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. [Operator Instructions] As a reminder, this conference call is being recorded. Now I will turn the call over to Sandy Martin, 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, multifamily housing or ringing single-family homes are no longer a transitional housing option. Alternatively, people are deciding that apartments and build-to-rent communities are 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 snow 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 think 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 through 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 pod 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 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 $3.3 million or 19.5%, which compared favorably late to 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…

Thank you, Dan. Our teams are energized around our strategic BGSS 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 unique model empowers people and creates long-term relationships with both customers and our workforce. With the U.S. job openings training at almost all-time high, coupled with unemployment rates at record lows, especially for those with college degrees at 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 segment 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 techs, developing new diverse highly-skilled candidates for managed services, consulting and perm 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 amending to recessionary pressures, we have continued to execute with excellence in our markets and have a proven track record of managing through past down cycles. In addition, our divestiture of the Light Industrial business makes us less vulnerable to cyclical headwinds, and…

[Operator Instructions] 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 in regards to, I guess, real estate. And what really drove the gross margin above that 40% level, the first time we've seen that in its history.

Yes. So interesting enough, Normally, in the third quarter, it's tough to maintain that because that's normally their highest volume and they tend to have a little bit of pressure on pay to keep our people working, but 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 that? Or it's 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 from direct hire. So that direct tire 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 perm revenue almost doubled Q -over- Q. So yes. Thanks.

And have you laid out, and I know you've opened what number of offices you said you were so far -- is there a plan or a hint of how many new offices or split offices you're going to have heading into next year?

We're in the process of doing our budgets right now. So we're identifying new opportunities for the future. So I think it's kind of early for me to answer that because there's some -- let me -- there definitely will be office openings that would definitely be expansion in the markets we're in. We just haven't nailed that that's complete.

Okay. And you talked about essentially your partnerships because you announced an inner 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 -- all right. And 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 that you are developing and the deficit in housing going forward for the segment that you're in. I mean, is this ex forward thinking that you have in play to maintain the -- I mean to get new employees basically to have the talent pool once those -- if the housing deficit ever begins to close. Obviously, it's I guess, it's all about the talent pool, correct? That's what you're driving for.

It is. And we -- the shortage were in the workforce right now is something that's painful for everybody. So we really strategically spend a lot of time figuring out 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, and we've decided to aggressively move forward so we are upskilling and reskilling people. So we're creating a group of people who not only we can end up helping place for ourselves with our customers, we're helping our customers upscale their work as well, 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 third quarter than in the history of the company.

Okay, guys, keep up the great work.

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. Nice quarter. And thanks for taking my question. First, many of the IT services on--Just many of the IT services companies are talking about a slowdown in growth in budgets are pressuring sorry, budgets are being pressured and therefore, progress has been delayed. The only real area of strength is digital transformation. I didn't hear such comments from you, other than you're not immune to recessionary pressures. So can you touch on changes in the pipeline, sales cycles and whether you're experiencing any of those 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 a decision on that. But in all the other areas of our business, we're not feeling it. And 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 are they historically have they 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. And 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 Fila 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 that -- those office openings if not, do you expect in the early time frame 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 where 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 on that. -- that's -- we did have -- we have a robust M&A pipeline. We're probably have seen about 100 deals. We continue to remain interested in a couple of those. And we fully expect M&A to be a part of our ongoing growth model. Yes. And when I think as Beth has mentioned on calls before, when we opened a new territory or a new market, if you will, for real estate, really talk about adding a salesperson. So there's no brick-and-mortar or anything like that. And generally, you can get 10 to 15 people working in a 3- or 4-month period and the return on that is pretty quick.

Understood. Thank you so much.

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 maybe some discussion maybe some key performance indicators relating to your technology investment and IT road map. I would 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 whole lot of the efficiencies, as I've said in the past, we really think that we'll start seeing major efficiencies due to the technology and going into the first quarter. However, I will say that we are seeing efficiencies in the professional group was how quickly they can get things moving in the process. So they're doing more revenue with less people than they were a year ago. And so we feel that that's positive. But we're still saying a lot of the KPIs and what the growth projections can be and getting the efficiencies. Remembering we just went live at the end of June. We're still in hyper care, which we're hoping to come out of hyper care by Thanksgiving. And then we really -- we have a pretty robust KPI dashboard that we are building right now to be able to really kind of see where we are. But to your point, we are doing fill ratios, time to fill, what's the sales pipeline going to give us, how quickly do we close the deal, we should be able to do some projections in whatever is in the funnel, what percentage we think will kick out from -- so we'll be able to do a lot more financial plan in the future.

