Good morning, everyone, and welcome to the BGSF, Inc. fiscal 2023 third-quarter financial results conference call. [Operator Instructions]. Now I'd like to turn the call over to Sandy Martin, Three Part Advisors..

Thank you. Good morning, and welcome to the BGSF 2023 third-quarter earnings conference call. With me on the call today are Beth Garvey, Chair, President, & Chief Executive Officer; and John Barnett, 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 archived on the company's Investor Relations page at investor.bgsf.com. Today's discussion will include forward-looking statements, which are based on certain assumptions made by the company under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results may materially different from those indicated by the forward-looking statements because of various risks and uncertainties including those listed in the company's filings with the Securities and Exchange Commission.

Management's statements are made as of today, 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 conditions 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, everyone, for joining us today for our third-quarter earnings discussion. Our performance for the third quarter reflects continued progress on our long-term strategic initiatives.

Our goals are to grow through organic and inorganic revenues and by diversification actions to higher value and specialized offerings in both segments. Property management solutions and our professional consulting and project work continue to enhance consolidated gross margins and companies return profile.

Our third-quarter performance reflects this progress with sales growth of 6.3% that resulted in total revenues of $83.5 million. We grew by 8% in Property Management segment and 5% in the Professional segment despite pockets of weakness mainly in the ERP-related consulting area.

The effects of economic uncertainties and high interest rates of 2023 continue to cloud our industry and create a choppy demand environment. We believe that our unique offerings across our two segments as well as good diversification of clients in the end markets position us well in this environment.

Our strategic investment in people, process, and technology over the last three years have given us more stability and capabilities to succeed than three years ago. The Professional segment is in the early stages of realizing benefits from recently added or acquired workforce solution competencies.

This includes our nearshore and offshore capabilities from the acquisition of Royal Consulting earlier this year. Our full suite of Professional Services & Solutions includes our acquisitions, has strengthened our go-to market value delivery proposition.

This includes added global IT resources and capabilities with AI capabilities, projects, and customer solutions. With that, I'll turn the call over to John to cover the detailed financial results..

Thank you, Beth, and good morning, everyone. Third-quarter total revenues grew to $83.5 billion, up 6.3% from the prior-year quarter. The Property Management segment, all organic, continued to show strength and grew revenues by 8.2% in the third quarter. This growth was on top of 34.1% revenue expansion in the third quarter of last year.

This translates to cumulative two-year revenue growth of over 42% compared to 2021. Seasonal apartment turnover make ready demand in the second and third quarters continues to advance the Property Management division. The professional segments' quarterly revenues increased by 5%, driven by recent acquisitions.

Organic sales and professional declined by 20.6% in the third quarter versus the prior-year quarter. The third quarter was going up against difficult prior-year comparisons that was aided by macro tailwinds, driving up sales by 14.9% in the prior-year quarter.

Sales softness in this year's first quarter was primarily related to staff augmentation placement and technology implementation starts.

We are benefiting from new service and solution offerings from our acquired businesses, and we are pleased to have invested in these differentiated businesses that offer nearshore and offshore IT capabilities and higher end finance and accounting solutions.

The third-quarter gross profit margins expanded to 35.9%, up from 35.7% in the prior-year quarter. Property Management gross margins were 39.5% compared to 40.8% in the prior-year quarter due to lower permanent placement.

Property Management permanent placement was relatively flat on a sequential quarter basis, but was up against tough comps from the prior-year quarter. The Professional segment gross margins were 33.2%, up 130 basis points due to the acquired businesses and continued shift away from low margin IT placements.

SG&A expenses for the third quarter were $22.7 million, essentially flat compared to the second quarter. Nonrecurring transaction fees for the quarter were $149,000.

Third quarter adjusted EBITDA was $7.9 million or 9.4% of revenue, which was sequentially higher in terms of dollars and margin percentage than the second-quarter adjusted EBITDA of $7.5 million or 9.3%.

We reported adjusted earnings of $0.36 per diluted share compared to $0.37 per share for the second quarter, which was lower primarily due to the impact of more interest expense this quarter. We are prudently managing our balance sheet, focusing on working capital efficiencies. We have continued to pay down debt.

Our bank covenant ratio of funded debt to trailing 12-month pro forma adjusted EBITDA increased to 2.5 times from 2.3 times as the reduction in debt did not offset the decline in pro forma adjusted EBITDA. We are in the process of refinancing our credit facility.

We have a great group of banks committed to participate in the refinancing, and we are working through the details to get an agreement executed.

