BGSF, Inc. (BGSF) Q1 2016 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator, and welcome to the BG Staffing First Quarter Results Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Terri MacInnis, Vice President of Investor Relations with Bibicoff + MacInnis. Please go ahead.

Thank you, operator, and good afternoon, everyone. As VP of Investor Relations representing BG Staffing, it's my pleasure to welcome you to the company's conference call to discuss Q1 record financial and operating results and a progress report on the company's business strategy. With me today on our call is Dan Hollenbach, Chief Financial Officer. Due to scheduling and travel conflicts, Allen Baker, the Chief Executive Officer, will not be on the call today. By now, you should have seen a copy of this afternoon's press release announcing BG's Q1 2016 financial results. If you don't have a copy of the press release, you can find it in the Investor Relations section on BG's website at www.bgstaffing.com. I remind you that this call is being webcast live and recorded. A replay of the event will be available later today on BG's website and will remain available for at least 90 days following the call. I would also like to remind you that our discussions today include forward-looking statements. These statements are based on certain assumptions made by BG Staffing based on and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The company's actual results could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including those listed in Item 1A on the company's annual report on Form 10-K and in the company's other filings and reports with the Securities and Exchange Commission. All of the risks and uncertainties are beyond the ability of the company to control, and in many cases, 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 the date of this call, and BG Staffing assumes no obligation to update these statements publicly, even if new information becomes available in the future. This broadcast is covered by U.S. copyright laws, and any use or rebroadcast of all or any portion of this conference call may only be done with the company's expressed written permission. On today's call, Dan Hollenbach, CFO, will provide an overview of BG's record Q1 operating results, and he will update you on the progress of BG's business strategy to provide temporary staffing services to a variety of industries, then the operator will open the call for your questions. Dan?

