Good morning, everyone. Welcome to the BGSF Inc. Third Quarter 2021 Financial Results Conference Call. As a reminder, this call is being recorded. Now, I will now turn the call over to Steven Hooser, Investor Relations, to provide instructions and read the safe harbor statement. Please go ahead..

Thank you, operator, and thank you to everyone for joining us to discuss BGSF's Third Quarter 2021 Earnings Results. Joining me on the call is Dan Hollenbach, Chief Financial Officer. Beth Garvey, President and CEO, unfortunately, has laryngitis and is unable to make this morning's call.

However, she is going to do her best to join us for the Q&A session at the end. Dan will cover operational and financial highlights for this call. After Dan's review, there will be a Q&A session. As noted, today's call is being recorded and webcast live.

A replay will be available later today and archived for 90 days on the Company's Investor Relations page.

I now want to take a moment to remind you that today's discussion will include forward-looking statements, which are based on certain assumptions made by BGSF, based on and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

The Company's actual results may 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, the quarterly reports on Form 10-Q and other company 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 its actual results to differ materially from those indicated by the forward-looking statements. These forward-looking statements are made as of the date and time of this call.

BGSF 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 the call, management will also reference certain non-GAAP financial measures, which management believes can be useful in evaluating the Company's operating activities and business trends related to financial conditions and results of operations.

These non-GAAP measures are intended to supplement GAAP financial information and not be consistent in isolation, as a substitute for or superior to financial measures calculated in accordance with GAAP.

Reconciliation of non-GAAP measures to the most direct comparable GAAP measures are provided in today's earnings release posted on the Company's website. With that, I'll now turn the call over to Dan Hollenbach, Chief Financial Officer.

Dan?.

Thank you, Steven, and thank you to everyone for joining today's call. I'll begin with a review of our operational highlights and segment performance. I will then discuss our financial results in more detail before wrapping up the call with some closing remarks.

Overall, as we reflect on our third quarter and the first nine months of '21, our momentum is best defined as progressive improvement across the board.

Our team members in all three segments have done an exceptional job of elevating our client and talent engagement to unlock new opportunities through our realigned sales strategy, optimized and strengthened leadership structure and digital transformation.

Our remaining IT road map projects are set for an April 2022 launch with new payroll, HRIS, CRM and applicant tracking systems. We look forward to the expected benefit from greater process efficiencies and to providing a better foundation for our teams to work across a single source of truth. Moving to our results.

We are pleased with our third quarter performance, having posted both sequential and year-over-year growth across our key financial measures. In fact, the third quarter is a continuation of both top and bottom line sequential growth in each of our quarterly results for the '21 nine-month period.

Additionally, cross-selling efforts are gaining further momentum and becoming a solid contributor to our results. Third quarter consolidated revenue increased 15% compared to the 2020 quarter, with net income up significantly by 80%. More detail on the numbers shortly. Turning to segment highlights.

We continue to see positive trends across our end markets, with real estate showing progress from a market recovery and pent-up demand. During the quarter, the CDC eviction moratorium expired with rent relief funding slowly funneling through but has a long way to go.

We are taking a measured approach to market relaunches in real estate while managing through the tight labor market. Vacancies in the multifamily real estate market are at historic lows and demand for new inventory is at an incredible high, both of which lead to increased demand for labor in the market.

We are accelerating and improving our recruiting efforts through our talent acquisition group, which is focused on new initiatives to attract, incentivize and retain field talent. We are also making tangible progress with our move to a centralized operational hub that includes training and ongoing employee development.

Market outlook and sector tailwinds remain positive, but we expect the segment to continue at a slow and steadily improving pace. Professional benefited from an increase in permanent placements and strong activity in our IT Consulting division. Overall, we saw sequential strength and solid performance across our professional divisions.

Year-over-year, IT Consulting, Accounting and Finance and L.J. Kushner drove most of the growth as we are seeing high demand from cloud transitions within IT Consulting and Accounting and Finance. While infrastructure and development has been slower to rebound, we expect to see improvements longer term.

RFP activity with strategic clients is robust with active discussions taking place for our higher-margin managed service projects. We are pleased to see a productive sales pipeline taking place as well.

While Light Industrial is managing through an increased wage pressure amid labor shortages, the team performed well, reporting a solid quarter compared to '20. Results were essentially flat year-over-year.

However, we were working on a solid opportunity pipeline, going into a seasonally stronger holiday season for warehouse logistics and fulfillment needs. We are seeing a mix of clients adopting increased pay rates to attract candidates. In some cases, we are the primary workforce solutions provider given our ability to fill placement orders.

As a reminder, we have an extremely high client retention with over 70% of our relationships being on-site managed programs. Demand remains extremely high, and we are focused on finding creative ways to combat the labor shortage. We are a stronger organization now with an even more agile team than we were prior to the pandemic.

Equally important, through the significant transformative efforts and investments in technology, we are well positioned to keep building on our brand and client partner strengths to maximize the long-term success of BGSF. And now for the third quarter financial highlights.