We maintain a disciplined approach to our capital allocation strategy that includes growth investment, debt paydown, and consistent capital returns to shareholders through our quarterly cash dividend at an annualized yield of approximately 6.4%.

Although we will continue to review the acquisition pipeline, we have no immediate plans for acquisitions in 2023 or early 2024. And with that, I would like to turn the call back to Beth..

Thank you, John. Like most businesses, we continue to navigate and manage through changing market dynamics this year.

We remain bullish on the company's prospects based on a significant progress of our strategic repositioning over the last several years, which includes higher value consulting, managed solutions, and a growing property management platform. We are truly unique in the workforce solutions space.

Although our stock has traded down and it's mostly in line with the industry, we believe that we are better positioned for future growth, higher gross margins, and meaningful cash flow generation leading to long-term shareholder value.

We have made significant progress and changes in both segments and believe we are well positioned for profitable growth. In property management, we have expanded across the US and Canada over the last few years that are still small from the market penetration perspective compared to the addressable potential.

The National Apartment Association expects added capacity with approximately 4.3 million new apartments planned to be built by 2035, and we plan to significantly benefit from this industry growth.

On the professional side, we are partnered with the world's leading technologies according to Gartner's 2023 cloud ERP report, which includes Workday, Oracle, and SAP to name a few.

We also provide other high value IT consulting, finance and accounting, managed solutions, and offshore IT engineers, building AI projects for valuable long-standing clients. Our transformation plan to build a strategic workforce solutions business with two growing segments accelerated in the most recent years.

We plan to continue to make prudent decisions as we continue to build an enduring company that create sustainable, long-term shareholder value. Looking into fourth quarter, despite continuing difficult comps, we expect the professional segment to stabilize somewhat.

We plan to continue to focus on our strategic initiatives this year to expand our business and prove profitability and generate cash flow. Our businesses are not recession proof, but we believe that they -- the segment and the diverse markets positions us to be more resistant to typical downcycles compared to others in the staffing industry.

For the remainder of 2023, we expect to see normal seasonality in our property management and growth in the professional segment, driven by our acquisitions. I want to thank the entire BGSF team for their diligence and hard work and supporting the company's expansion plans, acquisition integrations, and profitability progress this year.

Finally, it is with great sadness that I share the passing on Tuesday of former Chairman of the Board, President, and CEO, Allen Baker. Allen was a person of integrity and a forward-thinking leader. He dedicated over a decade of his life to helping shape the fabric of our company.

His impact extends beyond BGSF, leaving an indelible mark on the industry and his legacy is marked by steadfast commitment to excellence and a passion for driving success. I know that many of you knew him, so I wanted to share this with you today. For details on the memorial service, please go to dignitymemorial.com.

Before we open the line for questions, I wanted to mention that we will be presenting into Southwest IDEAS Conference in Dallas on November 15. With that, operator, I'd like to open up the call for questions..

[Operator Instructions]. The first question comes from Jeff Martin from Roth MKM..

Thanks. Good morning, Beth and John. My condolences on Allen Baker. Sad to hear that. I wondered if you could dive a little deeper on the ERP consulting trends that you're experiencing now and the technology innovation starts being pushed out delayed or not happening.

How large of a piece is that of the professional segment? And maybe just give us a sense of how the progression trend there has occurred over the quarter and into first half of fourth quarter. Thanks..

Thanks, Jeff. The first two months of the quarter really wasn't slower. We started to see a little bit of activity pipe coming in September, which was helpful. But we've been talking about starts in ERP area being pushed pretty much all year. Company still have the need to be able to do it.

They are just a little bit nervous on when to pull the trigger on those things. So we are hopeful that the activity we started to see in September and a little bit of life back into October will translate into better fourth quarter, or at least flat..

Great. And then the business is much different now than it even was a year ago with Arroyo and Horn.

Maybe -- could you give us an update of some of the progress since you've acquired those two businesses? What strategically has changed and how you've positioned the business now versus one or two years ago?.

Good question. I'll say that the one thing we have always strived to do through our acquisitions is to make sure that we can continue to add offerings to our customers that they have asked us for. We've talked in the past and we have the ability to be able to help somebody pick a software.

We have the ability team to help customize it, to get reporting out of it, which encompasses all of our team. You take it from selection to the IT group to the accounting group and that circle has been a strategic path for us for many years. What do we need to do to make sure that we don't break that circle.

And the two acquisitions with Horn and Arroyo helped with that last piece in the finance and accounting group. We did not have managed services in that F&A world, and that has proved -- started to prove out to be very beneficial for us.

