Good morning. Welcome to the BGSF Inc. Fiscal 2023 Second Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. As a reminder, this conference call is being recorded. Now, I will turn the conference call over to Sandy Martin, Three Part Advisors. Sandy, please go ahead.

Thank you. Good morning and welcome to the BGSF 2023 second quarter 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 question-and-answer 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. 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 Securities and Exchange Commission. Management's 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. 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 as 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 for joining us today for our second quarter earnings discussion. Our second quarter 2023 results reflect meaningful progress on our financial and operational initiatives. I want to thank the BGSF team for their tremendous contributions that supported our solid growth and progress, which resulted in higher revenue, profitability, and cash flow generation in the second quarter. We reported total revenues of $81 million, which reflected increases in both revenue and adjusted EPS of approximately 9% versus the year ago quarter. Adjusted EBITDA increased almost 39% to $7.5 million over last year's quarter, which represented an adjusted EBITDA margin of 9.3%. Notwithstanding industry-wide headwinds and headlines in the sector last quarter, we performed well and achieved results that met or exceeded our expectations. We will discuss progress on our operational initiatives in a few moments. Second quarter Professional segment results included 13 weeks of Horn Solutions acquired in December of last year, and 10 weeks of Arroyo Consulting acquired in April of this year. Both of these acquisitions added to BGSF's high-value consulting businesses and strengthened our go-to-market value delivery proposition. The Arroyo acquisition also adds global IT resources and capabilities, which are in demand from current clients and provide geographic resources from some of the best IT talent in the industry. As is typical in times of economic uncertainty, we are seeing that companies are reducing discretionary spending and capital spending by delaying or extending project timelines. On the contract side, we also are seeing elongated hiring cycles. As we look at our business today, I believe we are benefiting from the strategic transformation of the company that we started over five years ago. We have been focused on building high-end specialized consulting services through highly strategic acquisitions of professional and IT consulting, managed solutions, as well as real estate and property management workforce solutions. As part of this transformation, we sold our lower-margin light industrial business last year that was more difficult operationally to manage than our other businesses. This important divestiture allowed us to transform the business from a line staffing company to a high-value specialized professional consulting company with managed services and unique workforce solutions. I believe the strategic transformation at BGSF positioned us to respond well to the acceleration and growth of cloud computing and migrations. These projects have proven to be remarkably resilient. The pandemic fast-tracked everyone's desire to move to the cloud and to respond quickly to work-from-home and hybrid models and to allow companies to save money, become more agile, and drive innovation. Also, our specialized practices that support ERP software systems involve our teams in the build-out of important lifecycle projects and implementations for our clients. We continue to invest in the power of our people and technologies and believe that our higher-value higher-margin consulting, managed services, and professional workforce solutions company will continue to be well-positioned to respond to long-term secular trends, driving collaboration and differentiated service offerings. On the real estate property management side, we offer valuable training solutions, state-of-the-art technology, and market innovations for the growing multi-family apartment industry across the country. We like the strength of our diversified markets and expect our strategic investments and growth initiatives will continue to benefit us in the second half of 2023 and beyond. Let me briefly touch on recent industry dynamics that are impacting the marketplace and how our teams are winning and differentiating themselves with unique offerings. In property management, we are seeing regional differences in rental pricing and occupancy rates. Our diversified platform benefiting from the geographic footprint across the United States positions us to hedge against changing market dynamics. In addition, we are seeing a trend back to normal seasonality on apartment turnovers. Our efforts toward innovation and technology give us a distinct competitive advantage when it comes to partnering with our clients, especially surrounding our maintenance technician training solutions that we have rolled out to our teams across the country. This training tool has an AI component that allows apartment maintenance personnel in the field to access real-time expert solutions from their mobile device. This is just one example of how we're using technology to drive higher-value services and solutions to our clients by providing unique offerings in the marketplace. On the Professional side, the consulting and managed solutions backdrop has continued to evolve in 2023. Company leaders are making near-term decisions to delay or defer discretionary projects. However, we are not seeing project cancellations. All that said, we feel BGSF is well-positioned and prepared for the remainder of 2023. We are especially benefiting from the additions of both Horn and Arroyo as they provide additional strategic value adds to our full product offerings. As I mentioned, we continue to see solid demand for ERP and cloud migration services, and importantly, we have consulting and managed solution specialties and resources in top enterprise-wide technologies that include SAP, Workday, PeopleSoft, and ServiceNow, just to name a few. We are also seeing continued demand for near-shoring and offshore projects related to software development and AI assignments. In summary, our higher-value specialized solutions and offerings in both segments are ready to serve our clients' needs, which gives us confidence to execute our initiatives this year by continuing to grow revenues, improve profitability, and generate incremental cash flow from our operations. With that said, I'll turn the call over to John.

