BGSF Inc (BGSF) 2018 Q2 法說會逐字稿

It is my pleasure to welcome you to the BG Staffing conference call to discuss the Q2 financial and operating results and progress report on the company's business strategy. With me today on our call is: Dan Hollenbach, Chief Financial Officer; and Allen Baker, President and CEO.

By now you should have seen a copy of today's press release announcing BG's Q2 2018 financial results. If you do not have a copy of the press release, you can find it in the Investor Relations section on BG's website at www.bgstaffing.com.

I'll remind you that this call is being webcast live and recorded. A replay of the event will be available later today on BG's website and will remain available for at least 90 days following the call.

I would also like to 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 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 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 the 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 members -- sorry, our Board of Directors and investors about our operating activities and business trends related to our financial condition and results of operations. These non-GAAP measures are intended to be a supplement to the GAAP financial information and should not be considered in isolation, as a substitute for or as 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 today's earning release posted on BG's website.

I would now like to turn the call over to Dan Hollenbach, BG Staffing's Chief Financial Officer. Please go ahead, Dan.

Thanks, Ben, and good afternoon, everyone. Thank you for joining us today, and thank you for your interest in BG Staffing.

We are extremely pleased with the performance of BG Staffing for the second quarter and first 6 months of 2018, and I would like to start by taking a moment to recognize our people at each of the BG Staffing business units for their hard work and dedication to the company's continued success and strong gross profit margins. We are very proud of the job they have done.

BG Staffing provides temporary staffing services within 3 industry segments: Real Estate, which we previously referred to as Multifamily; Professional, which includes our finance and accounting and IT divisions; and Light Industrial, which we previously referred to as Commercial.

The change with respect to the Real Estate segment reflects the expansion of the company's go-to-market strategy with the addition of commercial real estate service offerings. The Real Estate segment now includes the company's BG Multifamily division, in addition to the company's commercial Real Estate division, which we refer to as BG Talent. In conjunction with the new Real Estate market segmentation, we believe it was important to change our branding for the company's Light Industrial segment to eliminate the use of the commercial name as we believe Light Industrial name identifies the segment's service offerings as distinct from those related to the commercial Real Estate.

Now I would like to spend a few minutes commenting on BG's financial results, and then turn the call over to Allen for his comments on the quarter, the company's strategic strategy execution and current industry conditions.

Our revenues for the second quarter of 2018 were $70.9 million, up 3.2% from the second quarter of 2017, with a very strong gross profit percentage of 27.1%, up from 25% for the second quarter 2017.

Net income for the second quarter was $5.2 million or $0.54 per diluted share compared with net income of $2.3 million or $0.25 per diluted share for Q2 '17. Revenues were impacted positively by an 8.6% increase in our volume of double borrowers over second quarter of '17, partially offset by a 5.3% decrease in our average bill rate.

Consistent with Q1 '18, customer sentiment remained positive and demand momentum was steady as we moved sequentially from Q1 into Q2.

Turning to year-to-date results. Revenues for the first 6 months of '18 were $137.8 million, an increase of $12.2 million or 9.7% compared with the first half of 2017. Gross profit increased $5.6 million or 18.1% to $36.5 million. And gross profit percentage increased by 1.9% to 26.5% for the first half of '18 compared with 24.6% for the same period 2017.

The company produced net income of $7.6 million or $0.82 per diluted share for the first 6 months of 2018, compared with net income of $3.6 million or $0.40 per diluted share for the same period of 2017.

And now looking at our segment results. Second quarter Real Estate revenues were $21.3 million, an increase of $4.7 million or 28.4% over Q2 '17, which was all organic growth. Real estate gross profit percentage for Q2 2018 was 38.1%, in line with the same quarter of 2017.

Real estate revenues increased $9.7 million to $39.3 million or 32.6% year-to-date over 2017, as we continue to scale the highest profit margin segment in our business. Real estate gross profit percentage was 38.1% for the 2018 year-to-date period, unchanged from the previous year.

Real Estate has opened 2 new offices and split 4 existing offices through the first half of 2018, and we expect to open 4 more offices this year.

Our Professional segment's second quarter revenues were $30.1 million, a decrease of approximately $4.1 million or 11.9% compared with Q2 '17, with gross profit percentage for the Professional segment coming in at 26.8% for Q2 '18, which compares with 24.2% for the same period last year. These results reflect the full quarter of both our Zycron and Smart acquisitions, whereas 2000 -- second quarter did not reflect any Smart acquisition numbers as it was completed in September of 2017. Smart contributed $3 million of revenues in Q2.

