Q2 2023 BGSF Inc Earnings Call

Participants

Beth A. Garvey; President, CEO & Chairwoman; BGSF, Inc.

John Richard Barnett; CFO & Secretary; BGSF, Inc.

Howard Allen Halpern; Senior Equity Analyst; Taglich Brothers, Inc., Research Division

Jeffrey Michael Martin; Co-Director of Research & Senior Research Analyst; ROTH MKM Partners, LLC, Research Division

Michael Nicholas Taglich; Co-Founder, President, CEO, Chairman and Financial & Operations Principal; Taglich Brothers, Inc.

Sandra J. Martin; MD; Three Part Advisors, LLC

Presentation

Operator

Good morning. Welcome to the BGSF Inc. Fiscal 2023 Second Quarter Financial Results Conference Call.
(Operator Instructions) As a reminder, this conference call is being recorded. Now I will turn the call over to Sandy Martin, Three Part Advisors. Sandy, please go ahead.

Sandra J. Martin

Thank you. Good morning, and welcome to the BGSF 2023 Second Quarter Earnings Conference Call. With me on the call today are Beth Garvey, Chair, President and 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. Today's discussion will include forward-looking statements, which are based on certain assumptions made by BGSF under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including those listed in the company's filings with the 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?

Beth A. Garvey

Thank you, Sandy, and thank you, everyone, for joining us today for our second quarter earnings discussion. Our second quarter 2023 results reflect meaningful progress on our financial and operational initiatives. I want to thank the BGSF team for their tremendous contributions that supported our solid growth and progress, which resulted in higher revenue, profitability and cash flow generation in the second quarter. We reported total revenues of $81 million, which reflected increases in both revenue and adjusted EPS of approximately 9% versus the year ago quarter. Adjusted EBITDA increased almost 39% to $7.5 million over last year's quarter, which represented an adjusted EBITDA margin of 9.3%.
Notwithstanding industry-wide headwinds and headlines in the sector last quarter, we performed well and achieved results that met or exceeded our expectations. We will discuss progress on our operational initiatives in a few moments. Second quarter Professional segment results included 13 weeks of Horn Solutions acquired in December of last year and 10 weeks of Arroyo Consulting acquired in April of this year. Both of these acquisitions added to BGSF high-value consulting businesses and strengthened our go-to-market value delivery proposition. The Arroyo acquisition also adds global IT resources and capabilities, which is in demand from current clients and provides geographic resources from some of the best IT talent in the industry.
As is typical in times of economic uncertainty, we are seeing that companies are reducing discretionary spend and capital spending by delaying or extending project time lines. On the contract side, we also are seeing elongated hiring cycles. As we look at our business today, I believe we are benefiting from the strategic transformation of the company that we started over 5 years ago. We have been focused on building high-end specialized consulting services through highly strategic acquisitions of professional and IT consulting, managed solutions as well as real estate and property management workforce solutions. As part of this transformation, we sold our lower margin light industrial business last year that was more difficult operationally to manage than our other businesses.
This important divestiture allowed us to transform the business from a line staffing company to a high-value specialized professional consulting company with managed services and unique workforce solutions. I believe this strategic transformation at BGSF positioned us to respond well to the acceleration and growth of cloud computing and migrations. These projects have proven to be remarkably resilient. The pandemic fast tracked everyone's desire to move to the cloud and to respond quickly to work from home and hybrid models and to allow companies to save money, become more agile and drive innovation.
Also, our specialized practices that support ERP software systems involve our teams in the build-out of important life cycle project and implementations for our clients. We continue to invest in the [power] of our people and technologies and believe that our higher value, higher-margin consulting, managed services and professional workforce solutions company will continue to be well positioned to respond to long-term secular trends, driving collaboration and differentiated service offerings. On the real estate property management side, we offer valuable training solutions, state-of-the-art technology and market innovations for growing multifamily apartment industry across the country.
We like the strength of our diversified markets and expect our strategic investments and growth initiatives will continue to benefit us in the second half of 2023 and beyond. Let me briefly touch on recent industry dynamics that are impacting the marketplace and how our teams are winning and differentiating themselves with unique offerings. In Property Management, we are seeing regional differences on rental pricing and occupancy rates. Our diversified platform benefiting from its geographic footprint across the United States positions us to hedge against changing market dynamics.
In addition, we are seeing a trend back to normal seasonality on apartment turnovers. Our efforts toward innovation and technology gives us a distinct competitive advantage when it comes to partnering with our clients, especially surrounding our maintenance technician training solutions that we have rolled out to our teams across the country. This training tool has an AI component that allows apartment maintenance personnel in the field to access real-time expert solutions from their mobile device. This is just one example of how we're using technology to drive higher value services and solutions to our clients by providing unique offerings in the marketplace.
On the Professional side, the consulting and managed solutions backdrop has continued to evolve in 2023. Company leaders are making near-term decisions to delay or defer discretionary projects. However, we are not seeing project cancellations. All that said, we feel BGSF is well positioned and prepared for the remainder of 2023. We are especially benefiting from the additions of both Horn and Arroyo as they provide additional strategic value add-ons to our full product offerings. As I mentioned, we continue to see solid demand for ERP and cloud migration services and importantly, we have consulting and managed solutions specialties and resources in top enterprise-wide technologies that include SAP, Workday, PeopleSoft ServiceNow, just to name a few.
We are also seeing continued demand for nearshoring and offshore projects related to software development and AI assignments. In summary, our higher-value specialized solutions and offerings in both segments are ready to serve our clients' needs, which give us confidence to execute our initiatives this year by continuing to grow revenues, improve profitability and generate incremental cash flow from our operations. With that said, I'll turn the call over to John.

