BGSF, Inc. (BGSF) Q3 2018 Earnings Report, Transcript and Summary

Thank you for standing by, this is the conference operator. Welcome to the BG Staffing Record Third Quarter Results Conference Call. As a reminder all participants are in listen only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Terri Macinnis, Vice President of Investor Relations at Bibicoff and MacInnis, Inc. Please go ahead.

Thank you Ariel. It's my pleasure to welcome you to BG Staffing conference call to discuss Q3 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; and Beth Garvey, President and CEO. By now you should have seen a copy of this morning's press release announcing BG's Q3 2018 financial results as well as the Form 10-Q. If you do not have a copy of the press release or Form 10-Q, you can find it in the Investor Relations section of BG's website at 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 the company'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 of 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 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 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 the US 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. During our call, we will discuss some non-GAAP measures which we use for internal evaluation and to report the results of the business as useful information to management our board of directors and investors about our operating activities and business trends related to our financial condition and results of operations. These non-GAAP measures are intended to supplement GAAP financial information and should not be considered in isolation, as a substitute for or superior to, financial measures calculated in accordance with GAAP. For a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please see today’s earnings release posted on Company’s website. I will now turn our call over to Dan Hollenbach, BG Staffing's Chief Financial Officer. Dan?

Thanks Terri and good afternoon everyone. Thank you for joining us today. We appreciate your interest in BG Staffing. This is our warning, I'm just getting over a cold, actually Saturday I was in a whisper so if for some reason during my talk my voice ends Beth will pick up and sort of finish what I was talking about. So anyway again thanks. We are very pleased with the performance of BG Staffing for the third quarter and first nine months of 2018. And I'd like to start out once again by taking a moment to recognize all of our people at each of the BG Staffing business units for their hard work and dedication to the company's continued success and strong gross profit margin. We are very proud of the job they continue to do for us. BG Staffing provides temporary staffing services within three industry segments - real estate and apartments and commercial building area, professional which includes our finance and accounting and IT groups and light industrial. The real estate segment includes the BG multifamily group. In addition to BG Talent our commercial real estate group. I'll spend a few minutes reviewing BGs financial results, before turning the call over to Beth Garvey our newly promoted President and CEO for her comments on the quarter, the company's strategy, execution and current industry conditions. First for the third quarter, revenues for the third quarter 2018 was $77 million up 8.1% from the third quarter of 2017 with a very strong gross profit margin percentage of 27.7% up from 25.6% for the third quarter of 2017. Net income in the second quarter was $5 million or $0.49 per diluted share compared with net income of $3.1 million or $0.35 per diluted share for Q3 ‘17. Revenues were positively affected by a 13.1% increase in our volume of billable hours over the third quarter of 2017 partially offset by a 4.5 % decrease in our average bill rate primarily in the finance and accounting group. Consistent with Q2 2018, customer sentiment remains positive, demand and momentum was steady as we move sequentially from Q2 to Q3 2018. Turning to year-to-date results. Revenues for the first nine months 2018 were $215 million an increase of $18 million or 9.1% compared with the first nine months of 2017. Gross profit increased $8.7 million or 17.8% to $57.9 million. Gross profit percentage increased by 1.9% to 26.9% in 2018 compared with 25% for the same period last year. The company produced net income of $12.7 million or $1.32 per diluted share for the first nine months compared with net income of $6.7 million or $0.75 per diluted share for the same period 2017. Looking at our segment results. Third quarter real estate revenues were $26.5 million an increase of $4.8 million or 21.9%over the Q3 '17 which is all organic growth. Real estate gross profit margins for Q3 2018 was 37.9% slightly higher than the second quarter last year. Year-to-date real estate revenues increased 14.4 million to 65.9 million or 28% over 2017. We continue to scale this highest profit margin segment of our business. Real estate gross profit percentage was 38% for the year-to-date period.

