Thank you for standing by. This is the conference operator. Welcome to the BG Staffing Third Quarter Results Conference Call.

As a reminder, all participants are in listen-only mode, 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 at 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 Q3 and 9 months' financial and operating results and a progress report on the company's business strategy.

With me today on our call is Allen Baker, Chief Executive Officer; and Dan Hollenbach, Chief Financial Officer. .

A copy of yesterday's press release announcing BG's Q3 2016 financial results can be found on the Investor Relations section on BG's website at bgstaffing.com. .

Today's 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'll 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 SEC.

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. .

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 yesterday's earnings release, a copy of which is posted on BG's website. .

I will now turn the call over to Dan Hollenbach, CFO.

Dan?.

Thank you, Terri. I will now discuss our consolidated and segment results from operations. First, our third quarter results. Revenues for Q3 2016 were $67.4 million, an increase of 12% when compared with revenues from Q3 2015 of $60.2 million. Multifamily increased 34.2% over Q3 2015, which was all organic.

Professional increased 16.5% over Q3 2015, and the Commercial division decreased 5.1% over Q3 2015. .

Gross profit increased to $2.5 million, an increase of 18.6% over 2015. Multifamily increased 40.5% over Q2 '15. Professional increased 14.2% over Q2 '15, and Commercial decreased 6.3% over Q3 '15. .

Third quarter growth in the Professional segment was bolstered by our acquisition of Vision Technology Services at the beginning of the fourth quarter 2015. .

Gross profit percent was 24.4% for Q3 2016 compared with 23% for Q3 2015. Operating income was slightly down over Q3 2015 by $0.4 million. Q3 2016 net income was $2.3 million or $0.26 per diluted share compared with net income of $2.2 million or $0.29 per diluted share Q3 2015. .

We had an unexpected conversion of 17 temporary workers in our Professional segment to full-time employees of our client at the beginning of the quarter, which had a $0.02 negative impact on fully diluted earnings per share for the quarter. .

And now for year-to-date results. Revenues for the first 9 months of 2016 were $189.6 million, an increase of 25.7% when compared with revenues from the first 9 months of 2015, $150.8 million. Multifamily increased 37.2% over 2015, which was all organic.

Professional increased 42.5% over 2015, and Commercial increased 4.5% over 2015, which was all organic as well. .

Gross profit for the first 9 months of 2016 increased to $11.9 million, an increase of 36% when compared with 2015. Multifamily increased 44.2% over 2015. Professional increased 49.4% over 2015, and Commercial increased to 5.8% over 2015.

Growth in the Professional segment was bolstered by our acquisition of Donovan & Watkins at the end of Q1 2015 and Vision Technology Services at the beginning of Q4 2015. .

Gross profit percent was 23.7% for 2016 compared with 21.9% for 2015. Operating income for the first 9 months of 2016 exceeded the first 9 months of 2015 by $2.7 million, an increase of 32.3%.

The company reported net income of $4.6 million or $0.56 per diluted share for the first 9 months of 2016 compared with net income of $3.8 million or $0.53 per diluted share for the first 9 months of 2015. .

Earnings per share for the first 9 months of 2016 was also affected by a onetime bad debt extinguishment expense or approximately $0.05 per diluted share. The company has had and expects to continue an acquisition strategy, and we believe that adjusted earnings per share provides investors an alternative measure of our earnings.

Adjusted EPS reflects add-backs to reported diluted earnings per share or GAAP EPS data to eliminate loss on extinguishment of debt, interest expense on contingent consideration payable and amortization expense related to intangible assets from our acquisitions, all net of tax. .

Adjusted EPS for the first 9 months of 2016 was $1.07, an increase of 21.6% when compared with the first 9 months of 2015 of $0.88. And the 2016 number was affected by the onetime bad debt extinguishment expense.

As the company continues its acquisition strategy, we believe 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 believe that investors, analysts and other interested parties view our ability to generate adjusted EBITDA as an important measure for operating performance and that of other companies in our industry. .

Third quarter 2016 adjusted EBITDA was $6.3 million or 9.3% of revenues compared with $6.2 million or 10.3% of revenues for the same period of 2015. First 9 months 2016 adjusted EBITDA was $16.5 million or 8.7% of revenues compared with $12.4 million or 8.2% of revenues for the same period last year.

Reconciliations of adjusted EBITDA to net income and adjusted EPS are available in our latest current report on Form 10-Q or in yesterday's news release, both of which are available on our website. .

We also had a significant change in our credit agreement by obtaining an additional $10 million in credit commitments from Texas Capital Bank pursuant to a commitment increase agreement, raising TCB's total commitment under the credit agreement to $35 million.