Consistent with Q1 2018, our Professional segment revenues were negatively impacted by certain projects during the process of winding down. In addition, the projects that were scheduled to ramp up in Q1 or Q2 would have been delayed. Most notably, and as we disclosed in our first quarter earnings call, a large project in our finance and accounting division is currently winding down.

We generated $1.7 million less revenue and $300,000 less gross profit attributed -- attributable to our deepwater project in Q2 '18 versus Q2 '17. We expected these declines and did not include any revenues from deepwater in our 2018 planning.

Year-to-date 2018 Professional revenues were $61.2 million, an increase of $1.2 million or 2% over 2017, while year-to-date Professional gross profit increased to 26% from 24.2% for the previous year. Our 2017 acquisitions of Zycron and Smart contributed $16.8 million and $5.8 million, respectively, to 2018 year-to-date revenues. The Zycron number of $16.8 was an $8.1 million increase over last year.

Second quarter Light Industrial revenues were $19.5 million, an increase of $1.5 million or 8.5% over Q2 2017. Light Industrial gross profit percentage was 15.4% in Q2 '18 compared with 14.5% for Q2 2017. These results are indicative of disciplined pricing and expense management by our managers in this segment of our business, where volume is driven much more by price than in our other 2 segments.

Light Industrial year-to-date revenues increased $1.3 million or $37.2 million -- to $37.2 million, I apologize, or 3.7% versus a year ago. The Light Industrial gross profit percentage was 14.9% compared with 14.2% for the period -- prior year-to-date period.

We are pleased to see both sequential and year-over-year improvements in gross margins in what is normally our lowest-margin business as demand for Light Industrial staffing continues to accelerate along with the overall economic activity.

Selling expenses for the second quarter increased approximately $1.8 million or 19.4% over Q2 2017, primarily due to the growth in Real Estate of $878,000, of which $159,000 was attributable to new offices and the addition of Smart, which added $797,000 of selling expenses to our Professional segment for Q2 '18. Excluding the addition of Smart, our other IT and F&A division selling expenses decreased $67,000, while the Light Industrial segment increased $157,000.

In the first half of 2018, selling expenses increased $3.9 million or 23% over the same period of '17. Real estate increased $1.8 million, with $318,000 coming from new offices. And Smart contributed $1.6 million of selling expenses.

Our G&A expenses for Q2 '18 reflect a $1.2 million gain on contingent consideration. Under U.S. GAAP accounting rules, the company is required to quarterly revalue this liability for estimated contingent earnout payments, with any revaluation recorded through the income statement. In effect, the revaluation of an earnout to its quarter-end fair value is a reduction in the acquisition purchase price. Excluding the effect of the gain on earnout, our G&A expense would have been $1.5 million, an amount that is 2.1% of sales for the second quarter of '18, which compares to 2% for the second quarter of '17. The slight increase as a percent is primarily due to increased transaction-related fees.

G&A expenses were down 31.2% for the 2018 year-to-date period, primarily due to the gain on earnouts. Excluding the effect of the gain, 2018 year-to-date G&A expenses would have been $3.1 million, an amount that is 2.3% of revenues, which compared to 2.2% for the prior year-to-date period.

Our effective income tax rate was 11.4% and 15.2% for the second quarter and first 6 months of 2018, compared with 39% for both periods of 2017. Contributing to the lower tax rate was a $2.6 million deduction attributable to the cancellation of outstanding stock options held by Mr. Baker in connection with the company's successful public stock offering that was closed in May as well as the tax legislation passed in 2017. Our current estimate of the effective income tax rate for the third and fourth quarters of 2018 is approximately 25.3%.

Turning to the balance sheet. And as I just mentioned, in May of 2018, we completed an underwriting offering of approximately 1.3 million newly issued shares of the company's common stock at a price of $18 per share, raising $23.3 million before deducting operating expenses. The proceeds of the offering were used to reduce our term debt by $10.7 million and our revolver by $7.5 million, strengthening our balance sheet and liquidity.

We believe the rebound of the company's share price since the offering and the 50% increase year-to-date reflects the market's expectations for solid, long-term fundamentals in terms of the company's performance, liquidity and risk. Our effective working capital management, along with solid earnings, continues to generate strong operating cash flows, allowing us to continue to return capital to our shareholders in the form of regular quarterly dividends.