And then the nearshore, offshore opportunities, we've talked about that over the last quarter that we had not in the past year, had any conversations with our customers who didn't ask us if we were considering that.

So as those two companies get integrated in the organization and the sales teams get more aligned and being able to cross-sell those efforts, we expect those revenues to increase and grow and actually make as offering that our customers won't have to go outside us but continue to keep all the business with us..

Yeah. Great. And then you referenced Q4 for professional, you expect it to be up year over year, mainly from the acquisitions, but you have an improvement on the core organic. Maybe give us a sense of what is driving that improvement on a sequential basis? Because I'm looking last year you still grew double digits in professional year over year.

So it's not necessarily an easy comp, but it does get a little easier..

Yes, a couple of things to come out. One, if you are looking at last quarter and you're going to do -- or last year fourth quarter and you're going to do a comparison this year fourth quarter, which everybody will be doing, including me sooner than later.

We did have 14 weeks in the fourth quarter of last year versus we will have our typical 13 weeks this year in the fourth quarter.

So I think when we talk about the fourth quarter and what we're expecting or what we're seeing so far, it's aligned with we're adjusting the prior year for that extra week and our expectations based on a comparable week quarter, right.

So I think we are seeing -- we did see some daylight in September for our core IT group, our core professional group. We hate to say that for six weeks means stabilization, but we have seen that level off on a sequential week basis.

And we -- right now, looking at how that performance has been, we are optimistic that the fourth quarter is going to continue along those same lines with typical seasonality. So if you look at our business, you look at the last two years as it's tough to see the seasonality. One because we were in a very aggressive growth market, in general.

And two, we had that extra week last year.

But if you go back before that, right, you'll see that there is seasonality in the professional segment, not as much is what you would see in the Property Management segment as we have really high demand in second and third quarters but we do have holidays and a little more vacations that hit the fourth quarter..

Great. And then last one, if I could. Could you talk on what you're seeing out there in terms of wage rates and the trends? Are you seeing increased competition on wage or any other factors competitively or on a rate basis that was not [Technical Difficulty] --.

I don't think there would be anything to note there specific..

Okay. Thanks, John and Beth..

Thanks, Jeff..

Our next question comes from Howard Halpern with Taglich Brothers..

Congratulations, guys, navigating a tough environment. First question is regarding, I guess, the property segment.

How many offices do you currently have open? And what's the plan going forward in terms of opening new or splitting existing locations?.

I believe we're right at 64 markets in the Property Management sector at this point, but I would say that it's always -- we would love to double down and open up quickly. But that cost -- that's a P&L hit, so we manage those costs to make sure that we can grow effectively and also not stress out the teams as they open up new markets.

But as you know from our prior history, we've always opened up new markets every year. And now that we have the new sales force marketing territorial mapping tool that we've been able to utilize, we anticipate that's going to allow us to really penetrate into these larger markets a lot better than we have been able to in the past..

And in terms of, I guess, finding people to complete your customers request, how is that going in terms of educating the potential -- your potential people, who will be deployed to your customers and what are you seeing in terms of that?.

Finding talent is not as big of a problem as it had been in the past, but I think we've talked about this in the past. We strive to be a leader and attract the best talent and we do that through relationships. And so we have a very big referral program within our organization.

So if somebody's working for us, we ask them to bring their friends along and have found that to be probably our number one recruiting tool..

Are there any additional internal technology projects that you are working on or is most of it now just maintenance and just making sure everything is tightened up from what you've done in the past year, a year or two?.

As a reminder, we went live with the technologies on the MVP, so we -- they all were basics. We wanted to make sure that we could pay them bill right out of the gate and that it wasn't disruptive to our consultants or our customers. And so we now have moved into the efficiency side of it.

So less things in regards to getting it actually implemented and cleaned up and more things into the efficiencies, and we're starting to see that move as well..

Okay, so we should -- and that should impact maybe the fourth quarter, but really next year we should see some of that on the P&L line?.

We've already started to see that. Internally, we track the contribution to overhead by employee and I think we had a target of getting 9% efficiencies.

So we've hit that this last quarter, but keeping in mind that our third quarter is our highest quarter in revenue, we like -- we're going to wait to see what happens in December to see how it stabilizes, but that's far from we've been pleased..

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

Our next question comes from George Melas from MKH Management..

Thank you. Hi, Beth and John. Congrats on good results in a tough environment. I have a very general question, which is you did this rebranding I think it's already quite a few quarters ago.

How do you manage the business differently now that you have that and what does that enable you to do?.