Thank you, Terri. As evidenced in our earnings release today and with our Q that was just filed, we are very pleased with our record operating results for Q1 of 2016. As a reminder, BG Staffing provides temporary staffing services within 3 industry segments: multifamily, professional and commercial. As we will discuss in Q1, all 3 segments had record revenue and gross profit. We are focused on continuing to grow our staffing business organically, while also looking to build through accretive acquisitions. I will now discuss our consolidated and segment results from operation. Revenues for Q1 2016 were a record $59.6 million, an increase of 45.7% when compared with revenues from Q1 2015 of $40.9 million. Multifamily increased 37.2% over Q1 2015, which was all organic growth. Professional increased 91.2% over Q1 2015. That growth was bolstered by our acquisition of Donovan & Watkins at the end of Q1 2015 and Vision Technology Services at the beginning of Q4 2015. We did have organic growth in our legacy IT businesses as well. Commercial increased 13.8% over Q1 2015, which was all organic as well. Gross profit increased $5 million, an increase of 60% over 2015. Multifamily increased 45.7% over Q1 2015, professional increased 106.1% over Q1 2015 and commercial increased 19% over Q1 2015. Gross profit percent was 21.4% in 2016 compared to 20.4% for 2015 due to the increase in professional segment business and multifamily. Q1 2016 net income was $833,000 or $0.11 per diluted share compared with net income of $164,000 or $0.02 per diluted share for Q1 2015. We've also started tracking a new non-GAAP measurement, adjusted EPS, which reflects the add-backs to reported diluted earnings per share or GAAP EPS data to eliminate the amortization expense of intangible assets from acquisitions, net of tax. Adjusted EPS for the first quarter of 2016 was $0.24 per diluted share, an increase of 140% when compared to the first quarter of 2015 of $0.10. As the company continues its acquisition strategy, we believe that the growth in adjusted EPS will likely increase at a greater rate than GAAP EPS. We also believe that adjusted EBITDA is a useful performance measure and is used by us to facilitate a comparison of our operating performance on a consistent basis from period to period and to provide for a more complete understanding of factors and trends affecting our business. We also believe that investors, analysts and other interested parties view our ability to generate adjusted EBITDA as an important measure of our operating performance than that of other companies in our industry. Adjusted EBITDA was $4.5 million or 7.6% of revenues for fiscal 2016 -- first quarter 2016, apologize, compared with $2.1 million or 5% of revenues for Q1 2015. I will like now to discuss fiscal 2016 pro forma results. Pro forma revenue exceeded Q1 2015 by $7.4 million, an increase of 14.3%; and pro forma adjusted EBITDA exceeded Q1 2015 by $1 million, an increase of 26.7%. Pro forma revenue and adjusted EBITDA includes 2 months of Donovan & Watkins and 3 months of Vision Technology Services in 2015. Reconciliations of adjusted EBITDA to net income, pro forma revenues and adjusted EPS are available on our latest current report on Form 10-Q and today's news release, both of which are available on our website. Now as the financial review is complete, I'd like to talk a little bit about our strategy and plans to continue to grow the company. At the conclusion of my comments, I'll be happy to answer your questions. In Q1 this year, we continued to successfully grow revenues, gross profit and net income in all 3 of our business segments. We expect to do the same in Q2 and expect revenue to be in line with expectations. Our temporary staffing demand is still up, and we believe the outlook is good. We are comfortable with guidance provided at year-end, though we expect at least 6% growth on fiscal -- on our fiscal 2015 pro forma results. While business is obviously good, we're always looking for ways to make it better. Last quarter, we made a key hire of Eric Peters in a newly created position of VP of Sales and Operations. Formerly, Eric helped several roles, including Regional Vice President of Management Resources, Vice President of Salary Professional Services at Robert Half. His initial focus is to leverage our existing strengths within the professional services segment, provide growth opportunities and initiate cross-selling within and across our professional services segment. We also began an initiative to implement a single software solution in our professional services division to support the leverages we just discussed. Turning to operations. We currently operate temporary staffing in 3 business segments from 45 locations in 18 states. Our multifamily segment provides temporary staffing needed to run apartment complex, mainly office and maintenance personnel. Multifamily is our highest gross profit margin segment. In our professional segment, we offer primarily 2 skill sets: finance and accounting, and IT. Professional is our highest revenue segment. Our commercial segment provides temporary workers and managed on-site services for light manufacturing, logistic companies and call center operations. Since 2009, when Allen Baker became the CEO, the company has been actively diversifying its revenue base and growing higher gross margin business segments. We are all doing -- we are doing that both by industry, for example, increasing in professional and multifamily segments; and by expanding geographically through new office locations as well as acquisitions. The goal of this strategy is about to increase profitability and reduce meaningful fluctuations, enabling us to continue to deliver reliable, repeatable revenue stream despite the ups and downs of the general economy. We also continue to maintain an opportunistic acquisition philosophy, while not having a certain number of acquisitions in mind for any given period. The U.S. temporary staffing industry typically has very strong deal flow. We continue to see that. We are never at a loss for companies to evaluate, and we are currently actively involved in assessing opportunities. Before turning to our Q&A session, I'd like to note that our board is committed to maintaining our quarterly dividend program and this morning, announced $0.25 per share dividend to common shareholders. At this time, I would ask that our operator initiate the question-and-answer session.

[Operator Instructions] The first question today is from Jeff Martin with Roth Capital Partners.

Dan, could you give us -- you mentioned -- reiterated guidance and referred to the second quarter estimates being in line with your expectations. Does that mean the consensus number for Q2, is that what you're referring to? And then could you also give us...

Well, we're -- yes, well, I believe our guidance was on -- on year-end, where we have 2 weeks into the second quarter and the numbers continue to track along the -- what we believe they were going to be. So again, we don't see any indication so far that would stray us off of our initial forecast.

Great. And then, can you remind me what the 2015 pro forma revenue was? So we know what...

Pro forma revenue was approximately $245 million.

$245 million, okay. Great. And then, could you touch on operating cash flow and CapEx for the quarter? And specifically, is there a significant investment in that single software solution that you referred to?

We are -- yes, hold on just a second, let me just get to a number. I apologize. So our CapEx for the first quarter was about $236,000. Typically, in a year, we'll spend somewhere in the $500,000 to $700,000 range. We're in an initial estimate for that CapEx, but we have an amount budgeted in the fourth quarter for a software. It wasn't necessarily indicative of any one, but we don't expect our CapEx to be out of line this year with the previous history.

Okay, got it. And then, can you touch on operating cash flow for the quarter?

Yes. So net cash provided by operating activities was $4.8 million compared to $2.2 million for the first quarter of 2015.