So real estate gross profit percentage was 38% for the 2018 year-to-date period slightly higher than the same quarter of 2017. Real estate has opened three new offices and put four existing offices through the first nine months of 2018. And we expect to open one more office this year. Our Professional segment’s third quarter revenues were $29.2 million, a decrease of approximately $2.6 million or 8.1% compared with Q3 of 2017 with gross profit percentage for the Professional segment coming in at 27.8% for Q3 of 2018 which compares with 23.6% for the same period last year. These results reflect a full three months of both our Zycron and Smart acquisitions whereas the 2017 third quarter included one week of Smart operations which was completed in September of 2017. Smart contributed $3.1 million of revenues in Q3 consistent with Q2 2018. Our professional segment revenues were negatively affected by the project that was in the process of winding down in addition to projects that are scheduled to ramp up in Q2, one of which is still delayed and one which began ramping up in Q3. Most notably and as we disclosed on our previous earnings call, a large project in our finance and accounting group is currently winding down as planned. We generated $1.5 million less revenue and $203,000 less gross profit attributable to that project in Q3 2018 versus Q3 2017. We anticipated these declines and included no revenues in our 2018 planning. Year-to-date 2018 Professional revenues were $90.4 million, a decrease of $1.4 million or 1.5% over 2017. While year-to-date Professional gross profit percentage increased to 26.6% from 24% for the previous year our 2017 acquisitions of Zycron and Smart contributed 7.2 million and 8.7 million respectively to the changes in 2018 year-to-date revenue. We generated 5.1 million less revenues and 887,000 less gross profit attributable to our finance and accounting group large projects in Q3 2018 versus Q3 of 2017. Third quarter Light Industrial segment revenues were $21.3 million, an increase of $3.6 million or 20.1% over Q3 of 2017. Light Industrial gross profit percentage was 15.1% for Q3 of 2018 compared with 14.4% for Q3 of 2017. These results reflected disciplined pricing by our managers in this segment of our business where volume is driven much more by price than the other two segments. Light Industrial year-to-date revenues increased $4.9 million to $58.6 million or 9.1% versus a year ago, while Light Industrial gross profit percentages was 15% compared with 14.3% for the period year-to-date. We are very pleased to see both sequential and year-over-year improvements in gross margins and what is normally our lowest margin business, as demand for Light Industrial staffing continues to accelerate along with the overall economic activity.

Thank you. As selling and expenses for the third quarter increased approximately $1.9 million or 19.7% over Q3 '17, primarily due to the growth in Real Estate of $867,000, of which $131,000 was attributable to new offices and the addition of Smart which increased $763,000. Excluding Smart, our other IT and F&A group selling expenses decreased $104,000 while Light Industrial segment increased $251,000. For the first two -- nine months of 2018 selling expenses increased $5.9 million or 21.8% over the same period of 2017. Real Estate increased $2.7 million with $242,000 coming from new offices. Zycron increased 1.1 reflecting 39 weeks in 2018 versus 25 weeks in 2017, and Smart contributed $2.4 million of the increase. Excluding Zycron and Smart, our other IT and F&A group selling expenses decreased $773,000 while the Light Industrial segment increased $316,000. Our G&A expenses for Q3 2018 reflect the $1 million gain on contingent consideration. Under US GAAP accounting rule, the Company’s required to revalue the liability for estimated contingent earn-out payments with any revaluation recorded through the income statement. In effect, the revaluation of an earn-out to its quarter and fair value is a reduction of the acquisition purchase price. Excluding the effect of the gains on earn-out, our G&A expense would have been $1.6 million, an amount that is 2.1% of revenue for the third quarter 2018, which compares with 1.9% for the third quarter of 2017. G&A expenses were down 38% for the 2018 year-to-date period, primarily due to the gain on earn-out. Excluding the effect of the gain on earn-out 2018 year-to-date G&A expenses would have been $4.7 million, an amount that is 2.2% of revenues which compares with 2.1% for the prior year-to-date period. Our effective income tax rate was 21.3% and 17.7% for the third quarter and first nine months of 2018, compared with 34% and 36.8% in the third quarter and first nine months of 2017. Contributing to the lower tax rate this year was a $2.6 million deduction, attributable to the cancellation of outstanding stock options held by Mr. Baker in connection with the Company’s successful public stock offering that was closed in May as well as the tax legislation that was passed in December of 2017. Our current estimate of our effective income tax rate for the fourth quarter of 2018 is approximately 22%. Our strong balance sheet effective working capital management along with solid earnings continue to generate robust operating cash flows allowing us to keep on returning capital to our shareholders in the form of regularly quarterly dividend currently set at $0.30 per share. Our current debt to adjusted trailing 12-months EBITDA is 0.93%, adjusted EBITDA for Q3 2018 was 8.1 million or 10.5% of revenues compared with 7.2 million or 10.1% of revenues for Q3 2017. Adjusted EBITDA for the first nine months of 2018 was 20.2 million or 9.4% of revenues compared with 17.9 million or 9.1% of revenues for the first nine months of 2017. We 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 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 and that of other companies in our industry. Additionally the financial covenants on our credit agreement are based upon adjusted EBITDA. Reconciliations of adjusted EBITDA to net income are available on our latest current report on Form 10-Q and in our earnings release, both of which are available on our website. I’ll now turn the call back over to Beth Garvey, Beth thank you.