Thank you, Beth, and good morning everyone. As Beth stated, the second quarter results included 10 weeks of business for Arroyo Consulting. Second quarter total revenues were $80.8 million, up 9.1% from the prior year period. The Professional segment was up 12.7% due to the addition of Horn Solutions and Arroyo Consulting. In our core Professional business, excluding the two recent acquisitions, we continue to see year-over-year declines in demand for consulting and staff augmentation. Declining demand for these services has been widely reported across the staffing industry. The property management segment was up 3.6% in the second quarter compared to the prior year period. Growth slowed versus the first quarter, growth of 9.6%, while year-over-year growth slowed against tough 2022 comps, the segment experienced typical seasonality growing 9.4% sequentially from Q1 to Q2 of this year. Although a short period the first weeks of third quarter show the sequential quarter increase that we expect for this historically peak seasonal quarter for the property management team. Second quarter gross profit margins expanded by 280 basis points to 36.6% compared to the prior year quarter. From a segment perspective, the Professional segment gross profit margins grew 340 basis points to 34% and property management gross margins expanded by 210 basis points to 40.7%. Professional continues to benefit from the blend of Horn Solutions and now Arroyo with higher gross profit margin profiles than the existing Professional business. For the property management business, we believe that the 40.7% gross margin is at the higher end of the long-term sustainable range for that segment. SG&A expenses for the quarter were $22.6 million, down from the first quarter's $23.2 million, and up $2.7 million from a year ago, primarily due to the addition of Horn and Arroyo. As I mentioned last quarter, Horn brings higher growth margins, which we believe should be balanced against higher selling costs that flow through SG&A expense. Transaction or deal costs for the quarter were $435,000 driven by the international complexity of the Arroyo consulting acquisition. Our fiscal year 2023 non-GAAP adjusted measures for EBITDA and earnings per share exclude the impact of acquisition amortization, the trade name impairment charge, and acquisition-related costs. Second quarter adjusted EBITDA strengthened to $7.5 million of 200 basis points to 9.3% of revenue from the prior year quarter. We disclosed adjusted earnings for diluted share of $0.37, an increase of 8.8% versus a year ago. This was solid improvement in EPS, even with $1.4 million of incremental interest expense resulting from the recent acquisitions. In addition to working on sales growth, margin expansion, and improving profitability, we have been prudently managing our balance sheet with a focus on working capital efficiencies. At the end of the second quarter, accounts receivables totaled $61.7 million, including $3.5 million from the Arroyo acquisition versus $62.5 million at the end of the first quarter. We have continued to pay down debt and our leverage ratio of funded debt to trailing 12 months pro forma adjusted EBITDA is down to 2.3 times from 2.6 times at the end of last quarter. We continue to maintain a disciplined approach to capital allocation strategy that includes investments in growth, paying down debt, and returning capital to shareholders through a quarterly cash dividend like the one we announced yesterday. Our investments in growth have included strategic acquisitions, and although we plan to continue to keep tabs on activity and valuations in our industry, we have no immediate plans for acquisitions in 2023. And with that, I would like to turn the call back to Beth.

