BGSF, Inc. (NYSE:BGSF) Q1 2024 Earnings Call Transcript

BGSF, Inc. (NYSE:BGSF) Q1 2024 Earnings Call Transcript May 11, 2024

BGSF, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the BGSF Inc. Fiscal 2024 First Quarter Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sandy Martin, Three Part Advisors. Please go ahead.

Sandy Martin: Thank you, Chad. Good morning, and welcome to the BGSF First Quarter 2024 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 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 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 condition and results. These non-GAAP measures are intended to supplement GAAP financial information and should not be considered a substitute. GAAP and non-GAAP measures are reconciled in today’s earnings press release. I’ll now turn the call over to Beth Garvey.

Beth Garvey : Thank you, Sandy, and thank you all for joining us in reviewing our performance so far this year. Before we discuss our first quarter earnings, I want to address last night’s release announcing our decision to review strategic alternatives for BGSF. Over the past 5 years, we have worked hard to execute our long-term strategy for growing the company organically and through M&A, enhancing our margins, paying down debt and returning capital to shareholders. I wholeheartedly believe what we have built will create value for shareholders over time. However, our valuation has not reflected that in progress today. And the Board and I know that this is the right time to evaluate our options. We also think suspending the cash dividend is appropriate as part of this decision.

This strategic process includes a full range of value creation opportunities to accelerate growth or improve the structural return profile of the company. John and I are fully engaged with our advisers and the Board to explore ways to unlock value for the shareholders of BGSF. We have not set a time line for the conclusion of the review, and I do not have an update today. So I will not be taking calls — or will not be taking questions related to the company’s strategic review process. Turning to our results. The first quarter of 2024 met our near-term expectations. Although there continues to be caution around hiring, we are encouraged by recent trends in our project and consulting work related to IT and finance and accounting. Despite choppiness in the past few quarters, we saw significant momentum for both areas, resulting in a 7% increase sequentially over last quarter.

Our recent project wins have bolstered our confidence in our strategic repositioning and important tech investments, bringing us closer to our clients’ needs in 2024. Our actions during the challenging macro backdrop over the last few years have helped us transition into a structural high margin profile business. We acknowledge that there is more work to be done and are increasing our focus on accelerating revenue growth and scale. We’re proud to offer high-value professional and property management services and solutions in highly specialized niches in growing addressable markets. Our business is built on state-of-the-art technology platform with proven process excellence. Looking at our professional segment, I’d like to start by highlighting just a few recent wins we are excited about.

In the first quarter, we commenced one of the nation’s largest SAP cloud projects with a Fortune 500 company that ranks in Fortune 100’s fastest-growing companies list. We would not have been in a position to bid on this project a few years ago. But today, we are because of our strategic implementations, process changes and platform upgrades we’ve made. We’re also actively engaged in projects to support 2 large divestitures for Fortune 500 clients and are engaged in supporting other merger and acquisition projects this year. These projects excite us and give us confidence that our strategic high-end consulting solutions are uniquely positioned on what clients are looking for in 2024 and beyond. We’re at the leading edge of the best technologies available to top companies worldwide.

Turning to a discussion about property management. As we look at the first quarter sales, we were up against strong sales from the prior year, which were up almost 10%. Competition coupled with increased operating expenses for property owners has resulted in a reevaluation of our sales process to overcome these factors for our valued clients. In the first quarter, we included restructuring of our sales organization and more importantly, a change in how we compensate them. Our property management sales leaders now are directly compensated for sales and are no longer tied to a specific market, empowering them to drive sales and see the success of their own personal production. This was based on our proprietary CRM technology we implemented last year.

Now we have full visibility into each market and the number of units, which is a game changer for the sales leadership and property management. We expect our work to show — to begin showing up in the results in the second half of 2024. With that, I’ll turn the call over to John.

John Barnett: Thank you, Beth, and good morning, everyone. Beth gave some great insight into a few key metrics, but let me provide a deeper dive into our numbers. First quarter revenues were $68.6 million compared to $75.3 million in the prior year quarter. Property management revenue declined 13.6%. And as Beth mentioned, we were up against an increase of 10% in the year ago period. Property management is experiencing increased competition. In addition, property management companies, our clients are facing cost pressures, adding complexities to our sales efforts. The Professional segment was down 5.7% from the prior year quarter and up slightly on a sequential basis as we continue to see the business stabilize. Gross profit and margins in the first quarter were $23.4 million and 34.1% compared to $26.8 million and 35.6% in the prior year quarter.