John Richard Barnett

Thank you, Beth, and good morning, everyone. As Beth stated, the second quarter results included 10 weeks of business for Arroyo Consulting. Second quarter total revenues were $80.8 million, up 9.1% from the prior year period. The Professional segment was up 12.7% due to the addition of Horns Solutions and Arroyo Consulting. In our core professional business, excluding the 2 recent acquisitions, we continue to see year-over-year declines in demand for consulting and staff augmentation. Declining demand for these services has been widely reported across the staffing industry. The Property Management segment was up 3.6% in the second quarter compared to the prior year period.
Growth [slowed] versus the first quarter growth of 9.6%, while year-over-year growth slowed going against tough 2022 comps, the segment experienced typical seasonality, growing 9.4% sequentially from Q1 to Q2 of this year. Although a short period, the first weeks of the third quarter show the sequential quarter increase that we expect for this historically peak seasonal quarter for the Property Management team. Second quarter gross profit margins expanded by 280 basis points to 36.6% compared to the prior year quarter. From a segment perspective, the Professional segment gross profit margins grew 340 basis points to 34% and Property Management gross margins expanded by 210 basis points to 40.7%.
Professional continues to benefit from the blend of Horn Solutions and now Arroyo Horn with higher gross profit margin profiles than the existing professional business. For the property management business, we believe that the 40.7% gross margin is at the higher end of the long-term sustainable range for that segment. SG&A expenses for the quarter were $22.6 million, down from the first quarter's $23.2 million and up $2.7 million from a year ago, primarily due to the addition of Horn and Arroyo. As I mentioned last quarter, Horn brings higher gross margins, which we believe should be balanced against higher selling costs that flow through SG&A expense. Transaction or deal costs for the quarter were $435,000 driven by the international complexity of the Arroyo Consulting acquisition.
Our fiscal year 2023 non-GAAP adjusted measures for EBITDA and earnings per share exclude the impact of acquisition amortization, the trade name impairment charge and acquisition-related costs. Second quarter adjusted EBITDA strengthened to $7.5 million, up 200 basis points to 9.3% of revenue from the prior year quarter. We disclosed adjusted earnings per diluted share of $0.37, an increase of 8.8% versus a year ago. This was solid improvement in EPS even with $1.4 million of incremental interest expense resulting from the recent acquisitions. In addition to working on sales growth, margin expansion and improving profitability, we have been prudently managing our balance sheet with a focus on working capital efficiencies.
At the end of the second quarter, accounts receivables totaled $61.7 million, including $3.5 million from the Arroyo acquisition versus $62.5 million at the end of the first quarter. We have continued to pay down debt, and our leverage ratio of funded debt to trailing 12 months pro forma adjusted EBITDA is down to 2.3x from 2.6x at the end of last quarter. We continue to maintain a disciplined approach to capital allocation strategy that includes investments in growth, paying down debt and returning capital to shareholders through our quarterly cash dividend like the one we announced yesterday. Our investments in growth have included strategic acquisitions and although we plan to continue to keep tabs on activity and valuations in our industry, we have no immediate plans for acquisitions in 2023. And with that, I would like to turn the call back to Beth.