Adjusted EBITDA for Q2 '18 was $7.9 million or 11.1% of revenues compared with $6.6 million or 9.6% of revenues for Q2 of '17. Adjusted EBITDA for the first 6 months of 2018 was $13.1 million -- I'm sorry, $13.3 million or 9.6% of revenues compared with $10.8 million or 8.6% of revenues for the first 6 months of 2017.

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 provides for a more complete understanding of factors and trends affecting our business. We also believe that investors, analysts and other interested parties view our ability to generate adjusted EBITDA as an important measure of our operating performance and that of other companies in our industry. In addition, the financial covenants of our credit agreement are based on adjusted EBITDA.

Reconciliations of adjusted EBITDA to net income are available on our latest current report on Form 10-Q and in our earnings release, both of which are available on our website.

I will now turn the call over to Allen Baker. Allen?

Thanks, Dan. Good afternoon, everybody, and thank you for joining us today. I'm very pleased to review our financial results with you.

A continuation of strong demand, a 3.2% increase in revenue and solid operational performance by our managers in the field resulted in our highest quarterly consolidated gross profit percentage on record at 27.1% and our fifth consecutive quarter with consolidated gross profit percentages in excess of 25%.

BG Staffing's gross margin percentage has steadily increased from 19.1% as of fiscal year-end '13 to 27.1% for the most recent quarter. Needless to say, we're very proud of this achievement.

We sometimes hear the assertion that if a company's revenues grow, its return on capital will naturally increase. Therefore, low-margin companies should strive for revenue growth. However, that argument does not appeal to us. The foundation of value creation for BG Staffing consists of generating higher cash flows through a combination of revenue growth and return on capital.

And while the company's revenue growth over the past several years has certainly been impressive, we believe our focus on the strategic priority of growing returns, as measured by gross profit margin percentage, adjusted EBITDA and adjusted EBITDA margin, has benefited our shareholders with sustained value creation.

Simply put, for any level of revenue growth, we believe value increases with improved returns. As such, our focus has been on creating value by increasing margins through operational discipline, organic growth initiatives and through M&A, for we believe our insights into how certain market segments and the staffing industry itself will evolve have demonstrated our successful strategic execution as a value-creating serial acquirer.

The acquisitions we have completed in our Professional segment over the past several years have allowed us to create market access across all the divisions within this segment for cross-selling opportunities. These acquisitions also allowed us to build our Professional segment service offerings more quickly and at a lower cost than they could be built in-house.

The acquisition of our Real Estate segment was a clear example of picking a winner early, long before any competitors and the market saw the segment's potential and helping them improve performance and scale the business. The impressive trend and historical gross profit margin improvement over the past several years that we are discussing today is directly attributable to return on these capital investments.

So far in '18, we have not completed any acquisitions. However, the pipeline remains very active due to an attractive industry structure, and we continue to evaluate opportunities that we believe will complement our existing market exposures and our diversification strategy.

In addition to investing in higher-returning businesses through a disciplined acquisition strategy, we will also continue to return cash to shareholders through quarterly dividends. The quarterly dividend currently stands at $0.30 per share for an approximate dividend yield of 4.5%. BG Staffing has now been paying regular quarterly dividends for 15 consecutive quarters.

Turning to our industry outlook. We remain optimistic regarding business activity levels in the third quarter and the second half of 2018. Subject to normal seasonal patterns, we believe economic momentum will continue to be positive, and we believe growth trends in the staffing industry indicate that more companies are using temps as a normal component of their business operations across various industries.

Conventional wisdom holds that as economic expansion matures, we see a shift from temp to perm jobs. But so far, we have not seen any material indications of this underlying trend within our business segments. Generally, we have found that many companies are wary of overstaffing with permanent employees, as carrying workers who are underutilized much of the time is inefficient. This appears to be the case even during peak periods. We have found that for many of our customers, the desire to stay lean has positive implications for the use of temporary help versus permanent staff. We believe that as the economy continues to improve and labor markets remain tight, this will be a positive for BG Staffing overall.

Wrapping up my comments. With the first half of 2018 in the books, our results have been very strong, and we have reason to believe that our performance will continue to strengthen for the remainder of the year. We continue to work with our customers, both new and existing, across all of our business segments to proactively identify areas in which we can provide additional staffing services, and we will continue to invest in these incremental growth activities.

Our strategy remains consistent, made possible by our continued improvement in earnings, which, in turn, provides strong cash flow from our operations and an improved balance sheet. We will continue to grow our business through a balanced combination of organic investments and acquisitions while also returning cash to our shareholders.

With that, I will turn the call back over to our operator for the question-and-answer session.

(Operator Instructions) The first question comes from Jeff Martin of Roth Capital Partners.

