap up the call with some comments on how we see our markets changing and BGSF plans for delivering unique workforce solutions for current and future customer needs, strategic initiatives, and M&A. Dan?

Thank you, Beth, and good morning, everyone. Based on the sale of our Industrial segment this year, our financial results discussed today are from continuing operations and except where noted, exclude discontinued operations for this year and last year. As Beth discussed, strong momentum continued into the third quarter with revenue up 22.3% to $78.5 million compared to $21 million by segment. Real estate grew 34.1% and professional increased 14.9%. Wage rates have been relatively flat throughout the year, yet increased 10% Q-over-Q. In addition to year-over-year improvements, both segments showed sequential growth between Q2 and Q3. Real estate revenues grew 11%, and professional segment revenues increased 3%. The professional segment revenue growth was impacted by strong double-digit growth in IT and Momentum Solutions. We continue to expect solid demand for cloud migration, ERP selection, and implementation as well as customizations. As Beth mentioned, we believe digital transformation and enterprise modernization work are both strong, and business investments in these areas will continue. Although managed services are a small but growing component of the professional segment, we had an 85% growth in this business Q-over-Q, which grew out of our Momentum Solutions acquisition in February of '21. Gross profit increased by a strong 27% compared to the prior year quarter, growing to $28 million, primarily due to revenue expansion and increased spread in both segments. As a percent of revenue, total gross profit increased by 140 basis points to 35.7%. Positive operating leverage continued in selling, general and administrative expenses, which improved by 60 basis points to 26% of revenue. SG&A dollars increased by $3.3 million or 19.5%, which compared favorably against our revenue growth. Third quarter net income from continuing ops was $4.7 million or $0.44 per diluted share compared to net income of $3.7 million or $0.36 per diluted share a year ago. Included in '21 net income was a $974,000 impact on a gain from contingent consideration. Adjusted EBITDA for Q3 was $8 million or 10.2% of revenues compared to $5.4 million or 8.4% of revenues in '21. We are excited to report the 10.2% adjusted EBITDA margin this quarter as we work towards our strategy to enhance returns after the divestiture earlier this year. Our Q3 effective rate was 23.6% for '22 compared to 19.4% in last year's third quarter. Turning to year-to-date results. Revenues were $221.1 million, up 29.1%, while gross profit was $76.5 million, up 33%. Our first nine months’ gross profit percent increased by 100 basis points to 34.6%, while SG&A operating leverage improved by 130 basis points this year compared to last. Net income from continuing operations was $9.8 million or $0.93 per diluted share compared to $6.1 million or $0.59 per diluted share for the '21 period. Included in '21 net income was a $2 million impact from a gain on contingent consideration. Adjusted EBITDA from continuing operations totaled $17.4 million or 7.9% of revenue compared to $9.9 million or 5.8% of revenue last year. The year-to-date effective tax from continuing operations was 24.5% compared to 17.9% for last year. Regarding the company's financial position, we continue to maintain a strong liquidity position and balance sheet. Days sales outstanding improved by one day from year-end, and our working capital ratio strengthened to 2.98 from 1.95 at year-end. Based on the strength in our business through the first nine months, we used more working capital to grow, which resulted in net cash used in continuing operation activities of $5.6 million. We continue to maintain a conservative leverage ratio of funded debt to trailing 12 months adjusted EBITDA from continued operations of 1.2x as of the September balance sheet date. Our Board of Directors approved our 32nd consecutive quarterly dividend payment of $0.15 per share in support of our strategic initiatives. We believe that our prudent financial management and capital allocation strategy will continue to provide ample flexibility to fund operations, make strategic acquisitions, and invest for future growth while returning value to our shareholders through cash dividends and stock appreciation. I will now turn the call back to Beth.