Beth A. Garvey

Thank you, John. Now turning to our 4 strategic initiatives for 2023. First, our team successfully implemented our rebranding initiative with the transition of many trade names to BGSF. Although this may not seem like a big or important milestone for our company, we completed a total of 14 different branded acquisitions over the last 13 years, and each of these added complexity, cost and potential confusion to our customers. 1 week after the social media consolidation, our net followers increased 110.3% year-over-year. So we believe this will continue to positively impact our organization moving forward.
I'm very proud of our team for successfully transitioning our employees, clients and all stakeholders over through this process. Today, we go to market as BGSF, and we are seeing this benefit us with clients and partners recognizing our scale and breadth of solutions and services in both of our segments. The second strategic initiative, process improvement, is all about further leveraging our IT technology platform in big and small ways. We have been process mapping and reducing tasks from our sales and recruiting teams to allow them to do more customer-centric and focused on engaging with our people and our clients. As we mentioned earlier, we are also leveraging mobile-first tools that reduce tasks as well as reduce process friction for our employees, customers and candidates.
I'm very pleased with our progress on process improvements and believe that our business optimization goals are well underway for this year. Our third strategic initiative is shared services. We are focused on improving our time and attendance process and believe the process enhancements will gain meaningful efficiencies, allowing our delivery teams to focus on more revenue-generating activities. These improvements and best practice developments will continue to be leveraged as we expand and grow our businesses. Finally, I know that we routinely provide an M&A update as well as our position on the pipeline and valuations in the industry.
We are pleased with our transactions over the years, including the most recent deals with Horn Solutions and Arroyo Consulting. Both are cultivated over time and fit well strategically with our acquisition criteria, meaning that the cultural and capabilities were right. We plan to continue to look at deals that are already in the pipeline or that fit our strategic criteria. However, as John mentioned, we are not proactively pursuing M&A at this time. Now wrapping up with some comments regarding the remainder of the year. While both of our business segments are not recession-proof, we do believe that they are recession-resistant versus other segments in the staffing industry.
For the remainder of 2023, we expect our normal seasonality in Real Estate, and we also expect growth in Professional segments driven mostly by the acquisitions. We do not know when the economic fog will lift but we'll plan to continue to work prospects, cross-sell opportunities and other new business, and we expect continued demand for large-scale ERP implementations and support. We will continue to monitor the economic conditions and impact in the markets as we move through the year. Finally, I'm excited to share that Property Management division was awarded the 2023 National Apartment Association or NAA Excellence Award for Supplier Company of the Year. This recognition underscores our commitment and dedication to delivering high-value staffing services and innovative recruiting solutions for the multifamily communities and the apartment industry.
I'm extremely proud of Kelly and her team for their distinguished award and the recognition for this year. Before we open the line for questions, we would like to call out that we will be presenting at the Midwest IDEAS Investor Conference in Chicago on August 23. If you'd like to come meet with us, we'd love to chat with you. With that said, I will turn it back over to the operator.

Question and Answer Session

Operator

(Operator Instructions)
Your first question comes from Jeff Martin, ROTH Capital.

Jeffrey Michael Martin

First of all, congratulations on the margin gains in the quarter, something you've done consistently throughout the year. So I know you mentioned that Real Estate margin is at the high end of what the long-term range should be. But I wanted to get a sense from you whether the increased margins were more a function of mix, the addition of Horn and Arroyo or there was also some efficiency gains from the technology platform and the investments that you made over the past several years?

John Richard Barnett

Yes. Thanks. I think really, it's a combination of all of those things coming together at the same time this quarter and actually our trend. Definitely, on the Professional side, we're having some good gains from the addition of Horn and certainly from Arroyo. But it's definitely a combination of everything.

Jeffrey Michael Martin

Okay. And then how did the permanent placement in the quarter track relative to, say, last quarter or the last 12 months? Was it fairly high in the quarter?

John Richard Barnett

I think we're seeing -- if you look at competitors within the industry, we're seeing similar trends in perm placement. It is kind of the first thing to go when there's uncertainty in the marketplace and again, kind of this fog over the economy is people slowdown in their hiring, they delay -- they leave open positions open longer. So what we've seen is down anywhere 20%, 30% in that business.

Jeffrey Michael Martin

Okay. (inaudible) that there's a significant lift to margins potentially. So you have the margin gains in the face of a decline in (inaudible). That's impressive. Just wonder if you could provide a little more detail with respect to the contract delays in Professional. Were any of those of significant size? Do you have any visibility on timing? Or are those just kind of in the midst of all the fog of the uncertainty in the economy?

Beth A. Garvey

Sure. We do have visibility into what the resources have been put on hold. So we have many of our customers. We've got people lined up. They have a project they're doing and then they just decide to delay it every month. And so nobody is canceling anything. They're just kind of being very cautious as they move through the rest of this year. And we're hopeful for everything that we're hearing from them that it's not going to be any kind of change where they're not going to pull the trigger on these deals. They're just waiting to see kind of how things shake out.

Jeffrey Michael Martin

Okay. And then could you give us a sense of over the next year or so, what the expansion plans are for the Real Estate segment?