Thanks, Dan, and good afternoon everyone, and thank you for joining us today. First before I begin my reviews of our financial results and business outlook in my new role as President and CEO I would like to take the time to acknowledge the accomplishments that Allen Baker our outgoing President and CEO through his transition in key office as our Chairman of the Board. You may recall that Allen assumed leadership of our company in 2009 at a time when the company only had one sales vertical was generating 35 million in annual revenues and was losing money. Allen's deep industry experience and vision has led us to where we are today. We are financially strong growing in the right areas and consistently producing increasing profitability and cash flow is very nice place to be when you are looking for new opportunity. It's been my privilege to work with Allen for the past five years the last two serving as a Chief Operating Officer and now looking forward to continuing to work closely with Dan and our amazing team to further build upon the strong foundation and growth path firmly positioned under Allen's leadership. You can be confident that our goals remain unchanged. We will continue to grow our existing initiatives, seek ways to improve operating efficiency enhance our cross selling opportunity and build upon our sturdy foundation in order to improve value to you our current and future shareholders. The board continues to support the return of cash to shareholders through quarterly dividend. The quarterly dividend currently stands at $0.30 per share for an approximate dividend yield of 5%. BG Staffing has now paid quarterly dividend for 16 consecutive quarters. Turning now to our strong operating results and achievements. We are continuing to see strong customer demand which resulted in our 9.1% increase in revenues led by solid operational performance by our managers in the field. We are proud to have reported our highest quarterly consolidated growth profit percentage on record of 26.9% and our sixth consecutive quarter with consolidated gross profit percentages in excess of 25%. BG Staffing’s gross margin percentage has steadily increased from 19.1% as of fiscal year 2013 to 27.7% for the most recent quarter. We don't pursue revenue growth for its own sake, believing that value increases with improved returns. The foundation of value creation for BG Staffing consists of generating higher cash flows through a combination of revenue growth and return on capital. And while the Company’s revenue growth over the past several years has certainly been impressive, we believe our focus on the strategic priority of growing returns as measured by gross profit margin percentage, adjusted EBITDA, and EBITDA margin has benefited our shareholders with sustained value creation. We continue our focus on creating value by increasing margins through operational discipline, organic growth initiative and M&A, where we believe our insights into how certain market segments and the staffing industry itself will evolve. We believe that one as our strength as a serial acquirer is our strategic execution of value creating acquisition. We will continue to seek acquisitions primarily in our professional segment that will allow us to create NIM market access across all the groups within this segment for cross selling opportunities. These acquisitions allow us to build our service offerings more quickly and at a lower cost than if we built them in-house. The impressive trend in our historical gross profit margin improvement over the past several years that we are discussing today is directly attributed to return on capital investments. So far in 2018, we have not completed any acquisitions. However, the pipeline remains very full and active due to an attractive industry structure, and we continue to be disciplined buyers evaluating accretive opportunities that we believe will complement our existing market exposures and our diversification strategy. Turning to our industry outlook. We remain optimistic regarding business activity levels in the fourth quarter of 2018 subject to normal seasonal patterns. Beyond that we believe that even in a tightening labor market economic momentum will continue to be positive, we see growth trends in the staffing industry that indicate more companies are using temporary and contracting fleet as a regular and normal component of their business plan and operations across various industries. A few interesting staffing industry stats in the US there are about 20,000 staffing recruiting company more than 3 million temporary and contract employee work for American staffing companies during an average week. During the course of the year American Staffing companies hires more than 15 million temporary and contract employee. As a matter of fact, the Bureau of Labor Statistics just released the US temporary labor market penetration rate continues to be strong at 2.05% and rising. Our conclusion is that the economy continues to improve and the labor market remains tight this will be positive bips for BG overall. Q3 is historically our best quarter, we expect the remainder of the year to be strong and look forward to closing of books on a record 2018 and are very optimistic about 2019. We continue to be proactively identifying areas across the all segments in which we can provide additional staffing services and we will continue to invest in these incremental growth activities. As we look at 2019 our focus is twofold talent acquisition and technology upgrades to enhance our contingent employee and customer experience. We've all heard in the news that that US job openings have exceeded the amount of unemployed Americans for several months in a row. We have put together a team to identify technology platforms that will enhance the candidate and customer experience through mobile access, artificial intelligence and data analytics. Beyond technology we are surveying our candidates in regards to how they interact with us and has found that speed mixed with the personal interaction from our team have resulted in our most engaged talent resource. We believe strongly that this initiative will increase our candidate flow and produce a better candidate for our customer. Our overall business strategy remains consistent, made profitable by our continued improvement in earnings which in turn provides strong cash flows from our operations and it improves the balance sheet. We will continue to seek to grow our business through a balanced combination of organic investments and acquisitions while also returning cash to our shareholders. With that said I'll turn the call back over to Ariel our operator for questions.

