Terri Macinnis - Vice President of Investor Relations at Bibicoff and MacInnis, Inc. Dan Hollenbach - Chief Financial Officer and Secretary Allen Baker - President and Chief Executive Officer.

Jeff Martin - ROTH Capital Partners Michael Taglich - Taglich Brothers John Rolfe - Argon Capital Kevin Allen - Vertical Trading Group Howard Halpern - Taglich Brothers Suzanne Antolini - Vertical Trading Group.

Thank you for standing by. This is the conference operator. Welcome to the BG Staffing Second 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 Incorporated. Please go ahead. ma’am..

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 record Q2 six-month operating results and to provide 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. Yesterday’s news release announcing BG’s financial results and the company’s quarterly report on Form 10-Q 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 today later on the company’s website and will remain available for at least 90 days following the call. I 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 express 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 conditions 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 as posted on BG’s website. I’ll now turn the call over to Dan Hollenbach, CFO.

Dan?.

Multifamily, Professional and Commercial, today, through approximately 62 branches and 20 onsite locations in 26 states. I will now discuss our consolidated and segment results from operations. First, for our second quarter results. Revenues for Q2 2017 were $68.8 million, up $6.2 million, an increase of 9.8%.

Multifamily grew organically 19.1%, both from existing offices and our continuing expansion plan. Professional increased 25%, primarily related to the acquisition of Zycron in the second week of Q2, which contributed $8.7 million. Our other top IT branches were down $1 million. Finance accounting was off 400,000 and commercial decreased 15.6%.

While revenue grew 9.8%, gross profit dollars increased to $2 million, or 13.4%, and gross profit percent increased by 0.7% to 25%, as a result of our focus on growing the professional business segments as a percent of our revenue. Multifamily contributed $1.1 million of the increase and Zycron contributed $2 million.

Our other IT branches decreased to 563,000 and commercial decreased 490,000. The company reported net income of $2.3 million, a 63.6% increase over 2016. Diluted earnings per share was $0.25, a 47.1% increase over 2016.

Selling expenses increased $1.2 million over Q1 2016, primarily due to the growth in multifamily of $373,000, of which $219,000 is related to new office growth and the addition of Zycron, which incurred $915,000. It should be noted that we have opened five new multifamily offices this year and seek to open five more.

General and administrative expenses were flat compared to 2016, and were 2% of revenues in 2017 versus 2.2% in 2016. And now for the year-to-date results. Revenues for the six months of 2017 were $125.6 million, up $3.5 million, an increase of 2.8%.

Multifamily grew organically 20.3%, professional increased 9.1%, primarily related to the acquisition of Zycron, which contributed $8.7 million. Our other IT branches were down $3 million, finance and accounting was off 600,000, and commercial was down 15.5%.

While revenue grew 2.8%, gross profit dollars increased to $2.4 million, or 8.3%, and gross profit percent increased by 1.2% to 24.6%. Multifamily contributed $2.1 million of the increase and Zycron contributed $2 million. Our other IT branches decreased 623,000 and commercial decreased $1 million.

Q2 and six-month IT decreases were primarily due to a reduction of two customers, both of which were expected. Finance and accounting decrease were from the expected fall off from a large long-term contract. The commercial decreases were primarily due to decreased usage of four customers consistent with previous periods.

The company reported net income of $3.6 million, a 60.7% increase over 2016. Diluted earnings per share was $0.40, a 42.9% increase over 2016. Selling expenses increased $2 million over 2016, due primarily to the growth of multifamily of $1.2 million, of which $345,000 was in new offices and the addition of Zycron, which incurred $915,000.

Our other IT branches decreased selling expense by $628,000. General and admin, excuse me, general and administrative expenses decreased by $175,000, primarily related to reduced professional fees and compensation-related expenses and were 2.2% of revenues in 2017 versus 2.4% in 2016.

