Q3 2022 BGSF Inc Earnings Call
Expense growth in our managed services and consulting areas.
Our real estate segment continues to expand and accounted for 42% of revenues as we discussed last quarter the multifamily industry.
Significantly under belt, and the National apartment Association and National multifamily housing Council estimate that 600000 apartment homes are needed today in the U S. It is also estimated that the U S is under built by $4 3 million units by 2035, which has been accelerating primarily due to the pandemic and further.
Demographic shifts.
People today in all ages and categories are choosing to live in apartments.
The family housing or renting single family homes are no longer a transitional housing option.
Alternatively people are deciding that department and build to rent communities are desirable solution for long term housing.
The strong tailwind to have contributed to <unk> market leadership position in the multifamily industry over the last couple of years, we recognize that long term pent up demand exists and we are seeing strong new demand for apartments and built to rent single family housing communities across North America.
Our real estate division is strategically focused across the U S opening in <unk> key markets this year, including our recent expansion into Canada.
Finally recall that we experienced unseasonably strong real estate segment performance in Q4 of 2021. We think this activity was driven by pent up demand that started during COVID-19 lockdowns, coupled with landlords spending again.
Last year's strength creates tougher comparisons for us in the fourth quarter of this year.
With that said I'd like to turn the call over to Dan to walk through our financial results in more detail for the quarter, then I'll wrap up the call with some comments on how we see our markets changing and Bgs's plans for delivering unique workforce solutions for current and future customer needs strategic initiatives and M&A.
<unk>.
Thank you Beth and good morning, everyone.
Just on the sale of our industrial segment. This year, our financial results discussed today are from continued operations.
We're noted exclude discontinued operations for this year and last year.
As discussed strong momentum continued into the third quarter with revenue up 22%, 3% to $78 5 million compared to 21.
Segment real estate grew 34, 1% professional increased 14, 9%.
Raise rates have been relatively flat for the year increased 10% Q over Q.
In addition to year over year improvements both segments showed sequential growth between Q2 and Q3.
Real estate revenues grew 11% and professional segment revenues increased 3%.
The professional segment revenue growth was impacted by strong double digit growth in it.
And momentum solutions, we continue to expect solid demand for cloud migration.
RFP selection and implementation as well as customization.
As Beth mentioned, we believe digital transformation and enterprise modernization work are both strong and business investments in these areas will continue.
Although managed services are a small but growing component for the professional segment, we had an 85% growth in this business Q over Q, which grew out of our momentum solutions acquisition in February of 'twenty one.
Gross profit increased by a strong 27% compared to the prior year quarter growing to $28 million, primarily due to revenue expansion and increased spread in both segments.
As a percent of revenue total gross profit increased to 140 basis points to 35, 7%.
Positive operating leverage continued in selling general and administrative expenses, which improved by 60 basis points to 26% of revenue.
SG&A dollars increased $3 3 million or 19, 5%, which compared favorably to our revenue growth.
Third quarter net income from continuing ops was $4 7 million or <unk> 44 per diluted share compared to net income of $3 7 million or <unk> 36 per diluted share a year ago.
Included in 'twenty, one net income was $974000 impact on gain from contingent.
Consideration.
Adjusted EBITDA for Q3 was 8 million or 10, 2% of revenues compared to $5 4 million or eight 4% of revenues in 'twenty. One we are excited to report the 10, 2% adjusted EBITDA margin this quarter as we work towards our strategy to enhance returns after the divestiture earlier this year.
Our Q3 effective rate was 23, 6% for 22 compared to 19, 4% in last year's third quarter.
Turning to year to date results revenues were $221 1 million or 29, 1%, while gross profit was $76 5 million up 33%.
Our first nine months gross profit percent increased 100 basis points to 34, 6%, while SG&A operating leverage improved by 130 basis points this year compared to last.
Net income from continuing operations was $9 8 million or <unk> 93 per diluted share compared to $6 1 million or <unk> 59 per diluted share for the 'twenty one period.
Included in 'twenty, one net income was $2 million impact from a gain on contingent consideration.
Adjusted EBITDA from continuing operations totaled $17 4 million or seven 9% of revenue compared to $9 9 million or five 8% of revenue last year the.