As discussed, we saw competitive pressure in the property management segment, which has impacted our GP margins. Slightly lower margins for the Professional segment are expected to recover in the second quarter. SG&A expenses for the first quarter were $20 million and 30.6% of revenue, an improvement from $23.2 million and 30.8% of revenue in the prior year quarter. Reported operating income was $415,000 versus an operating loss of $20.7 million in the prior year quarter. Recall that we recorded a onetime noncash brand name impairment charge of $22.5 million related to our rebranding initiatives. Fourth quarter adjusted EBITDA was $2.7 million or 3.9% of revenue compared to $4.3 million or 5.6% in the prior year quarter. We reported adjusted earnings of $0.07 per diluted share compared to $0.16 per share in the prior year quarter.

As Beth mentioned, we have suspended our dividend as we work with Houlihan Lokey on our strategic review. While our strategic review may change our near-term outlook, we currently have no plans for acquisitions in 2024. Funded debt to trailing 12-month pro forma adjusted EBITDA was 2.53x at March 31. With that, I would like to call Beth turn the call back to Beth.

Beth Garvey : Thank you, John. Over the last several years, our strategic directives have focused us on transforming our business from a lower-margin staffing agency to a premier high-value consulting, managed solutions, workforce solutions, and property management organization. Today, our tech stack includes business and technical expertise with over 100 technologies covering the software development life cycle. BGSF’s collective knowledge is highly valuable to our clients because we bring an unbiased approach that ranges from selection to implementation, to expansion, and that often includes every part of a tech cycle. For professional consulting, we see a steady ramp-up of new client relationships, strategic IT consulting, executive search and senior level projects related to tax and mergers and acquisitions, to name few.

As discussed, we’ve secured an important partnership with Workday. This means that we now are a partner company, and our people are Workday-certified resources with credentials that validate their skills and knowledge in all Workday products and services. Although our legacy Workday assignments continue to benefit our Professional segment, this new credential Workday relationship will benefit us beginning in late Q2 and into Q3. Our relationship with Workday is stronger than ever, and we are happy to accelerate Workday’s progress, which translates to acceleration of our growth. Managed solutions has been another growth area in our successful — after our successful acquisition of Momentum Solutionz a few years ago. This offering is a high-value proposition for clients looking for us to give them advisory services.

After further assessing our growth strategy, we strategically hired a leader from the consulting world to help us grow this practice. I’m proud to announce that Hitesh Talati, a 20-plus-year veteran of Deloitte has joined BGSF to focus on key customers and bring consolidated packages with various service offerings while helping us explore new revenue streams, including artificial intelligence, product development, cloud initiatives and delivery excellence. Hitesh has a depth of experience and a strategic division that will help us be a valuable asset as we navigate our next growth phase and continue to deliver value to our customers, employees and shareholders. In property management, we continue offering proprietary training to attract an upscale talent, a unique differentiator in the marketplace.

Our operational teams have added an important sales training facilitator role, and we have completed 4 different training modules in the first quarter alone. We know this industry is evolving and growing, and we are excited to continue to be on the leading edge of innovation and expanding industry of apartments, luxury communities, and commercial conversions to residential. Multifamily is a dynamic industry that grows especially as single-family housing becomes less affordable and high interest rates remain. I am pleased with BGSF’s growth prospects. Even with the strategic review underway, we will continue to focus on sales, profitability and cash flow growth. I want to thank our associates, our partners, our shareholders and our Board for their support and dedication to our business strategy.

We would now like to open the call for operational and financial questions concerning the business. We do not plan to discuss the strategic review or the suspension of the dividends on this call. However, we have something — when we have something to report, we will include it in future calls or releases. Operator?

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Q&A Session

Operator: [Operator Instructions] And the first question today will be from Jeff Martin with ROTH Capital.

Jeff Martin: Wanted to start with property management. You mentioned the challenging comp from a year ago. How does — any expectation that you’ll ramp starting in the second half? Just curious against the comps for the back half of last year, does that serve as a tailwind or a headwind? And to what degree do you expect it to ramp in the back half?