Thank you, Dan. Our teams are energized around our strategic BGSF programs, and we view changing market dynamics, pandemics, and inflationary recessionary pressures as the best time to think outside the box and provide creative solutions to our customers. That is how we've been able to win market share and enable our leaders to create meaningful differentiators for both our professional and real estate segments. BGSF's unique model empowers people and creates long-term relationships with both customers and our workforce. With U.S. job openings reaching almost an all-time high, coupled with unemployment rates at record lows, especially for those with college degrees at a 1.8% unemployment rate, we've decided to change the game. We offer our people training platforms to either upscale or reskill their talent. By using specialized training modules, we are advancing both the professional and real estate segments with a more robust and skilled talent pool. These training platforms or Sandbox experiences also allow existing and future BGSF workers to learn a new field or specialization. They build important staff loyalty and retention for both our customers and our associates. This is important on the professional side with Oracle or Workday experts and on the real estate side, with new leasing office personnel or property maintenance technicians, developing new diverse highly-skilled candidates for managed services, consulting, and permanent placement creates a flywheel effect on the business because clients today are more likely to hire BGSF for other projects and services tomorrow. This has proven to work very well for us. Although we are not immune to recessionary pressures, we have continued to execute with excellence in our markets and have a proven track record of managing through past downturns. In addition, our divestiture of the Light Industrial business makes us less vulnerable to cyclical headwinds, and we benefit from our specialization in professional and real estate segments, which operate many times in different business environments. The pandemic introduced unprecedented events to the businesses in North America, and corporate response to those events gives us confidence today that customers are not likely to pull back on IT investments for important cloud migrations or ERP projects. From what we have experienced, coupled with prevailing housing trends, we believe that the real estate segment is more recession-resistant and will greatly benefit from our client partnerships. We remain optimistic about the GSS growth prospects as we get closer to 2023, and we believe that our business will continue to be driven by strength in our people, technology, reputation, business model, and client partnerships. A few final words concerning our M&A work. Deal flow continues to be strong, and valuations have softened somewhat. Our focus remains on the evaluation of strategic bolt-on acquisitions, and we are actively looking for transactions both in North America and a few globally. Also, we continue to seek businesses and technologies that could strongly fit with our customers and our culture. With that said, that concludes our prepared remarks for the third quarter. We will now open the call for questions. Operator?

The first question today comes from the line of Howard Halpern from Taglich Brothers. Please go ahead. Your line is now open.

Thank you. And congratulations. Great quarter, great year so far.

Thanks, Howard.

First question is regarding real estate. What really drove the gross margin above that 40% level, the first time we've seen that in its history?

So interesting enough, normally, in the third quarter, it's tough to maintain that because that's typically their highest volume and they tend to have a little bit of pressure on pay to keep our people working. But we did a much better job of managing that this year, and we're able to pass through that cost to the customers and help support that spread increase.

Okay. Is that something that you're going to be able to maintain, or is it going to fluctuate again depending on the volume that you have going forward?

Howard, I think there's another piece of that along with what Dan said, and that's the fact that we've got some strategic relationships we have right now and with that comes direct hires. So that direct hire will also push up the margin. And right now, we don't feel like there's a reason for us not to think we can't maintain it based on the pipeline of activity we have right now.

Their permanent revenue almost doubled Q-over-Q. So yes. Thanks.

Have you clarified how many offices you've opened so far? Is there a plan or indication of how many new or split offices you expect to have next year?

We are currently working on our budgets and looking for new opportunities for the future. It’s a bit early for me to provide a detailed answer since we will definitely have office openings and expansion in the markets we operate in, but we have not finalized the specifics yet.

Okay. And you talked about essentially your partnerships because you announced an interplay and developing your talent pool. Has that actually begun? Or is that in the process of being developed to begin at a certain point?

It has begun. We just finished the pilot program. We found it to be successful, and now we are working with Interplay to expand that throughout our markets.

Okay. And do you believe you'll be able to achieve that? I guess that was the thought process in developing these partnerships?

Howard, I'm sorry, you cut out. We missed half of what you said.

Sorry. With the partnerships you're developing and the ongoing housing deficit in your segment, do you have a forward-thinking strategy in place to attract new employees and build a talent pool? That seems to be essential, especially if the housing deficit starts to improve. It's really about having the right talent, isn't it?

It is. The shortage in the workforce right now is something that's painful for everybody. So we really strategically spend a lot of time figuring out if we can either sit back and be like everybody else and wait for it to hopefully get better, or we can start really aggressively moving forward. We have decided to aggressively move forward, so we are upskilling and reskilling people. We are building a group of people who not only we can help place for ourselves with our customers but also assisting our customers in upskilling their workers as well.

Okay. And just one last one on professional services. You're seeing a robust pipeline from your customers for projects and still maintaining some of the cross-selling opportunities that you previously talked about?

Absolutely. We signed more new contracts and added more logos, which we call as a company, in the third quarter than in the history of the company.

Thank you. The next question today comes from the line of Brian Kinstlinger from Alliance Global Partners. Please go ahead. Your line is now open.

Good morning. It was a strong quarter, and I appreciate the opportunity to ask a question. Many IT services companies are noting a slowdown in growth, indicating that budgets are under pressure, which has led to some delays in progress. The only consistent area of strength seems to be digital transformation. I haven't heard similar comments from you, apart from acknowledging that you are not immune to recessionary pressures. Could you provide insights on the changes in your pipeline, the sales cycles, and if you are noticing any of these trends?