We filed our Form 10-Q for the third quarter ended September 26, 2021, yesterday afternoon. So I'll focus my remarks on key financial highlights for the quarter and nine-month period. Consolidated third quarter revenues increased 15.1% to $82.4 million. We had notable revenue growth in Real Estate, up 29.4%, while Professional posted a 15.7% increase.

Real Estate benefited from market relaunches and a turn toward overall market recovery. The Professional segment benefited from higher permanent placement fees and a $1.1 million contribution from our Momentum Solutionz acquisition, partially offset by a decline in our Infrastructure & Development group.

I&D has seen a slower recovery pace from pandemic effects. Light Industrial revenues moderated and were down slightly 0.8% against a strong Q3 2020 comparison that benefited from peak online ordering activity during the pandemic environment. On a sequential basis, Momentum continued with consolidated Q3 revenues up 10.7%.

From a segment breakdown, all three segments showed progressive improvement, with Real Estate up 16.9% while Professional revenues increased 8.9%. Cross-selling efforts continue to make a meaningful contribution in Professional, which represented 22% of revenues in Q3 of '21 versus 7% in Q3 of '20.

Light Industrial continued at a good pace with a 6.9% sequential gain. We are moving into our historical seasonally strong fourth quarter for Light Industrial with warehouse and logistics demand on the rise for the holiday season. However, labor shortages and supply chain issues may dampen the results for this quarter.

From a margin perspective, consolidated gross profit increased by 25.1% to $24.7 million. As a percentage of revenue, gross margin increased 2.4% to 30%, benefiting from higher gross profit in our Professional segment, up 250 basis points; and increased Real Estate contribution, up 108 basis points. Light Industrial was also up slightly.

SG&A expenses increased by $3.6 million or 24% due to additional compensation in line with higher gross profit and the addition of Momentum Solutionz. As a percent of revenue, consolidated SG&A expense for Q3 was 22% versus 21% last year. A comparison of quarter-to-date SG&A is provided in the MD&A section of our 10-Q.

The effective tax rate was 19.4% versus 22% last year, Third quarter net income increased $4.6 million or $0.45 per diluted share compared with net income of $2.6 million or $0.25 per diluted share in the same quarter a year ago.

Of note, Q3 '21 included a $1 million gain net of tax due to a contingent consideration adjustment related to our 2019 L.J. Kushner acquisition. Adjusted EBITDA was $7 million or $0.43 per diluted share compared to adjusted EBITDA of $5.5 million or $0.35 per diluted share in the year ago period.

For the nine-month period, revenues were $224.5 million, up 7.8% year-over-year; while gross profit was $65.3 million, an increase of 14.7%. Higher gross profit contributions across our three segments drove 180 basis point gross margin increase to 29.1% versus 27.3% last year. Our effective tax rate was 17.9% versus 25.4% for the nine-month period.

Net income was $8.8 million or $0.85 per diluted share compared to a net loss of $0.8 million or negative $0.07 per diluted share in 2020. '21 included a $2 million adjustment net of tax due to a contingent consideration adjustment related to the L.J. Kushner acquisition.

And the '20 period net loss included an impairment of certain intangible assets and goodwill of $5.4 million net of tax recognized in Q2 of '20 in our Finance & Accounting division. Net income before the impact of the impairment was $4.7 million.

Adjusted EBITDA was $14.6 million versus $14 million in '20, and adjusted earnings per share increased to $0.92 versus $0.82.

Our SG&A expenses for the nine-month period increased by $7.6 million primarily due to compensation related to higher gross profit, reopening of real estate locations and additional costs associated with our recent acquisitions. A comparison of year-to-date SG&A is provided in the MD&A section of our 10-Q.

We continue to prudently manage our cash flow and strengthen our balance sheet and overall liquidity position. Our debt leverage improved with a debt to adjusted trailing 12-month EBITDA of 2.1 at quarter end. We are pleased to see the Board of Directors has approved our 28th consecutive quarterly dividend of $0.12 per share.

We continue to maintain strong financial flexibility while executing our strategic plan, evaluating opportunistic acquisitions and successfully navigate changing market conditions, which we believe will allow us to emerge stronger. Overall, we are tracking well toward a solid finish.

Throughout 2020 and the first half of '21, we were keenly focused on cost efficiencies, strategic realignments, cross-selling strategies and key investments into the business. Moving forward, we are stepping up all efforts to accelerate growth across our diversified client base, brand solutions and markets.

The industry outlook is supporting a strong recovery in the coming year, and we are positioned well in high-growth sectors. The latest SIA September 2021 report is forecasting record growth of 16% for staffing solutions overall in 2021 with the surge in professional talent needs and IT growth factor for these sectors forecasted 11%.

Strategically, we are executing well, making key investments in our people and infrastructure. Our team is empowered to deliver the absolute best client service and provide critical support to our talent partners. On the M&A front, we continue to evaluate opportunities and remain engaged with our M&A partners. The current activity levels remain slow.

But we continue to seek the right partner that provides geographic and brand diversification into new or complementary high-growth areas that are synergistic to margin enhancement, quickly accretive to EBITDA and a strong cultural fit.

We continue to be grateful to our entire team for their passion and diligence in maintaining exceptional levels of service. With that, I'd like to open the call for your questions.