Okay. Great. And then I was curious on the professional side, if you're seeing extended assignment duration, people are being put to work on projects that go longer, does that increase the visibility of the segment for a better period of time?

We do have several long-term customers where we have people that are -- were -- they've outsourced their whole project or their whole IT department to us. So the rest of them are probably and is still running in the 7- to 9-month project range depending on what the implementation or projects we're working on. So we're still running about the way we always have.

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 probably 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 folks that are data security folks that are working within our divisions. One of the other things we'll be able to get out of our technology is we're going to start being able to separate how much of the business is in SAP, how much of it is in Oracle or Workday or Service Now or what -- so we do have it. It is -- you're definitely right. It is something that everybody talks about. It is something that our teams are constantly working on filling and doing a really good job in providing those resources to our customers.

It is on our wish Yes. It's on our wish list for -- on 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, that's certainly -- we would love to find a cyber-company-- consulting company on the M&A side.

Great. Great. And then one more if I could. With entry for real estate in Canada. I was just 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. And all indicators are it should be beneficial for us.

Great. Thanks for taking the questions.

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. So with that said, some of the multiples or valuations you're looking at maybe based on inflated trailing earnings, which are at risk of a weakening job market again since that is a clear intent of the Fed. So how do you adjust for that in evaluating a potential acquisition?

Well, we do look at that, and we try and go in and understand certainly, if we get into an active deal, we spent a lot of time on due diligence to ensure the validity certainly of the numbers. There are still -- the last number I saw, 10 million open jobs out there. So even if you cut that back by 20%, there's still 8 million jobs. So -- and in the world that we work in, sort of higher-end accounting, IT consulting side, particularly it's 60% of revenue, Unemployment there is less than 2%. So we've seen demand continuing, as Beth mentioned, and it's still hard to find resources. So they've been raising rates for six months now or to nine months, and we're still signing more logos than we ever have.

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, again, I mean, the Fed stated it very clearly yesterday, they're not going to stop in their mission until the job market weakens and there is a long lag effect. So even though they've raised rates a bunch to now, the market is still strong. I don't think we can assume that it's going to stay that way indefinitely. So I guess my concern would be paying for something based on peak earnings. And so I just 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. And we spend a lot of time talking about the pipeline with a potential target.

Thank you.

Bailey, do we have anybody else?

We do have some more questions. Here we go. Next question today comes from the line of [Darrell Davis]. Please go ahead. Your line is now open.

Good morning, Dan and Beth. So I'm going to dovetail on that last question. The last question was really a forward-looking question. This is going to 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 has certainly changed over the past eight months. You took that light industrial to market today, what sort of price do you think you could get? And you may not have woken up this morning ready for that question. So if you have to give a range, a big range is 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 [indiscernible] 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. And I will go forward to more of these in the future. So it's all due to a steady, steady leadership on your part guys. So my question is, we're another three months into the technology into seeing some results from your technology spend. Can you put a guess about how much of that came from that this quarter? And how much more of that I have to look forward to rolling into the next three, four quarters?

Yes. So we pretty much wrapped that up at the end of Q2. We went live with the last piece of that at the beginning of Q3. So the big spending, if you will, the credit or road map is over. We forecasted -- currently, we're working on next year's forecast, and we have about $2 million in CapEx relative 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, though, what kind of return are we getting -- do we see the return this quarter? Right?

No. I think, Michael, we talked about that, as Beth mentioned, this quarter, we're in what we're calling hyper care. We're trying to make sure that the product is working as we anticipated. -- fixing when you do a massive migration like that, there are things you want to fix. So we're doing that this quarter. Fourth quarter, we'll look at processes. We expect those efficiencies, I think, was, as we've mentioned on 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 start seeing some return on it. Well, we are seeing efficiencies. I think I mentioned earlier that we are able to do more revenue with less people. And I think part of that is a little bit because of the systems, but a lot of it has to do with identifying our processes because we really had to work on our processes before we went live on the system, so we could make sure you can put a system in, but you don't have a process that works with that you're wasting your money. So we did a lot of work in processes in preparation for the system. So we are doing more revenue with less people. So we are seeing that. But these are -- as our CIO says, these are baby systems. They're still baby. We're still working on getting all the KPIs in place and making sure things are working the way we're doing. So I think that we'll get more solid data that we'll be able to track in the future. But for right now, we're just seeing it from a perspective of less people, more revenue.

Right, which usually means more money, more earnings. So was it in the quarter or not? When it's all said no, we spent some money, we 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 -- at the end of day, I hear about it's a number to figure how much more money you're going to make next year with listing on a run rate basis.

We expect to see efficiencies and improvements in both the COH, what we call the COH, or 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 free conference call, just so you know. Thanks. It was 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.