All other terms and conditions of the credit agreement remain the same as those in effect prior to the increase. .

Now that the financial review is completed, I'll turn the call over to our CEO, Allen Baker, to talk a little bit about our strategy and plans to continue to grow the company. At the conclusion of his comments, we will open the call for our Q&A session.

Allen?.

Thanks, Dan. Demand for temp workers in the U S. is expected to increase 1.5% for the 2016 fourth quarter when compared with the same period in '15 according to the Palmer Forecast. This is the 27th consecutive quarter of year-over-year increases in demand for temporary workers.

The 2 temp job categories of highest growth are service employment and professional and business services. We serve both of these business segments. .

Key metrics for the 9 months ended 2016 all trended positively as compared with the same period in '15. While we saw some softening in early Q3 resulting in a $0.02 EPS negative impact, later that same quarter, we returned to normal levels. .

I'd like to point out that our core plan to diversify both by geography and by segment is validating our business model and accomplishing exactly what it is designed to do, that is to help build both top line and gross profits in a sustainable, repeatable manner and absorb any bumps in the road.

We continue to see demand for our service offerings even though our operating teams report a continuing tight market for skilled resources. Because of this, our outlook remains optimistic, and our annual guidance remains in line with recently adjusted industry estimates. We're expecting 4% growth on the 2015 fiscal pro forma revenue of $246 million. .

We agree with Duff & Phelps that EBITDA, not revenue, drives staffing company valuations. We're proud of our 7 years of continuous revenue growth, but our real goal is and always has been increasing EBITDA.

In August, as part of our growth plans and continued initiative to make good business even better, we appointed Beth Garvey to the newly created position of Chief Operating Officer. Beth has been with us since 2013, and she continues to do an outstanding job. In a short time, Beth is making inroads to improve our operating efficiency. .

Currently, we provide temporary staffing in 3 business segments through 50 branches and 16 -- or approximately 16 on-site locations in 22 states. Our Multifamily distinguishes our staffing company in the marketplace. This rapidly growing group provides temporary staffing needed to run an apartment complex, namely office and maintenance personnel.

We believe we are the largest provider of such services in the U.S. Approximately 1/3 of the revenue in Multifamily comes from the office and leasing side, and approximately 2/3 of our revenue comes from different maintenance activities.

Multifamily has the highest gross profit percent, certainly a specialty niche as defined by the Staffing Industry Analysts. All of our growth in this segment has been organic. .

In our Professional segment, we offer primarily 2 skill sets. The first is IT, and the second is finance and accounting. Professional is our highest revenue and fastest-growing segment. .

Our Commercial business segment, which was our first business division, provides temporary workers and manage on-site services for light manufacturing, logistics and call center operations.

While Commercial was 100% of our revenue stream when I joined the company in 2009, for the first 9 months of 2016, it represents 34.4% of revenues as a result of our planned diversification. .

As I noted earlier, we continue to diversify our overall revenue base and growing gross margin by adding additional skill sets. We are doing that both by segment, for example, doing a greater percentage of our total business in the Professional and Multifamily segments; and by expanding geographically.

The ongoing goal of this strategy is to deliver a reliable and repeatable top line revenue stream and to continuously increase our EBITDA. .

During Q3, we were pleased to receive a few external recognitions of our growth. BG Staffing has been named the 56th largest staffing firm in the U.S. by Staffing Industry Analysts in its 2016 report. This is up from the 71st largest staffing company the previous year.

For the third -- at least the third time, Staffing Industry Analysts also ranked BG Staffing in its list of fastest-growing companies in the United States at #71. And though our CFO, Dan Hollenbach, is too modest to mention this, I will.

Dan was recently acknowledged by the Dallas Business Journal's CFO of the Year Awards for having excelled in his field in the quick-impact category for his ability to come into his current position and make a difference in a relatively short amount of time. Dan is certainly one of our key assets. .

I'd like to briefly address our acquisition strategy, which has not changed. In the 7 years that I have been here, we have completed and successfully digested 7 acquisitions. The U.S. temporary staffing industry continues to see strong deal flow, and we have never been at a loss for companies to evaluate.

We continue to maintain an opportunistic but disciplined acquisition philosophy. We do not have a certain number of acquisitions in mind for any given time period.

We seek only accretive targets, companies with gross margins of at least 24%, and we have seen more than 50 potential acquisition candidates this year and are currently actively involved in assessing several opportunities. .

As mentioned, in the third quarter, we increased our bank revolver limit by $10 million. It now resides at $35 million, and this gives us dry powder to be nimble. .

Before we move to our Q&A session, I'd like to reaffirm that our board is committed to maintaining our quarterly dividend program. Presently, it's set at $0.25 per share per quarter, which provides a current return of about 7.3% to our investors. .