Cash flow from operations of $6.8 million allowed us to fund our two quarterly dividend by reducing our revolver by $2.2 million. Our dividend cover is 2.63X calculated by dividing our adjusted trailing 12 EBITDA of $23.1 million by our current annual dividend of $8.76 million.

In April, in connection with the Zycron acquisition, we borrowed $20 million on a five-year term note and issued $1 million of our stock, or 70,670 shares. 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 to provide a more complete understanding of factors, and trends affecting our business, the measures under GAAP alone can provide. In addition, the financial covenants in our credit agreement are based on adjusted EBITDA. Adjusted EBITDA for the six months was $10.8 million, or 8.6% of revenues, a 4.7% increase over 2016.

A reconciliation of adjusted EBITDA and net income is available in our latest current report on Form 10-Q, or in yesterday’s news release, both of which are available on our website. Now the financial review is complete. I’ll turn the call over to our CEO, Allen Baker, to talk a little bit about our strategy, plans to continue to grow the company.

At the conclusion of his comments, we will open the call to our Q&A session.

Allen?.

Thanks, Dan. I’m obviously pleased with the increases in bottom line results for Q2 and the first six months of 2017. Our multifamily segment continues to distinguish our staffing company in the marketplace.

Personally, I don’t know of any other company doing staffing that does the multifamily at the size that we’re doing it at as we continue to grow that particular segment. I’m especially pleased with our recent acquisition of Zycron.

Zycron has been a leading regional provider of IT outsourcing and temporary staffing talent to companies throughout the Southeastern United States and selected markets across the country, both with Fortune 500 companies and governmental entities since 1991.

Zycron focuses on multi-year and long-term assignments with average linked in excess of three years. This was one of the reasons that I particularly stuck with looking at this company over the past year. The season leadership team is remaining and fits well with our team.

It is vertically oriented around IT in healthcare, local state government, logistics manufacturing and utilities. The average hourly bill rate was approximately $70. Finally, it broadens both our geographic footprint and IT skill set offerings.

We expected Zycron to have a run rate of approximately $4 million of annual EBITDA, which we referred to as contribution to overhead. We are pleased that it contributed $1.1 million for the first 12 weeks just reported.

Over the past eight years, our business planned to add more skill sets to our offering and to do so in more geographies in the United States, both organically and through acquisition, continues to deliver and accomplish exactly what would – what it was designed to do, keep the top line changes minimal, while improving our margins.

Our Commercial segment, which was our first business division was 100% of our revenue stream, when I joined the company in 2009. The first six months of 2017, commercial represented 28.6% of revenues, a result of our successful diversification plan. Our current target for adjusted EBITDA as a percent of annual revenue remains at 10%.

Gross profit and adjusted EBITDA, both improved as we continue to execute on our strategy. We expect to do more of the same in Q3 when we expect our numbers to peak for the year as they have done in the past. We continue to see high demand for our service offerings even though our operating teams reported continuing tight market for skilled resources.

In Q2, we were also pleased to have earned a few accolades. We were named to the Russell 2000 Index, a staffing industry analyst ranked us 60 of largest staffing firm in the United States. The Dallas Morning News ranked us as 105th largest public company in the DFW, or North Texas area.

The Dallas Business Journal ranked us the 22 fastest-growing company among what they define as the mid-market 50, which includes both private and public companies. They also named us as the 20th fastest-growing public company.

These are all in North Texas, second largest staffing agency in the DFW area, that’s based on a number of W2s that were cranked out. Regarding the subject of acquisition, deal flow continues to be good. We seek targets with gross margins equal to or greater than the mid-20s, and we are actively involved in assessing opportunities.

We have been proactive and continue to be an opportunistic acquirer. We have a clean balance sheet, plenty of back office capacity, and believe we can accommodate a revenue ramp up to $500 million, with minimal incremental G&A costs.

As Dan mentioned, in conjunction with the Zycron acquisition, we amended our bank agreement by adding a term loan of $20 million. And additionally, we have arranged for some dry powder to do acquisitions with by having $20 million accordion available to us.