Beth A. Garvey

I'm very excited about all the things that we have going on in Real Estate right now. So outside of the fact that they've consistently grown double digits, and it's all been organic. The new technology that we just implemented last year has allowed us to be able to really take some efforts and take -- we now are rolling out with the help of Salesforce and [ALM]. We were able to go out and do territory mapping. So our system now matches every property that is out there in the country to Salesforce, and then we are taking that data, and we are mapping out territories in the larger markets like Dallas and Atlanta, Houston, to start.
And this allows us to be able to take and really allow our salespeople to have a bigger focus on the types of properties than having just a fail -- here's 1,700 properties you need to just go try to figure it out. So it allows a bigger focus on defining who they go to see, when they go to see, we're able to take revenue and tie it to that system to be able to tell if somebody -- if we've spent a lot of revenue in this customer, in this pocket, it shows us white space, so we can go -- move into those areas where we maybe historically haven't gone in the past.
So super excited about that. That launched last week, went live last week. And I know that Kelly and [Jim Roeder], who kind of heads up that project, have done a really good job in making sure that we are positioned to get the most out of that. So that's an exciting move for us in Property Management.

Jeffrey Michael Martin

Great. And then I know right after you purchased Arroyo, you had significant inbound interest in offshoring. Are you seeing some contracts come to fruition there? Maybe give us a sense of how the offshoring initiative is trending with clients?

Beth A. Garvey

We are seeing activity in the offshoring side of it. And customers here in the U.S. are -- they're starting out slow. So they're giving us a shot saying, hey, give us 2 or 3 people to see what your capabilities are. But we -- it's kind of your foot in the door. And once we get people on the ground and in those departments, we definitely feel that that's going to be an expansion in the departments that we have for Arroyo. It's been super exciting, and Eric Peters and the team have really gone through and make sure that they are telling the story and leading with managed services and the capabilities of the Arroyo team.

Operator

(Operator Instructions) Next question comes from Howard Halpern, Taglich Brothers.

Howard Allen Halpern

Congratulations. Great quarter. In terms of the 2 acquisitions, how has that helped in terms of the cross-selling and building that type of pipeline for future projects?

Beth A. Garvey

Howard, as you know, every acquisition that we've ever made has been a strategic acquisition as in -- is there a capability that we need? Is there something that a customer has asked us for? And in both of the acquisitions, it was basically for those 2 things. And the managed services side of the Horn Solutions acquisition as well as the abilities of our Colombia and India operations has really given the sales team for Professional. I had really strong effort to be able to go out to the market and sell solutions across the board.
And I think that, that has excited the team. There's a lot of motivation and a lot of energy. We've got a lot of different platforms that we've been landing pages that the marketing team has built, that has allowed the sales team to really get to out-to-market quickly. So we're just in the process, especially with the Arroyo acquisition of building these things out. But every week, we're finding some new capability that, that team has the ability to do, and it's super exciting to watch it unfold.

Howard Allen Halpern

Okay. And within the Real Estate segment, has some of the wage pressures abated? Have you seen that occur?

Beth A. Garvey

I think on both segments, we are not seeing the wage inflation that we saw in last year. I think that's all kind of lined out. It is what it is right now. So we're not seeing it be crazy like it was last year.

Howard Allen Halpern

Okay. And then just a couple more. With the transaction fees, are we going to see any more transaction fees going forward? Or did this round out that from the acquisitions this quarter?

John Richard Barnett

I would expect very little -- we will have some come through. We're still working through a number of legal items related to the acquisition of Arroyo, as you can imagine, it's fairly complex, certainly with both the Colombian entity and India. But it won't be anywhere as significant as what we saw flow through this quarter or the last quarter.

Operator

Next question comes from Michael Taglich from Taglich Brothers.

Michael Nicholas Taglich

Terrific. Beth and team, congratulations on an excellent quarter, beating the street. I had a question about the tech part of the business. Obviously, you've been outperforming the industry on the tech side. Do you think Arroyo, which is a fairly small acquisition is going to help you continue to do that?

Beth A. Garvey

I definitely do. So the capabilities that, that Arroyo team is really going to open up doors across the Professional division and the IT segment altogether. So we've got very exciting things that are in the works with that team.

Michael Nicholas Taglich

All right. No, I don't think it's in my numbers, but I should look at that as a cushion, if you will, those synergies, like the tech spend and the improved margins we're seeing in the business now.

Beth A. Garvey

Correct.

Michael Nicholas Taglich

Congratulations on a strong Real Estate performance there.

Beth A. Garvey

Thank you. Super proud of the teams right now.

Michael Nicholas Taglich

They're doing a great job. Thank you very much. Looking forward to a couple more great quarters.

Beth A. Garvey

Thank you.

Operator

I will now turn the call back over to Beth Garvey for closing remarks. Beth, please go ahead.

Beth A. Garvey

As always, thank you for your time today. We appreciate your continued support. As always, we're available for follow-up calls. If you would like to work out with Three Part Advisors, we'd be happy to chat in more detail. Otherwise, we will talk to you after we -- when we report our third quarter in November. Have a great day.

Operator

Ladies and gentlemen, that concludes today's call. Thank you so much for joining, and you may now disconnect.