At this time, I would like to ask that our operator open the question-and-answer session. .

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

Could you characterize the quarter, specifically on Professional and Commercial, in terms of performance versus your expectations and if there are any things you can specifically point to -- I'm under the notion that Professional is probably growing mid-single digit and Commercial growing more at GDP-type rate.

We saw some fluctuation from that this quarter. Probably for the year, you're around that level. Just curious to get your thoughts if there's anything specific going on there to certain clients or if we just have some softness for the summer in the market. But a perspective there would be helpful. .

Yes, we -- Q3 was a tough quarter and mainly because it started off badly in July. It got a little bit better in August, and then it rebounded rather healthily in September.

And the reason it started off negatively in July was primarily due to unexpected, we call it, taking direct of some -- about 17 of our temps in large IT staffing customer, which is probably equivalent to $0.02 per share EPS. On the Commercial side, we saw some softening in the revenue, for sure, in the quarter.

And that's primarily due to a strategy that we have, which is to raise the margins in Commercial. Probably it's not a surprise to everybody that Commercial has some of the lower margins in the industry. We're trying to raise ours. We're not really trying to get rid of customers.

But when they come to us wanting a price reduction, we're not as -- we don't dig in our heels and lower the price anymore. And we have a rather large customer that probably makes up the lion's share of the downturn in the third quarter of the revenue. And so as that customer continues to dig in their heels, so to speak, we'll see what happens.

We have experienced it both ways, there's been cases that we've lost a customer. There's also been cases whereby the customer comes back, and we end up with a higher margin than what we left with. So it's too soon to tell on that subject, but that softening in that particular segment is not bothersome.

It's probably been caused by us as we continue to try to increase our gross margins. .

Okay.

And then could you speak to specific trends within Professional, on breaking it up by finance and accounting and then by IT, that you're seeing specifically to BG?.

As far as Professional goes, we've had a complete restructure of all key managers in that Professional division. It started off with naming Beth as Chief Operating Officer. We now have new #2s in command. They're all division presidents. We've brought in Amy Bingham from outside in the Commercial segment.

She replaces Beth, which is what Beth was primarily doing at that point in time. We've also replaced branch managers. I'll call them, they're probably called market directors, I'm not sure, as well as division presidents in each of our Professional offices.

So it's a little too soon to tell exactly what that's going to do, but we certainly have high hopes for all the people that are in place now. And it's just a matter of time to measure how that works out. .

Okay. Seems like a lot of significant change happening very quickly.

Is something that prompted that change?.

Something that prompted the change. In this business, you've got to be able to react quickly when something happens. We had a couple of key people leave the organization for various reasons, and we just reacted to that. But I don't see anything yet that causes me concern. We'll see how it goes in the fourth quarter. .

Okay. And then your guidance for the year, growing 4% off the pro forma base, that compares with your previous guidance of 6%.

Is that right?.

That's correct. The only thing that might be different -- let me just add to that, Jeff. The only thing that might be a little different is Staffing Industry Analysts came out with their new forecast for the year, and they have reduced what they're expecting by 2 percentage points. They were anticipating 6%, and now they're anticipating 4%.

And we feel like we're in line with what they're saying. .

The next question comes from Michael Taglich with Taglich Brothers. .

I have a question for you. The SG&A for the quarter at $10 million and change seemed like a pretty significant increase over the first half of the year.

Is that your new run rate? Or is there a onetime explanation in there?.

Well, I don't ever look -- I don't look at SG&A, so I'll defer to Dan on that. That's kind of an accounting term. .

I do. In the third quarter, Michael, we have the -- you're comparing last year with no VTS in it and VTS in it this year. So about $1.1 million was the VTS acquisition, and then Multifamily continues to grow and add people in locations. So that's probably a bigger part -- that's the other part of the significant growth there as well, so... .

So you're up -- the first half of the year, you had about 18 -- I'm sorry, you're about a 9 3 kind of number. You added $1 million Q3 this year versus Q2 -- versus the average of the first half.

Was it all Multifamily?.

A big chunk of it is VTS, and a big chunk of the growth is Multifamily, yes. So they've opened the 11 new locations this year, so... .

And that [indiscernible] quarter?.

I might add to that, Mike, that most of that increase is in the selling area, and that's what Dan is really alluding to. The G&A is running roughly flat.

We were slightly ahead of what we were anticipating, and we - we've had some hires and some other unusual items that have hit the G&A area, which is what I -- I watch that closely because we kind of target that between 2% and 2.5% of our overall revenue.

And the increase would be in the selling expense area, and that's why when you lump it all together as SG&A, it's a foreign number to me, but that might add some clarification for you. .