Right now, we are not experiencing a slowdown. I think the only area we might have a little bit is in direct hire. I think some of the customers are taking a little bit longer to make decisions on that. But in all the other areas of our business, we're not feeling it. We still have many RFPs that are in the works right now.

Great to hear. And then can you talk about spreads on the IT staffing side? How are they being impacted? And I guess, how have they historically been impacted during recessionary periods?

Well, Q-over-Q spreads in the professional side were up 17%, primarily because of the strategic direction to shift our model from lower type roles to more consulting type roles. With the addition of Momentum Solutions, which is a managed service product where we help our customers through the whole project phase. So that's been a driver of that spread increase, as well as the average bill rate is up dramatically. It's a shift towards a consulting model.

Great. My last question is, you touched on M&A. You also touched on office openings in strategic lesions where you want to expand or open up? Will M&A possibly play a role in those office openings? If not, do you expect in the early timeframe of next year, there will be a little bit of pressure on margins as you open offices ahead of business? Just how do you think about each of those? Thank you so much.

On the M&A side, we're focused on the professional side. So it does impact the opening of territories or offices on the real estate side because that's where the focus is. We do have a robust M&A pipeline. We've seen about 100 deals, and we continue to remain interested in a couple of those. We fully expect M&A to be part of our ongoing growth model. Yes. As Beth has mentioned on previous calls, when we open a new territory or a new market for real estate, we're really just talking about adding a salesperson. So there's no brick-and-mortar or anything like that. Generally, you can get 10 to 15 people working in a 3 or 4-month period, and the return on that is pretty quick.

Thank you. The next question today comes from the line of Jeff Martin from ROTH Capital Partners. Please go ahead. Your line is now open.

Thank you. Good morning, Beth and Dan. I was hoping, Beth, you could give us some discussion around key performance indicators relating to your technology investment and IT roadmap. I imagine one of those is openings versus fill rates and time to fill, those sorts of things. Just curious what you're experiencing and if you think that's contributing to the nice growth that you're seeing.

I don't think we're seeing a substantial amount of efficiencies, as I've said in the past. We believe that we'll start seeing major efficiencies due to the technology going into the first quarter. However, I will say that we are seeing efficiencies in the professional group regarding how quickly they can get things moving in the process. So they're doing more revenue with fewer people than they were a year ago. We feel that that's positive. We're still finalizing many of the KPIs and assessing growth projections and efficiencies. Remembering we just went live at the end of June. We're still in hyper care, which we're anticipating to come out of by Thanksgiving. We have a robust KPI dashboard that we are building right now to gauge where we stand. To your point, we are tracking fill ratios, time to fill, the sales pipeline's potential, and the percentage of leads that close, which will enable us to do more robust financial planning in the future.

Okay. Great. And then I was curious on the professional side if you're seeing extended assignment duration, with people being placed on projects that go longer. Does that increase the visibility of the segment for a longer period?

We do have several long-term customers where we have people that have outsourced their entire project or IT department to us. The majority of assignments are still running in the 7- to 9-month project range, depending on the specific implementation or projects we're working on. So we're still operating in line with our historical norms.

Okay. Great. And then last question on the market in cybersecurity. There's a massive labor shortage in cybersecurity, and that's going to be a hot segment for many years to come. I was just curious if you're doing anything in cybersecurity now and if that's a focus strategically for you going forward?

We are. We do have a lot of security personnel, particularly data security experts, working within our divisions. One of the other things we'll be able to achieve with our technology is that we'll start separating how much of the business is in SAP, how much of it is in Oracle or Workday or ServiceNow or other platforms. We do have capabilities in this area, and our teams are consistently working on filling roles in cybersecurity and doing an excellent job at providing those resources to our customers.

It is on our wish list for the M&A side as well, Jeff. So as we talk to our partners out there who are in the market on the broker side, it is certainly something we would love to find—a cybersecurity consulting company for M&A.

Great. And one more if I could. With entry into real estate in Canada, I was curious how you think about that market in terms of longer-term opportunity relative to the U.S. market?

We're pretty optimistic about the Toronto area, and we're going to see how that pans out before we start looking at other provinces in Canada. All indicators point toward it should be beneficial for us.

Thank you. Our final question today comes from the line of Bruce Geller from Geller Ventures. Please go ahead. Your line is now open.