[Operator Instructions] Our first question comes from Jeff Martin of ROTH Capital.

Beth, follow up on your comment regarding technology platform and technology upgrade. How much of an initiative is this? And is this something that’s going to become main stream throughout the organization? And is it a really a sea change type of initiative or is this just an enhancement of what you have already been doing?

I think there is opportunities that we made right now. The technology that we are talking on about really through our ATS system. So all of our performance is stand for our applicant tracking systems. So there is technology out there that will add on to that which would help us to be able to -- for example when we have a job opening and we have candidate that live close to where that location is where we need put people. It will go find them and send them the request are you available for this job. It gives them ability to be able to apply quickly. It gives us as the ability to be able to respond to them quickly. It allows our customers to be able to prove their time and attendance online. It allows our candidate to think about in terms of swiping left or swiping right if you have that dating app on your phone. It allows them to be able to accept the job or decline the job quickly. And as the technology moves we have been a little bit behind in that area and so it's something that we really need to be focused on.

What kind of timeline is this planned for?

We put together the taskforce right now. We will be strategic about it because there are lots of options out there. So we have identified people to be able to go out and work on that but we are hoping to be able to do that in some time in 2019.

And then on the real estate segment could you touch on the commercial strategy how it's progressing? I know Allen at one point had talked about potentially being 5 million to 6 million this year and I think recently said it's less likely to be at that level, because there's some learning curve. So I want to get your sense of the potential for that segment and the progress that you have made year-to-date with that and what's your thinking over the next two three years with that part of the real estate segment?

Yes, I'll start on that Jeff. So we currently have five offices open. We will probably come in this year less than the 6 million target Jamie was a bit aggressive probably in that. But we are currently on the $6 million run rate when you look at headcount that's currently up being built. So certainly will be there next year, they are looking probably next year growth in that area three to five new offices depending now on how the new ones open up and I think Jamie's feeling on that who's the President of that division feels I think we said this in the past the potential there is as big as multifamily, our long-term goal for anything more than three years is to have as many offices as we have on the multifamily side and we see an exorbitant amount of growth possible there, successful so far.