Okay. So if I look at -- let's see. We got.

[Audio Gap].

Yes, we're up -- we're $9,079,000. Now you're $10,300,000, so it's up $1.3 million quarter-over-quarter actual. How much -- the Multifamily is spending that much money in that quarter. That's the bulk of that. .

I'm not sure I'm following you, Michael. .

Okay. So SG&A is up over $1 million, $1.2 million quarter-over-quarter , okay? And the bulk of that, if I'm listening correctly, is Multifamily. .

Well, there's -- you have the -- you got the VTS impact because we have SG&A -- we have a selling cost there this year that we didn't have last year.

So are you talking Q-over-Q or Q-over-year?.

I'm looking quarter-over-quarter. I'm not looking year-over-year. I'm looking quarter-over-quarter. .

I apologize. I don't have those numbers in front of me, so I... .

Okay.

We had $1,079,000 in Q2 and, what, 10 3 in Q3?.

And I apologize. I do not have that analysis in front of me, Michael. So I'm at a loss, so I apologize for that. .

Okay. We can talk about it offline. Just -- okay. So if most of that is -- when did you close that acquisition? I just forget because you've got a bunch of them. .

Beginning of the fourth quarter last year. .

Right, okay. So that's in -- so that increase in SG&A is on the same business, new one, okay.

So when you spend money opening up these new Multifamily locations, which it looks like you did a bulk of them in Q3, how long is it before they start cash flowing?.

We have a rule in place that if they're not profitable in 90 days, we shut them down. .

So this huge increase in Multifamily, we should see some back-end growth here.

That's the plan, right?.

Yes, and you'll probably see most of that next year, correct. .

All right. I'd love to get a deeper understanding whether -- was there any legal expenses that popped up in the quarter that were extraordinary or... .

If -- I will be happy to get back to you offline and do an analysis of that for you, so... .

The next question is from Howard Halpern with Taglich Brothers. .

What does it cost to open up one new Multifamily location?.

Well, let me put it this way on Multifamily. Typically, to open a location, we try to be at breakeven with temps in there initially. Secondly, we rent a executive suite. And thirdly, the most important thing, is we try to hire the correct person. And typically, the cost on that is not that great. And like I said, we try to be at breakeven within 90 days.

Now we could have lower volume in those new offices, and typically we do, but it only takes 5 to 10 temps to open a new office at breakeven. So I don't have an exact number, and the reason I don't is because we have successfully executed on those lines.

And typically, as long as we're doing that, as long as they deliver a 15% contribution overhead, I'm happy. .

Okay.

Do you know how many were opened in the third quarter or newly opened?.

I don't know.

Dan, do you know that number?.

I don't know the number in the third quarter. Of the 11, probably 2 were opened early and 2 were opened sort of around probably end of the quarter or actually end of the fourth quarter. But I can certainly get those numbers for you, Howard. .

Okay.

And do you have the plan for next year to open at least 4 new offices?.

I would say at least. .

Okay. And then I sort of want to get back to the SG&A question. Because at this point or this quarter, as a percentage of sales, it's running at the highest rate since Q1 of '15, I guess. And I guess, I wanted to get a handle, too, a little bit on the SG&A. I know VTS, over last year, added $1.1 million.

And that leaves a $1.3 million, $1.4 million increase over if you exclude VTS. So I sort of want to get a handle on what that increase really came from. .

I think Dan is going to work on that offline, and we don't have any instant reaction to that. [indiscernible].

Okay. Okay. Okay. And then just one last one then again. Because you talked about -- and maybe it was because of the July month, but -- and you've talked about this being a little bit of a rough quarter. When you look at it year-over-year, this is the first time, I guess, in a while that EBITDA was, on a percentage of sales, declined.

Is that something to be concerned about going forward or you think this was a 1-quarter occurrence?.

Frankly, I think it's too early to call it a 1-quarter occurrence. We've been reacting quickly to things. We've actually eliminated about $0.5 million worth of salaries in our structure. I don't know exactly if that's enough.

I don't know what's going on there, but I would say let's wait and look at the fourth quarter and then we'll see because then we'll have apples to apples to compare to. .

There are no more questions at this time. I'll now turn the conference back over to Allen Baker for any closing remarks. .

Thanks, operator, and thanks to all of you for joining our call today. The key takeaway for you today is that we continue to expect a robust year in 2016, and we look forward to finishing this year as one of our strongest. We've built the company from the top down, and we continue to firmly manage our corporate costs.

We have a target there, as I mentioned before, of between 2% and 2.5% of revenues in our centralized back office. Overall, I look forward to ending 2016 right about where we plan. I'm looking forward to reporting our progress and speaking with you again with our year-end 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..