Hi, good morning, guys. Congratulations on the impressive earnings progress. I have a question related to the M&A discussion. You mentioned that earnings multiples are getting a little bit more reasonable, which is favorable. But I'm curious how you adjust for or address the fact that the Fed's clearly stated intention is to weaken the job market in order to get inflation under control. With that said, some of the multiples or valuations you're looking at may be based on inflated trailing earnings, which are at risk of a weakening job market since that is a clear intent of the Fed. How do you adjust for that in evaluating a potential acquisition?

We do look at that, and we spend a lot of time on due diligence to ensure the validity of the numbers. There are still, from the last report I saw, 10 million open jobs out there. So even if you cut that back by 20%, there are still 8 million jobs. In the world we operate in, particularly higher-end accounting and IT consulting, we observe that unemployment is less than 2%. Demand continues to rise, as Beth mentioned, and it's still challenging to find resources. We've been raising rates for six to nine months, and we're still signing more clients than ever before.

Yes, that's great. I appreciate that. I just don't want to see a situation where you make an acquisition that in hindsight turns out to be based on peak earnings because the Fed has clearly stated its mission to weaken the job market. There is a lag effect, and even though they've raised rates several times now, the market is still strong. I don't think we can assume that it will stay that way indefinitely. So my concern would be paying for something based on peak earnings. I wanted to understand how you adjust for that in your acquisition model.

We'll certainly look at it and make sure that we're paying what we believe to be a fair price based on what we see. We spend a lot of time discussing the pipeline with potential targets.

Bailey, do we have anybody else?

We do have some more questions. Here we go. Next question today comes from the line of an unidentified analyst. Please go ahead. Your line is now open.

Good morning, Dan and Beth. I'm going to dovetail on that last question. The last question was really a forward-looking question. This will be a backward-looking question. If you look at the light industrial sale early this year and the multiple you garnered there, some multiples around the marketplace have certainly changed over the past eight months. If you took that light industrial to market today, what sort of price do you think you could get? You may not have woken up this morning ready for that question. So if you provide a range, a big range would be much appreciated.

If I had to guess, I would probably say that would trade at 5 to 5.5 today.

So where does that translate to in dollars?

So 20% less, $6 million, $7 million less. Yes.

Got you. Great quarter, guys.

Thank you. The next question today comes from the line of Mike Denham from Taxpayers. Please go ahead. Your line is now open.

Hi guys. This is Mike, standing in for Bob. First of all, congratulations on an excellent quarter. I will look forward to more of these in the future, all due to steady leadership on your part guys. So my question is, we're another three months into the technology, and we're starting to see some results from your technology spend. Can you estimate how much of that came from this quarter? And how much more of that should we expect rolling into the next three, four quarters?

Yes. We wrapped that up at the end of Q2. We went live with the last piece at the beginning of Q3. So the major spending, if you will, the credit, the roadmap is over. We forecasted that next year, we would have about $2 million in CapEx, relating to probably close to $6 million this year for next year for just steady state and enhancements to our current products.

So from a return standpoint, what kind of return are we going to see this quarter?

No. Michael, we mentioned before this quarter that we're in what we're calling hyper care. We're ensuring the product is working as we anticipated and fixing it as we go—when you execute a massive migration like that, there are things you want to address. So we're doing that this quarter. In Q4, we'll evaluate processes. We expect those efficiencies, as we've mentioned in calls before, to begin in early to mid-'23.

Okay. So no efficiencies in this quarter just expense. Same thing in Q4 and early to mid-next year?

We're beginning to see some return. We are seeing efficiencies; I mentioned earlier that we're able to produce more revenue with fewer people. While this may be partially due to the systems, a lot of it is about the processes we refined before we went live on the system, ensuring that we sort our systems fit the processes effectively. While these systems are in their early stages, we are doing more revenue with fewer people. We're still honing in on achieving all KPIs and ensuring things work as planned. We think that we'll attain more concrete data that we can track in the future. For now, we're seeing that we can generate more revenue with fewer resources.

Right, which usually means more earnings. So was it in the quarter or not? When it's all said, we spent some money, had a good quarter, or should I see significant productivity increases from here, which is sort of what Dan said. But I want to try—to me, it all boils down to it being a number to figure out how much more money you're going to make next year, looking at it on a run rate basis.

We expect to see efficiencies and improvements in both the COH, what we refer to as the operating EBITDA line, as well as the bottom EBITDA line next year. So yes.

Okay. I'm going to ask the same question at the next quarterly conference call, just so you know. Thanks. It was a great quarter, and keep up the good work.

There are no further questions registered at this time, so I'd like to pass the conference over to Beth Garvey for any closing remarks. Please go ahead.

Thank you, Bailey. Thank you for your time today, and we appreciate your continued support. We look forward to updating you on our fourth quarter in a few months. Have a great day.

This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.