BGSF, Inc. (NYSE:BGSF) Q3 2023 Earnings Call Transcript

BGSF, Inc. (NYSE:BGSF) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Good morning, everyone, and welcome to the BGSF, Inc. fiscal 2023 third-quarter financial results conference call. [Operator Instructions]. Now I’d like to turn the call over to Sandy Martin, Three Part Advisors.

Sandy Martin: Thank you. Good morning, and welcome to the BGSF 2023 third-quarter earnings conference call. With me on the call today are Beth Garvey, Chair, President, & Chief Executive Officer; and John Barnett, 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 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 different 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 conditions 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?

Beth Garvey: Thank you, Sandy, and thank you, everyone, for joining us today for our third-quarter earnings discussion. Our performance for the third quarter reflects continued progress on our long-term strategic initiatives. Our goals are to grow through organic and inorganic revenues and by diversification actions to 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 companies return profile. Our third-quarter performance reflects this progress with sales growth of 6.3% that resulted in total revenues of $83.5 million. We grew by 8% in Property Management segment and 5% in the Professional segment despite pockets of weakness mainly in the ERP-related consulting area.

The effects of economic uncertainties and 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 investment in people, process, and technology over the last three years have given us more stability and capabilities to succeed than three 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 Royal Consulting earlier this year. Our full suite of Professional Services & 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.

John Barnett: Thank you, Beth, and good morning, everyone. Third-quarter total revenues grew to $83.5 billion, 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 third quarter. This growth was on top of 34.1% revenue expansion in the third quarter of last year. This translates to cumulative two-year revenue growth of over 42% compared to 2021. Seasonal apartment turnover make ready demand in the second and third quarters continues to advance the Property Management division. The professional segments’ quarterly revenues increased by 5%, driven by recent acquisitions. Organic sales and professional declined by 20.6% in the third quarter versus the prior-year quarter.

The third quarter 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 first quarter was primarily related to staff augmentation placement and technology implementation starts. 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 third-quarter gross profit margins expanded to 35.9%, up from 35.7% in the prior-year quarter. Property Management gross margins were 39.5% compared to 40.8% in the prior-year quarter due to lower permanent placement.

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&A expenses for the third quarter were $22.7 million, essentially flat compared to the second quarter. Nonrecurring transaction fees for the quarter were $149,000. Third quarter adjusted EBITDA was $7.9 million or 9.4% of revenue, which was sequentially higher in terms of dollars and margin percentage than the second-quarter adjusted EBITDA of $7.5 million or 9.3%. We reported adjusted earnings of $0.36 per diluted share compared to $0.37 per share for the second 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-month pro forma adjusted EBITDA increased to 2.5 times from 2.3 times as the reduction in debt did not offset the decline in pro forma adjusted EBITDA. 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 paydown, 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 or early 2024. And with that, I would like to turn the call back to Beth.

Beth Garvey: 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 a 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 solutions space. Although our stock has traded down and it’s mostly in line with the industry, 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 US and Canada over the last few years that are still small from the market penetration perspective compared to the addressable potential. The National Apartment Association expects added capacity with approximately 4.3 million new apartments planned to be built by 2035, 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 for valuable long-standing clients. Our transformation plan to build a strategic workforce solutions business with two 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 create sustainable, long-term shareholder value. Looking into fourth quarter, despite continuing difficult comps, we expect the professional segment to stabilize somewhat. We plan to continue to focus on our strategic initiatives this year to expand our business and prove profitability and generate cash flow. Our businesses are not recession proof, but we believe that they — the segment and the diverse markets positions us to be more resistant to typical downcycles 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 and supporting the company’s expansion plans, acquisition integrations, and profitability progress this year. Finally, it is with great sadness that I share the passing on Tuesday of former Chairman of the Board, President, and CEO, Allen Baker. Allen was a person of integrity and a forward-thinking leader. He dedicated over a decade of his life to helping shape the fabric of our company. 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 into Southwest IDEAS Conference in Dallas on November 15. With that, operator, I’d like to open up the call for questions.

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Q&A Session

Operator: [Operator Instructions]. The first question comes from Jeff Martin from Roth MKM.

Jeff Martin: Thanks. Good morning, Beth and John. My condolences on Allen Baker. Sad to hear that. I 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. How large of a piece is that of the professional segment? And maybe just give us a sense of how the progression trend there has occurred over the quarter and into first half of fourth quarter. Thanks.

Beth Garvey: Thanks, Jeff. The first two months of the quarter really wasn’t 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 ERP area being pushed pretty much all year. Company still have the need to be able to do it. 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 a little bit of life back into October will translate into better fourth quarter, or at least flat.

Jeff Martin: 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’ve positioned the business now versus one or two years ago?

Beth Garvey: Good question. I’ll say that the one thing we have always strived 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 and we have the ability to be able to help somebody pick a software. We have the ability team to help customize it, to get reporting out of it, which encompasses all of our team. 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 the two acquisitions with Horn and Arroyo helped with that last piece in the finance and accounting group. We did not have managed services in that F&A world, and that has proved — started to prove out to be very beneficial for us.

And then the nearshore, 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 get more aligned and being able to cross-sell those efforts, we expect those revenues to increase and grow and actually make as offering that our customers won’t have to go outside us but continue to keep all the business with us.

Jeff Martin: Yeah. Great. And then you referenced Q4 for professional, you expect it to be up year over year, mainly from the acquisitions, but you have 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.

John Barnett: Yes, a couple of things to come out. One, if you are looking at last quarter and you’re going to do — or last year fourth quarter and you’re going to do a comparison this year fourth quarter, which everybody will be doing, including me sooner than later. We did have 14 weeks in the fourth quarter of last year versus we will have our typical 13 weeks this year in the fourth quarter. So I think when we talk about the fourth quarter and what we’re expecting or what we’re seeing so far, it’s aligned with we’re adjusting the prior year for that extra week and our expectations based on a comparable week quarter, right. So I think we are seeing — we did see some daylight in September for our core IT group, our core professional group.