Thank you, John. Now, turning to our four strategic initiatives for 2023. First, our team successfully implemented our rebranding initiative with the transition of many trade names to BGSF. Although this may not seem like a big or important milestone for our company, we completed a total of 14 different branded acquisitions over the last 13 years, and each of these added complexity, cost, and potential confusion to our customers. One week after the social media consolidation, our net followers increased 110.3% year-over-year. So we believe this will continue to positively impact our organization moving forward. I'm very proud of our team for successfully transitioning our employees, clients, and all stakeholders through this process. Today, we go to market as BGSF, and we are seeing this benefit us with clients and partners recognizing our scale and breadth of solutions and services in both of our segments. The second strategic initiative, Process Improvement, is all about further leveraging our IT technology platform in big and small ways. We have been process mapping and reducing tasks from our sales and recruiting teams to allow them to do more customer-centric work and focus on engaging with our people and our clients. As we mentioned earlier, we are also leveraging mobile-first tools that reduce tasks as well as reduce process friction for our employees, customers, and candidates. I'm very pleased with our progress on process improvements and believe that our business optimization goals are well underway for this year. Our third strategic initiative is shared services. We are focused on improving our time and attendance process, and we believe the process enhancements will gain meaningful efficiencies, allowing our delivery teams to focus on more revenue-generating activities. These improvements and best practice developments will continue to be leveraged as we expand and grow our businesses. Finally, I know that we routinely provide an M&A update as well as our position on the pipeline and valuations in the industry. We are pleased with our transactions over the years, including the most recent deals with Horn Solutions and Arroyo Consulting. Both were cultivated over time and fit well strategically with our acquisition criteria, meaning that the cultural and capabilities were right. We plan to continue to look at deals that are already in the pipeline or that fit our strategic criteria. However, as John mentioned, we are not proactively pursuing M&A at this time. Now, wrapping up with some comments regarding the remainder of the year. While both of our business segments are not recession-proof, we do believe that they are recession-resistant compared to other segments in the staffing industry. For the remainder of 2023, we expect our normal seasonality in real estate, and we also expect growth in professional segments driven mostly by the acquisitions. We do not know when the economic fog will lift but we'll plan to continue to work prospects, cross-sell opportunities, and other new business, and we expect continued demand for large-scale ERP implementations and support. We will continue to monitor the economic conditions and their impact in the markets as we move through the year. Finally, I'm excited to share that our Property Management Division was awarded the 2023 National Apartment Association, or NAA, Excellence Award for Supplier Companies of the Year. This recognition underscores our commitment and dedication to delivering high-value staffing services and innovative recruiting solutions for the multifamily communities and the apartment industry. I am extremely proud of Kelly and her team for their distinguished award and the recognition for this year. Before we open the line for questions, we would like to call out that we will be presenting at the Midwest Ideas Investor Conference in Chicago on August 23rd. If you'd like to come meet with us, we'd love to chat with you. With that said, I will turn it back over to the operator.

Thank you. Your first question comes from Jeff Martin at ROTH Capital. Jeff, please go ahead.

Thanks. Good morning, Beth and John. First of all, congratulations on the margin gains in the quarter, something you've done consistently throughout the years. I know you mentioned that real estate margin is at the high end of what the long-term range should be, but wanted to get a sense from you whether the increased margins were more a function of NICs, the addition of Horn and Arroyo, or there were also some efficiency gains from the technology platform and the investment that's made over the past several years?

Yes, thanks. I think really it's a combination of all of those things coming together at the same time this quarter and actually our trend. Definitely on the professional side, we're having some good gains from the addition of Horn and certainly from Arroyo. But it's definitely a combination of everything.

Okay. How did the permanent placement in the quarter track relative to the last quarter or the last 12 months? Was it fairly high in the quarter?

I think we are seeing, if you look at competitors within the industry, we are seeing similar trends in perm placement. It is kind of the first thing to go when there's uncertainty in the marketplace. And again, kind of this fog over the economy is causing people to slow down in their hiring. They delay, they leave open positions unfilled for longer. So what we've seen is down anywhere 20%, 30% in that business.

Okay. The reason I ask is because that is a significant lift to margins potentially. So, you have the margin gains in the face of a decline in permits. That's impressive. Beth wondered if you could provide a little more detail with respect to the contract delays in professional. Were any of those of significant size? Do you have any visibility on timing? Or are those just kind of in the midst of all the fog of the uncertainty in the economy?

Sure, we do have visibility into what the resources have been put on hold. So we have many of our customers where we've got people lined up, they have a project they're doing, and then they just decide to delay it every month. And so nobody's canceling anything. They're just being very cautious as they move through the rest of this year. And we're hopeful for everything that we're hearing from them, that it's not going to be any kind of change where they're not going to pull the trigger on these deals. They're just waiting to see kind of how things shake out.

Okay. And then could you give us a sense of over the next year or so what the expansion plans are for the real estate segment?