Allen, can you give us an update on the commercial side of the Real Estate business, the new venture for you? I think you're on record saying you are hopeful to generate $5 million to $6 million of revenue from that this year. So looking -- wanted to see what's the kind of progress you've made.

Yes, that's true. We're probably not going to hit the $5 million to $6 million, but we're going to hit our profitability goals, which, I think, in the second quarter, we hit 15% contribution to overhead is what I call it, which is basically through selling expenses. So we're probably going to come in for the year at $3 million to $4 million in sales, but there's been a lot of bumps in the road, a lot of things that we've learned. But I think that it's here to stay, and we're hopeful that next year will be even bigger than this -- this year.

Okay, excellent. And then on the Professional and Light Industrial segments, just curious if you could provide any detail you can around, for the Light Industrial, return to growth in the segment. I know that was about a 9% growth. And then Professional looks like, both on the IT and finance and accounting, there's some headwinds. You also mentioned some project ramps that were delayed. Curious of any details you can provide around those 2 segments.

Correct. Which one do you want first?

Let's start with Professional.

In the Professional area, we think, number one, we've put a person in charge of that. He's got a history with Robert Half. He's done an excellent job. He's gotten rid of a lot of people, and that's probably why the downturn, I'll say, in Q2 happened. But we are looking forward. And we think that by the first quarter of next year, we'll be in serious -- we'll be a serious competitor in this particular market. But for now, we had to just put the brakes on and do some things and pick some things. And we're now operating more closely in terms of cross-selling than we ever have before, and I feel really good about the division. I know it looks flat, but it's really on the uptick from my vantage point. As far as Light Industrial goes, Light Industrial goes as Light Industrial goes. I mean, the good news is we got a customer back at a higher margin than what we had them exit at. And so therefore, we've got some growth in that particular segment.

Okay. And then on the delayed projects, can you give us a sense of magnitude and timing on when those will come on and what kind of contribution they'll have? I would imagine those are in the Professional segment.

Yes. We had a very large project going on last year in one of our IT divisions at a health services company that had multiple locations. They were implementing SAP. And about early part of third quarter last year sort of stepped back and said, this project needs to be reevaluated and sort of put the brakes on it. It was supposed to start up in Q1 and then supposed to start up in Q2, and we're waiting for it to start up in Q3. It's about a $4 million impact year-over-year. In addition, Allen mentioned the cross-selling...

For the first half in aggregate or just per quarter?

First half in aggregate. Yes, yes, yes. The other thing that Allen mentioned about was the cross-selling, and we had a large cross-selling opportunity that's come our way in the Dallas market. And due to delays in the office construction for that client, that was supposed to start in Q2, and it's starting to ramp up probably, we're expecting, in the next 2 to 3 weeks or so.

The next question comes from Howard Halpern of Taglich Brothers.

Just going back to what you were just talking about on the delays and when you see them flowing through, for the Professional segment, are they going to help continue to boost margins -- gross margins?

Well, I'll talk about the F&I -- F&A part of it. The project that is declining off was a relatively low-margin piece of our business, probably in the upper teens, although it was a significant amount of volume a year or 2 ago when we had close to 200 people out there. And the new business we're bringing on to replace that, although volume-wise is coming on not quite as fast as it rolled off, is much more in line with our Professional margins in the upper 20s to 30%. So we should see a continued increase in margin percentage as that business completely is eliminated and our new business rolls on. On the IT side, we continue to probably manage at about the same level or so.

Okay. And when you talk about ramping up for the cross-selling opportunities that you see, are those projects mostly going to be higher-margin business to drive it up -- or drive it or at least maintain what you achieved in Q2?

I would say at least maintain, yes.

Okay. And in terms of the Real Estate and the commercial side of it, how many -- do you know how many offices are actually actively marketing the commercial real estate part of your business?

Yes. We have approximately 5 offices actively marketing currently, and then we have some resources that are marketing into other areas where we do have offices. But the bottom line there is we feel good about it. It's not going to be as we have projected it, but we do feel good about it because it's hit the profit goals.

Okay. And just one last one in the Real Estate. You talked about adding 4 more offices this year. Are they going to be in existing states? Or are you going to -- are you being pulled into other states here?

I don't know.

So 2 of it is new states, new geography. And 2 of them are -- our plan is to split the existing offices so...

There are no more questions at this time. This concludes the question-and-answer session. I would like to turn the conference back over to Allen Baker for any closing remarks.

Thank you, operator, and thanks to all of you for joining our call today, 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.