And then just wanted to point out and as you did mention it on your prepared remarks but you're coming up on a difficult comparison in Q4 based on number of weeks in the quarter is that right?

Well, it's over group last year we had our I guess our 53 week comparison when you started looking at and what I did last year was compare last year to the year before because I thought the question would come up and it never did. But because of the way the holidays fell I think we only lost or only gained to couple of days of holidays, so I think we are only going to lose a couple of days this year probably doesn’t move the needle much so.

And then in terms of the gross profit margin on the professional segment that increased dramatically year-over-year which is nice to see your gross profit dollars were actually up 8% on an 8% revenue deployment segment just curious if there is any particular drivers there was there any permanent placement revenue is it just at a sustainable level, just kind of wanting to peel the layers of the onion a little bit given in terms of what droves that gross profit performance?

A lot of it has to do with the mix of business that we bought in at this point. In prior years we did a lot of business with system integrators in the professional brand and that really produced a lower margin business but we've done a lot of education with that group in regards to go and directly to the client and by going to the client we are able to have a higher pay rate and bill rate and plus it gives us the opportunity to be able to build those relationship so when they go to grow in other areas we're able to grow with them on that. So a lot of it has to do with that.

And the other factors also in that is that just as that large project with finance and accounting as those revenues fall off that margin was in the 15% to 16% range and there was price analysis that's -- in the more 25 to 30 plus range.

Our next question comes from Howard Halpern of Taglich Brothers.

First question I think you mentioned it earlier and it's sort of the question I think you answered a little bit last quarter in terms of that projects that's sort have been on hold and is that starting to go now that healthcare project with SaaS implementation is that -- has that started in the fourth quarter?

Yes, so it has. So and we are experiencing a lot of growth in that area they've really have come on strong we have been able to go out to their facility and get work outside of the original statement of work and it is really got some heavy perm in it as well as we've build out the management but we are seeing if that is going to help us because then we will have the alumni support there so the people will go in and they will use us because we placed them there. So we are seeing I mean just last week we had an additional 27 orders that came in that we were not expecting. So it's up and running and it's guns blazing.

And do you have any rough idea of what type of opportunity that is over what timeframe in terms of dollars?

We are told that it could be upward to 10 million.

And then I think you talked about second project that might be starting is that something that you are willing to discuss at this point?

With the same customer?

Is that the same customer? I don’t know if it was the same or a different customer, you said there was -- I think earlier that was one that was about to start maybe new client.

No, there is -- what we chatted about in that past Howard it was a large medical IT support project that got put on the hold second quarter last year, third quarter -- third quarter. That has not come back to life. Word is they're going to come back up to the market, but they have been saying that for a year now so we are not counting on that. We are not putting it into the chicken hold so yes.

And a question about the Light Industrial. What do you see is moving the needle there? And are there new customers that are coming to you that are willing to give you that the margin that you are seeking?

It’s a combination. So last year as you recall their numbers went down tremendously and that was pretty much related to one customer. That same customer has come back strong this year and in addition to coming back strong and winning back the client that they have lost. They have started to do acquisitions themselves that they are taking us with them so that’s part of it. The other part of it is we have got a very strong sales person in Midwest area and she has been able to give time business it's been in the 18% 19% 20% range. And we have put her in charge in mentoring the new sales people to be able to go and negotiate better pricing.

And one final one I guess in terms of the you Dan about contingent consideration. Do you see any significant adjustments again in the fourth quarter on the horizon?

We are looking at the final payment on vision and we are in discussions with them and when that’s going to be, right now I can't speculate as to what that number will be.

We have no more questions at this time. This concludes the question and answer session. I would like to turn the conference back over to Beth Garvey for any closing remarks.

Thank you Ariel, and thanks to all of you for joining our call today. Hope you had a great afternoon.