John Barnett: Yes, Jeff, I would say, historically, right, we don’t provide guidance on expectations moving forward. I think we are moving into a period that we haven’t experienced before, and it’s really coming from 2 different areas. One, we’ve had competition, but I think what we’ve experienced more recently was meaningful competition in the marketplace impacting our efforts. And then the other thing that’s happening is the — our clients, the property managers are feeling cost pressures from several different avenues. And that’s causing them to really tighten down the belt, too, and, in some cases, moving decisions on the use of our service to a level up. So it’s a more competitive market that we’re seeing and it’s — we’re entering a different phase for the property management business operators.

Beth Garvey: Jeff, I think we’ll have our normal seasonality in that division, and I think that we feel good about it. But to John’s point, when you don’t have any competition and all of a sudden, you have more competition, it’s a different sell for us. It’s also a different structure for the property owners. At one point, the decision is to be made at the property level, and we’re now seeing those decisions being moved up to a regional level. And so that’s a different type of approach. And so our team has done an incredible job in understanding and navigating what the changes have been in the market and how the industry is evolving. And I think that we have a lot of good things that are coming forward for us in that area. It’s just — it’s a shift for right now, but a shift that we have under control.

Jeff Martin: On the professional side, could you compare/contrast Professional today versus 5 years ago? I know you’ve made a lot of efforts to transition to more of a consulting type of role with clients. Maybe just give us a snapshot of today versus 5 years ago. And then also give an update on what’s happening in the area of finance and accounting, which historically you’ve had a significant degree of business there.

Beth Garvey: The IT and Professional world is completely different today than what it was 5 years ago. It was disjointed 5 years ago. We did not have the cross-sell efforts and we really kind of did a little bit of this and a little bit of that. And we’ve really doubled down and said, what do we want to be and where do we want to focus? If you’re going to be something, you can’t be all things to everyone, so what do we want to be? And leadership got together and we decided when we looked at our business, we looked where we were strong. We look where the margin profiles we’re at. We got together and we decided how we wanted to move those technologies forward, how we wanted to build out the teams around that. And strategically, that moved us in a bunch of — in the right direction for the business to be focused and more intentional on how they sold.

It put us in a position to really open up the doors in the cross-sell efforts to where now the brands that operated in silos no longer operate in silos. They operate as teams. And those teams are super incredibly powerful. And I think that the way the acquisitions that we’ve done over the last 3 years have been super complementary to what we already had, and that was not a strategy for our M&A in prior. Prior years was we bought something, we kind of saw how it was going to fit. And the last 3 acquisitions we’ve done have been specifically around something that we saw the need in the market that fit a puzzle piece within our organization that allowed us to go to our customers and tell our customers that you do not have to do business with anybody else because we have you covered in all of these arenas.

And that transition has been a game changer for that group. But it took us a while to get there, honestly. When you do acquisitions, it takes a while to get the implementation. When you change comp plans, it gets people — it takes a while for people to understand that. Teams were getting to know each other that — and it took us a while to get there. But I feel so incredibly good about that division and the things that they have coming out of their area in the last 4 to — really the last 3 to 4 months. I just could not be more proud of what they’ve done to transition that group.

Jeff Martin: Then one more, if I could. On the neutral offering update, you bought Arroyo about a little over a year ago now. Just curious how the progress is there, you would think in the current economic climate that clients would be looking to do more near and offshoring.

Beth Garvey: They’re a solid acquisition. They have done some really great things that continue to grow. The teams have started to cross-sell into that business that we would never been able to get before from our customers because they were giving it to somebody else who had offshore capabilities. And so we’re starting to see some of that traction moving in the right direction. And the addition of Hitesh is really going to be a big part of seeing that group growth.

Operator: And the next question will be from Howard Halpern from Taglich Brothers.

Howard Halpern: I guess, if you could talk a little bit more about the Workday, the strategy there and the pipeline that’s developing for the second half of the year due to that recognition?

Beth Garvey: This is a new program for Workday. Workday, it’s never in the implementation type of business. So they said, we want to go in and we want to have some consultants that we own as in Workday. And they came to us because of our relationship that we had with them and said, look, we don’t really know how to build this out, and we would like for you guys to come help us think through it. So we had a group of leaders that went to California and sat down and said, here’s how this would look for you. What it means is we have certified Workday folks that will go into a Workday portal at Workday. And in Workday, we’ll have the ability to go into that portal and select those consultants and deploy them out. So that is different than a Workday person, success managers saying, hey, we’ve got this customer over here and they’re having struggles, let me walk you in the door.