Great question, George. Thank you for asking it. So we did that in second quarter. And what it allows us to be able to do is we had 13 different ways we communicated out to the public based off of the 13 different brands that we had.

Centralizing that and having it all change over to BGSF, we have had our social presence increase triple at this point and sometimes it's five times what it was before, depending on the platforms. That allows us to be able to do more targeted campaigns to be able to attract customers and candidates.

I believe we had a report out this week that some of those initiatives have reported, we allow our customers to come in directly into the platform now to supply orders, to give us an order, and we had 70 orders in the last few weeks that have come in through the websites because of the things that we've done.

So all about attraction of the candidates as well as the customer, and we track that very, very closely to see how the initiatives are working within the new platforms..

Okay. And then from the P&L sort of from a reporting perspective you had -- I can't remember if these brands had separate P&Ls. Clearly at one point they did.

How do you manage that in the professional segment?.

George, we're actually -- internally, that's right. Traditionally, when we made acquisitions, quite often there was an earn out attached to it and so we -- internally, we did keep it as a separate P&L.

Now, with acquisitions aside from Arroyo, which is really different than what our traditional IT business is right, we view that in really IT and then finance and accounting segments.

Now that we have added Horn and we will -- internally, we will start looking at the business from a -- how IT -- traditional IT -- how is traditional finance and accounting, and then how is managed services performing specific to both IT and finance, but really managed services in total as that becomes also a bigger part of our business..

Okay. That's really interesting. Great. It seemed like the Property Management was extremely strong. It seems like it's your best quarter ever and it seems to be continued momentum there. What makes it so successful because at one point, it felt like it was decelerating a little bit and now it's really back on track and doing very well..

Well, George, they really decelerated during COVID. They got hit very, very hard. But that team is an amazingly engaged team and they really did great things within the industry. As a reminder, they won the national supplier of the year for NAA, which is amongst all suppliers to the Department Association.

So this team shines bright and that is a relationship business in whole and the team does an amazing job in making sure that they are offering solutions to our customers and it turns into results and revenue..

Sounds good. Thanks for that..

[Operator Instructions]. Our next question comes from Mike Taglich from Taglich Brothers..

Good morning, Beth. Morning, guys. Again obviously condolences on Allen, a terrific guy. Most of my questions have been answered.

If I'm looking at adjusted for the acquisition as of date -- as of the beginning of this year, if I put Arroyo and obviously Horn was already in it, what would by nine-month EBITDA number be, the adjusted EBITDA number?.

We don't separate it out all the way down to EBITDA, if that's the short answer..

Okay.

Beth, how much money do you expect to spend over the next year or so opening new offices for the real estate division?.

We're in the budget process right now and as in the past, we've always opened up -- we've always budgeted maybe six-ish and then ended up doing more. We really are doubling down on this territory mapping in the larger markets. The early signs is that's going to be super successful.

So that's probably a really good question for next quarter when we have a better idea of how we're going to be able to penetrate those markets that we're currently in, because keep in mind that as a reminder, we've had one salesperson in Dallas and there's like 15,000 apartments here, and one person can't do that.

So with this territory mapping tool, we'll be able to take several more salespeople and have a higher touch value to these customers and get out there more often. So we think that we're going to get major benefits from that.

We launched it in Houston and have already started to see a little bit of movement in the right direction on that, so I think next year is going to be a little bit more of opening offices as well as penetration into the markets that we're already in. And the faster we can do that the better we are.

Everybody's goal is to go fast and make sure that we do successfully..

If you had to guess, so if I'm hearing you correctly, the better staffing some of the existing offices to flesh out the market opportunities in the area, right?.

Correct..

It's going to be -- if you were spending money on growth initiatives, would that be 70% versus open up another five, six offices which would be 30? Or I mean what are your thoughts on that? I want to get a feeling how much cheaper is that? And obviously, you don't have to open up the office, it's there..

None of these places have offices. No, there are no brick and mortar. When we open a market, it's a salesperson. So this is all people. There is no office associated with that.

So it's a matter of whether or not we're going to hire 10 salespeople, whether or not that's two new markets, and 8 people in existing markets that we're in, it's just what we have to do from that perspective. But it's really just about being able to manage through that.

Like I said, we are just starting the budget process right now, and I'll be able to better answer that in a little bit later..

All right. Thank you..

This concludes our question-and-answer session. I'd like to turn the conference back over to Beth Garvey for any closing remarks..

Thank you, Scott. Thanks for your time today, and we appreciate your continued support. As always, we are available for follow-up calls, and we look forward to updating you on our fourth-quarter results in March. Have a great day..

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