Great. And then could you touch on the balance sheet, cash and debt, specifically?

We are a net borrower, utilizing our line of credit to fund operations, so we have no cash. Debt was just over $30 million as of the end of the quarter. So that includes our senior subordinated as well as our line of credit.

Great. And then last question. How does the current environment look for availability of labor? And are you seeing wages tick up?

We have not seen a significant increase in wages across the board based on our ops discussions with our division presidents today. There are certain, as you well know, either states or locales, that are raising minimum wages. Generally, I would say that's good for us because we work on a markup for our margin. And if you pay more, you make a little bit more. So in terms of -- and as -- so wage was one of them. And then availability of resources was the second one?

Right.

So it is -- particularly in the professional arena, availability of skill sets continues to be work for us. As you well know, in our industry, it's either lots of orders and no people or lots of people and no orders. So we clearly rather be in the lots of orders and have to find the people. There has not been a significant impact on the ability to sell orders by the lack of skilled people. Certain skill sets, say Workday or whatever, we find -- finding those resources a bit more difficult, but our teams are very good at doing that.

Okay. And then, do you look at your organic growth broken down by how much has changed in wages versus assignments? An insight there would be helpful.

We look at growth in hours, primarily. And all those were positive across the board.

The next question is from Brian Kinstlinger with Maxim Group.

The discretionary spending is commoner question in the current earnings season from much larger companies. I'm wondering if you can just talk about the spending patterns you've recently seen, if anything has changed at all, or do you anticipate from communication that you've had with customers any changes to sales cycles?

We have not -- there's been nothing indicative to us, either in order flow or client demand, that has -- that we've seen a decrease. So I guess the answer is we have not seen an impact or a decline, at least in our activities.

Great. And then, can you talk about the pipeline of companies in M&A? And maybe, what are the top priorities, such as are there specific geographies you'd like to add or are there specific verticals? I know you've, in the past, talked about profitability and better margins, but maybe highlight specific geographies or verticals you'd like to expand or add to.

So yes, I will. Thank you. So we have seen 25 opportunities so far year-to-date; haven't looked at all of them, but have seen that many. We look for companies that either provide geographic or skill set expansion for us, and we look for companies that are accretive to our gross margins. So it would have to be, in that case, in excess of 22 and change in terms of gross margin. Ideally, we like companies in the $5 million EBITDA range. We believe that, that range provides us an opportunity as a buyer to be a little bit more competitive and keep certain buyers out of the market.

Great. And then I think you mentioned in your prepared remarks, you have 45 locations in 18 states. Will expansion come -- and I wasn't sure that was a specific division or your entire company, but maybe you can respond to that. But will expansion come from acquisitions? Or are you also planning to expand greenfield without acquisitions?

So the answer is yes. But the 45 locations is all of our company. Generally -- well, not generally, our multifamily business or segment is growing through additional geographic locations. They've already opened 6 locations year-to-date, probably expect that to be 8 for this year. Basically, we sort of go where our clients want us to go. So we do business with many of the large apartment management companies, and they like what we do and ask us to come in and help them. So the -- in our professional division, we are looking to open additional offices while also looking at acquisitions in that segment.

Next question is from Howard Halpern with Taglich Brothers.

I just have one question regarding the back-office consolidation and how that is progressing in terms of leveraging the operation going forward.

So all of our -- well, I guess it depends on what you call back office. All of our payroll for all the entity; accounting, finance, insurance, legal, HR, is all done here at corporate. All of the companies that we've acquired, including Vision last year, are on one payroll system. So we just initiated, as I mentioned earlier, an initiative this year to put our professional division on a shared office software, which we believe will be implemented sometime in the third, maybe early fourth quarter that will allow them to share customer information, help leverage cross-selling and provide, we hope -- or not hope, provide some organic growth through that cross-selling effort.

There are no further questions at this time. I will now turn the conference back over to Dan Hollenbach for any closing remarks.

Thank you, I appreciate it. Thank you all for joining our call today. A key takeaway for all of us is that we continue to expect a strong year again in 2016. Our management team is committed to doing what we've been doing. I look forward to speaking to you again when we report second quarter results. Thank you, and have a good afternoon.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.