That agreement now has four syndicated partners; Texas Capital Bank as the lead, Independent Bank of McKinney, Bank of America and BMO Harris Bank.

Before turning to our Q&A session, I’d like to note that our Board is committed to maintaining our quarterly dividend, which is presently set at $0.25 per share per quarter, and it also provides a 5.6% yield through our dividend program. At this time, I would like to ask that our operator initiate a question-and-answer session..

Thank you. We will now begin the question-and-answer session [Operator Instructions] The first question comes from Jeff Martin with ROTH Capital Partners. Please go ahead..

Thanks. Good afternoon, guys..

Hi, Jeff..

I’m confused in looking through the 10-Q filing, I noticed bill rates and spreads were both up mid single digits is not a little higher across three segments.

I was wondering if you could comment to that?.

Well, it’s just a result of our continuing focus on growing our gross margin. It’s probably the lifeblood of any staffing company and we continue a heavy focus on that and I’m pleased to see that’s the case..

And then in terms of the commercial and professional segments that are under the headwind of some known – some customer transitions that you were aware of, I was just curious what your thought is regarding the tight market for resources relative to the ability to grow the business on those two segments?.

It’s kind of multiple questions. The first one I’ll take is, my view on commercial versus professional. Professional, you’ve got to find higher margins. And in commercial, you find lower margins. Typically, commercial is going to be high volume. Customers that are more stable, they stick with you a long time.

But you take a big hit on the top line when everyone leaves. However, I’m kind of a bottom line individual. And when you look at the bottom line, what you’re missing, it’s not as great as the top line.

So I’m familiar with one of the customers that were down significantly in this year and they’ve chosen to strategically and I don’t blame them to have more than one supplier. So roughly, our revenue is going to be cut in half there, but the gross profit on that is roughly 8%.

So unlike by the time you follow that down to selling expense and the G&A and all of that that it takes to support that, it really isn’t that big of a hit to the bottom line. So as we continue to rationalize our gross margin, low margin accounts like that that we take a hit on the top line and they go away.

I’m not as concerned about that, as I would be other larger accounts. So that would be my comment on commercial. As far as the resources, finding resources, that’s across all segments, and we’re not any different than anybody else.

It’s continued to be – it gets harder and harder as the unemployment rate drops to find good quality candidates, which is what our customers want. The only difference between us and our customers is, they’re running a business and they’re trying to make $1, and this is all we do all day long.

So typically, we have an ability to find people in certain niches and all of that and are able to supply our customer needs. We still have a lot of orders that go unfilled. If we could fill all the orders that we get, it would be nice, because our revenues would be a lot higher than they are..

Great. That’s very helpful. I appreciate that. Could you also give us an update you’ve had some promotions to more senior level positions with some of your people internally and also I believe hired to back fill some leadership positions.

I was wondering if you could give us an update on the progress there?.

Yes, I mean, progress is good there. It’s been so long since we’ve done some of these promotions. I can’t really remember all of them. Most recent one, we have done and it may have occurred in this quarter is that, we finally made a decision and found somebody internally that can help run the commercial division.

And his name is Drew, and we promoted him maybe a couple of months ago. And he’s doing fine. He’s been working in the company, running one of our regions for, I don’t know several years, and that transition seems to be going well..

Very good. And I compliment you on the ability to grow the bottom line and whether it’s a tight resource market for sure. Thanks for taking my questions..

Thanks..

The next question comes from Michael Taglich with Taglich Brothers. Please go ahead..

Hey, Allen, congratulations on a good quarter, very good quarter by the way..

Thank you..

I mean, do me a favor, in the future don’t have a conference call in the afternoon..

Yes, we know all the rules, Mike..

All right. My quick question is the – you mentioned deal focus and deal flow, okay.

Do you want to elaborate on what the environment, what you’re seeing, and given, are you seeing still deals that are somewhat attractive, or is it a particular environment that it used to be?.