Operator?.

[Operator Instructions] First question comes from Brian Kinstlinger of Alliance Global Partners..

This is [Matt Campuccelo] in for Brian.

So in terms of labor challenges, would you say it's gotten better, worse or the same as 2Q '21?.

I think it's tougher right now across all the divisions. The open orders that we have are probably as high as they've ever been. So it's a good news, bad thing news, right? Demand is outstanding. It's just a matter of finding the talent to go out there. Wages are going up. Demand across all of the companies is out there.

And everybody is having a harder time finding the people. So I would say harder across the board..

Okay.

And another one, how much benefit to revenue was there in September quarter, if any, related to the fallout of the eviction moratorium? And have you seen increased demand related to this so far during the fourth quarter?.

Yes. So demand was up. We think the moratorium helped. And we're continuing to see strength in the real estate sector as we move into October..

And the next question is from Jeff Martin of ROTH Capital..

You mentioned in your prepared remarks that you're using creative ways to combat the labor shortage. I was just curious if you could elaborate on that..

Well, I think they're reaching out to other sources that they've used before. I'll give you an example. We -- as you know, we do a lot of work in El Paso. El Paso has a cross-border opportunity. And for the very first time, I think, in -- I don't know if it started in Q2 or early Q3.

We actually did some recruiting across the border and so try to develop some worker base in the El Paso area. So just expanding out to different ways, different sources. Certainly looking at our compensation levels to try and be competitive..

Okay. Great. And then on the real estate side.

Could you give us an update on markets reopening? Where are you at with respect to all markets being reopened? Are there certain geographies that are opening more quickly and having greater progress than others? And then if you could touch on where you think real estate is currently relative to, say, running at full capacity?.

Yes. So I do -- I apologize, I do not have the locations that we opened. But I can certainly get those for you later on. I think across the board, based on feedback from our Division President, the openings have been successful. We're certainly seeing the numbers rise. We're -- so Q3, they did $25 million.

If you go back to 2019, which is probably the last sort of time we sort of measured them against -- they were on a $100 million run rate. So Q3 looks good relative to where we are in 2019. I think they're looking forward to a very positive '22. And I will get the information on the locations for you, but I apologize for that..

Okay. Great. And then if you could touch on how wage inflation either benefits or hurts the model. Obviously, as wages rise, people are more willing to work and open orders can get filled.

Just curious if you're seeing clients more accepting the notion that they're going to have to raise wages and then, generally speaking, how that may benefit the model for BGSF..

Yes, absolutely. So Light Industrial, Light Industrial is done based on a markup business, right? So as wages go up, we make more money. So it's very beneficial to us. And wages are actually up almost -- probably close to $2 an hour from a year ago. So that clearly benefits us. Clients are recognizing that wages are having to go up.

They may or may not be happy about it, but they recognize that to get resources, they had to do it. Real Estate, as -- our margins have gone up as well. and we've been telling our customers we have to pay the wages to get the resources. There doesn't seem to be a lot of resistance there. On the Professional side, those wages tend to be high anyway.

So probably not the impact that we feel in the other two divisions. So....

[Operator Instructions] Next question, Howard Halpern, Taglich Brothers..

Congratulations, guys. Great quarter..

Thanks, Howard..

Could you, I guess, delve a little deeper into the cross-selling and the contributions it made during the first nine months of the year?.

Yes. So we put a big effort on cross-selling. As you well know, we started it, I guess, probably in mid- to late '20 as the pandemic was there, primarily focused between the professional divisions. But we brought in Real Estate and Light Industrial this year and started having a whole company, what they call, big cross-selling opportunities.

So again, you saw the number, 21% versus 8% on our cross-selling opportunities. So that's one location finding an order; another location filling it, which didn't happen very much before we started this process. So 21% of our Professional numbers is $10 million. So we're pleased and happy with the direction of that effort. So....

And I guess you talked a little bit earlier about developing, I guess, like a training hub.

Is that for all divisions and everybody in the Company? And what do you hope over the next years to gain from that type of internal opportunity, I guess?.

Are you talking training? Are you talking recruiting hub?.

I think you talked about a training hub for employees, I guess, or....

Real Estate is working on their -- on a centralized recruiting hub. So over the next probably three to four years, that group will be in Dallas, helping to support each other. So you have backup and support as people are in and out. I know we're working on training opportunities for everybody. We started some leadership training.

We're doing DE&I training. But I don't know -- I'm not sure about this training hub. The recruiting hub, the Real Estate Group is working on it currently and will continue over the next few years to make that happen as other leases expire. So....

Okay. And just one from a modeling perspective.

Is that under-20% tax rate, do you think that will hold during the fourth quarter?.

We do. We do, yes..

And one final one also.

Do you anticipate any additional contingent adjustments in the fourth quarter? Or were the second and third quarters it?.

We don't -- right now, we don't expect any other adjustments..

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Dan Hollenbach for closing remarks. Please go ahead..

Thank you, Nick. We appreciate you all taking time to join us for our call today, and we appreciate your continued support. We look forward to updating you on our fourth quarter year-end 2021 results in March. Please stay safe and healthy over the holiday season..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..