I'm very excited about everything happening in our real estate segment right now. We've experienced consistent double-digit growth, all of which has been organic. The new technology we implemented last year has greatly enhanced our efforts. With the support of Salesforce and ALN, we are now conducting territory mapping, aligning every property available in the country with Salesforce. We're using that data to identify territories in major markets like Dallas, Atlanta, and Houston. This enables our sales team to concentrate more on the specific types of properties, rather than just looking at a long list of 1,700 properties to navigate. It helps us focus on defining who they should meet with and when, and we can connect revenue to this system to identify areas where we may have previously overlooked opportunities. I'm very enthusiastic about this development, which just launched last week. Kelly and Jen Roeder, who lead this project, have done an excellent job ensuring we maximize the benefits. This is an exciting advancement for us in property management.

Great. And then I know right after you purchased Arroyo, you had significant inbound interest in offshoring. Are you seeing some contracts come to fruition there? Maybe give us a sense of how the offshoring initiative is trending with clients.

And we are seeing activity in the offshoring side of it. And customers here in the U.S. are starting out slow. So they're giving us a shot saying, hey, give us two or three people to see what your capabilities are. But it's kind of your foot in the door. And once we get people on the ground and in those departments, we definitely feel that that's going to be an expansion in the departments that we have for Arroyo. It's been super exciting. And Eric Peters and the team have really gone through and made sure that they are telling the story and leading with managed services and the capabilities of the Arroyo team.

Great. Thanks for the time.

Thanks, Jeff.

Next question comes from Howard Halpern, Taglich Brothers. Howard, please go ahead.

Congratulations. Great quarter. In terms of the two acquisitions, how has that helped in terms of the cross-selling and building that type of pipeline for future projects?

Well, Howard, as you know, every acquisition that we've ever made has been a strategic acquisition. Is there a capability that we need? Did a customer ask us for something specific? And in both of the acquisitions, it was basically for those two things. The managed services side of the Horn Solutions acquisition, as well as the abilities of our Colombia and India operations, have really given the sales team for professional a really strong effort to go out to the market and sell solutions across the board. I think that that has excited the team. There's a lot of motivation and a lot of energy. We've got many different platforms that we've built landing pages that the marketing team has put together that has allowed the sales team to get out to market quickly. So we're just in the process, especially with the Arroyo acquisition, of building these things out. But every week we're finding some new capabilities that team has the ability to deliver, and it's super exciting to watch it unfold.

Okay. And within the real estate segment, have some of the wage pressures abated? Have you seen that occur?

I think on both segments we are not seeing the wage inflation that we saw last year. I think that's all kind of lined out and it is what it is right now. So we're not seeing it be crazy like it was last year.

Okay. And then just a couple more in with the transaction keys. Are we going to see any more transaction keys going forward or did this round out from the acquisitions this quarter?

I would expect very little. We will have some come through. We're still working through a number of legal items related to the acquisition of Arroyo. As you can imagine, it's fairly complex, certainly with the Colombian entity and India. But it won't be anywhere as significant as what we saw flow through this quarter or the last quarter.

Okay. Okay, guys. Keep up the great work.

Thank you.

Next question comes from Michael Taglich from Taglich Brothers. Michael, please go ahead.

Terrific. Beth and team, congratulations on an excellent quarter, beating the street. I had a question about the tech part of the business. Obviously, you've been outperforming the industry on the tech side. Do you think Arroyo, which is a fairly small acquisition, is going to help you to continue to do that?

I definitely do. So the capabilities that that Arroyo team bring are really going to open up doors across the professional division IT segment altogether. So we've got very exciting things that are in the works with that team.

All right. Now, I don't think it's in my numbers, but I should look at that as a cushion if you will that those synergies like the tech spend and the improved margins we're seeing in the business now.

Correct.

Good. Congratulations on a strong real estate performance there.

Thank you. Super proud of the teams right now.

They're doing a great job. Thank you very much. Looking forward to a couple more great quarters.

Thank you.

I will now turn the call back over to Beth Garvey for closing remarks. Beth, please go ahead.

As always, thank you for your time today. We appreciate your continued support. As always, we're available for follow-up calls. If you would like to work out with the report advisors, we'd be happy to chat in more detail. Otherwise, we will talk to you after we report our third quarter in November. Have a great day.

Ladies and gentlemen, that concludes today's call. Thank you so much for joining, and you may now disconnect.