Well, yes, we are saying deals that are reasonably attractive. I’m now shooting for deals if I can find them that have a 30%-plus gross margin. Haven’t actually acquired one yet, but there are several out there and it just depends on what area you’re looking at.

As far as as many deals as we once had it’s probably dropped from 100 to 60 on an annual basis. But it’s still plenty to look at and comb through and see if you can find a nugget out there, which I’ve been able to do. So I mean, I don’t know what else I can say, I’ve got several NDAs in place, we’re looking at several deals.

But that’s about all I can tell you right now..

Now, I got you. Great. All right. We’ll keep up the good work. Thanks..

Okay. Thanks..

Thanks..

The next question comes from John Rolfe with Argon Capital. Please go ahead..

Hey, good afternoon, guys. A couple of questions. One, last quarter on a quarterly call, you had indicated that you expected to open an additional three multifamily offices this year. You’ve now raised that number to five.

So I was hoping you could just give a little bit of color, I mean, in terms of the increased areas that due to specific requests from existing clients, or what sort of driven the growth from three to five in terms of expected openings?.

It’s primarily client-driven. We start out the year. We try to look at opening anywhere from five to seven in a year. Everybody wants to know, jeez, where I wanted to do more of that. Well, it takes quite a bit to open a new office. You’ve got to have the right people. You’ve got to have the right resources, several other factors.

The biggest focus that we’ve had recently in multifamily has been on dropping their over 90-day balances in our accounts receivable. They’ve been highly successful in that. They used to run on our balance over 90 in the couple of million range. It’s now down to the 500,000 range.

And that just tells me one thing, we’re selling to people that are interested in paying us. So I think, our revenue is a higher quality revenue now. And as far as how many open offices we opened, that is building for the future.

We don’t really recognize that much revenue in terms of offices that we open in a year, because the revenue and the growth that we’re going to see from that is going to come in the years following. So I don’t – I’m not too sure what specifically drove the decision to open five instead of three. But I’d pretty well let the operations team define that.

And as long as they’re opening a minimum of five, I’m good with that. We’ve already done that this year. So they’re going for more..

Okay, great. And lastly, in the Professional segment, you had indicated, again, last quarter that you expected to, or at least hope to return to growth X Zycron in the back-half of this year. It sounds like based on your comments that some of the declines in 2Q were, as expected.

So, are you still expecting that you can sort of get back to growth in the back-half of the year, or is that looking increasingly less likely?.

Well, first of all, when I say growth, it’s not revenue, it’s profit. And I think we’re slightly ahead of last year in profit in our existing operations outside of Zycron. And so, yes, I’d like to have a little higher growth. We’re hoping for more growth.

We’ve strategically taken a position on one of our client losses that used to be a large client, but their margins have gotten so low that we’ve just – we just said let them go and don’t worry about it. So strategically, we might have an issue, but I think there should be some more growth and profit in the second-half of the year..

Okay.

And were there any conversion – consult conversions in professional this quarter that that impacted that top line growth rate?.

Well, I don’t know if it impacted the top line, because it’s primarily conversions are a very small portion of our total revenue, so small, that all I do is make sure it stays small, because I don’t believe that conversions or perm placements are value builders.

So we’re strictly trying to get value and most of the conversions are perm placements that we have or primarily is favor to existing temp customers..

Okay, great. I appreciate it. Thanks and nice quarter..

Thanks..

The next question comes from Kevin Allen with Vertical Trading Group. Please go ahead..

Hi, guys. Just had a quick question on the strategy going forward with the successful integration of Zycron.

Are you guys going to be looking in a sense that worked out to do more of the just like targeted acquisitions to kind get into new verticals that are more specifically like the IT solutions or programming and software kind of things going forward, or how do you guys look at that?.

Well, if you’re talking about strategically trying to change into a consulting group that maybe takes a little responsibility for work. We’re not interested in that. We’re strictly interested in staffing and we’ve never really been interested in becoming a consulting outfit. So we’re not really looking to do that.

I know there’s a lot of IT staffing companies that would love to do that. You have to know how to do that. I don’t think we have people on the ground that know how to do it. So we typically are not out looking for that. We’re just basically trying to find people that need help to get projects done and in the skilled area it’s nice.

We’ve first started out doing a lot of project work, that’s a little harder to project. But I think Zycron, the addition of Zycron with their more stable contracts, you sign a contract with them for three years, that’s an eternity in staffing.

So we’re real happy to have them on Board, and we plan to do all that work we can, and we’re still – it’s still early in the game to kind of figure out how that’s going to fit in with what we do.

But we just finished a conversion from – for front-end software that’s going to led everybody in our Professional segment do – to be in a better position to do cross-selling..

Okay. And you mentioned, the accolades are early on that you guys are the 60th largest staffing firm now.

Are you seeing any consolidation in the industry, or getting any kind of worse of that?.

There’s a lot of consolidation in the industry, that’s why there’s a lot of deal flow..

And you think that you guys are target for anyone in particular?.

Depends on the price, I guess, everything’s per se..

Okay, yes..

Not that I know of how’s that..

Okay. All right. Well, thanks a lot..

Thank you.

The next question is from Howard Halpern with Taglich Brothers. Please go ahead..

Hi, guys, two quick questions.

In the multifamily in the new office openings, are they going to be in any new states, or are they within current states, or they even split offices?.

The answer to that question is wherever there’s a need, that’s where we were going to open office.

Historically, how many states they have been?.

22..

Okay. Historically, they have been in multiple states. We used to measure that quite vigorously, because when we first bought the company back in May of 10, it was just four offices in the state of Texas. And I thought Texas was it. And I’ll never forget when [Bill Pan] [ph] came into my office, he was running the operation at the time.

And he said, well, we’ve got a problem. I said, what’s the problem, Bill? He said, well, we’ve got an order. I’m like, okay, I’m still waiting to hear what the problem is? And he said, well, it’s in Louisiana. And I said, okay, what’s the problem? And he said, well, we can’t do business outside of the state of Texas.

Well, right then I knew we had a problem, because staffing, it doesn’t matter what states you do then. And he said, we’ll, we don’t have the comp to do it. I said, look, you fill all the orders that come in and we’ll get the comp in the back office. So that was just kind of a cultural change that we had to do, they’re now in 22 states.

We used to measure outside of Texas versus inside of Texas. There’s probably some measurement around that we do monitor not as closely to make sure that Texas is still continuing to grow. But that’s kind of the way I look at multifamily. We’re not going to be happy until we’ve got an office in every state..

Okay. And then just one final quick one for Dan.

As of this point, we’re still modeling forward 39% tax rate is a good rate to go forward with?.

Yes..

Okay. Thanks, and keep up the great work, guys..

Thanks, Howard..

The next question is from Suzanne Antolini with Vertical Trading Group. Please go ahead..

Hi, good afternoon..

Hi, Suzanne..

With no – hi, how are you?.

Good..

With no cash on the balance sheet and when you feel debt position is your focus to leverage up at all to make acquisitions, or do you see yourselves at some point eliminating the debt and focusing on growing the dividend?.

Probably the former question would be, what I would say, I’m always looking for a deal, and we’ve got a good balance sheet. We’d love to increase the dividend, but right now we’ve got accounting rules that kind of govern that. And it’s – it is what it is. So we’re happy to do it either way..

Okay, great. Thank you..

Thank you..

This concludes the question-and-answer session. I would like to 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. We continue to believe our scale and breadth of services has as well positioned to take advantage of expected growth in the staffing industry. The key takeaway for you today is that, we continue to expect a robust year, again, in 2017.

And we look forward to finishing this year, as our strongest on record. We continue to work on improving business in all of our segments and firmly manage our corporate cost. We’ve got a target there of 2% and 2.5% of revenue, in our centralized back office.

I’m looking forward to reporting our progress and speaking to you again when we report our third 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..