The year to date effective tax from continuing operations was 24, 5% compared to 17, 9% for last year.
Guarding the company's financial position, we continue to maintain a strong liquidity position and balance sheet days sales outstanding improved by one day from year end and our working capital ratio strengthened to $2 98 to $1 95 at year end.
Based on the strength in our business through the first nine months, we used more working capital to grow which resulted in net cash used in continuing operation activities of $5 6 million. We continue to maintain a conservative leverage ratio of funded debt to trailing 12 months adjusted EBITDA from continuing operations of $1 two X.
The September balance sheet date.
Finally, the board of directors approved a 32nd consecutive quarterly dividend payment of <unk> 15 per share in support of our strategic initiatives. We believe that our prudent financial management and capital allocation strategy will continue to provide ample flexibility to fund operations.
Make strategic acquisitions and invest for future growth, while returning value to our shareholders through cash dividends.
Stock appreciation.
I will now turn the call back to Beth.
Thank you Dan our teams are energized around our strategic bjs's programs, and we'd be changing market dynamics, pandemics and inflationary recessionary pressures as the best time to think outside the box and provide creative solutions to our customers.
That is how we've been able to win market share and enabled our leaders to create meaningful differentiators for both our professional and real estate segments.
The GSS unique model empowers people and creates long term relationships with both customers and our workforce.
But chavez and in Germany at almost all time high coupled with unemployment rates at record lows, especially for those with college degrees at one 8% unemployment rate, we decided to change again.
We offer our people training platforms to either upscale or reskill their challenge by using specialized training modules. We are advancing both the professional and real estate segment with a more robust and scale talent pool.
Trading platforms, our sandbox experiences also allow existing and future bgs have workers to learn a new field our specialization.
They've built important staff loyalty and retention for both our customers and our associates.
This is important on the professional side with Oracle and workday experts and on the real estate side with new leasing office personnel property maintenance techs.
Eloping a diverse highly skilled candidates for managed services consulting and Perm placement creates a flywheel effect on our business because clients today are more likely to higher Bgs F. Four other projects and services Tomorrow. This is proving to work very well for us.
Although we are not immune to recessionary pressures, we have continued to execute with excellence in our markets and have a proven track record of managing through past down cycles. In addition, our divestiture at the light industrial business makes us less vulnerable to cyclical headwinds and we benefit from our specialization and professional and real estate segments.
Which operate many times from different business environments.
The pandemic candidates unprecedented events to the business is in North America, and corporate response to those events give us confidence today, the customers are not likely to pull on it investments for important cloud migrations, our ERP projects.
For what we have experienced coupled with prevailing housing trend. We believe that the real estate segment is more recession resistant and will greatly benefit from our client partnerships.
We remain optimistic about <unk> growth prospects as we get closer to 2023, and we believe that our business will continue to be driven by strength in our people technology reputation business model and client partnerships.
A few final words concerning our M&A work deal flow continues to be strong and valuations has softened somewhat.
Our focus remains on the evaluation of strategic bolt on acquisitions, and we are actively looking for transactions both in North America and a few globally.
Also we continue to seek business and technology that can strongly fit for our customers agriculture with that said that concludes our prepared remarks for the third quarter. We will now open the call for questions.
Brighter.
Thank you.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
Any reason you would like Jimmy is that a question. Please press star followed by two again to ask a question. Please press star followed by one as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
The first question today comes from the line of Howard Halpern from pockets. Please go ahead. Your line is now open.
Thank you and Gratulation is great quarter, great yourself are.
Thanks, Eric.
First question is in regards to I guess, the real estate and.
What really.
Drove the gross margin above that 40% level. The first time, we've seen that.
In its history.
Yes, so interesting and that's normally in the third quarter, it's tough to maintain that because that's normally are our highest volume and they tend to have a little bit of.
Pressure on pay to keep our people are working but at a much better job of managing that this year and we're able to pass through that cost to the customers.
And help support that spread increase so.
Okay is that something that you.
You are going to be able to maintain that or it is going to fluctuate again, depending on the volume that you have going forward.
Howard I think theres another piece of that along with what Dan said and Thats. The fact that we've got some strategic relationships, we have right now and with that comes some direct hire so that direct tire wall. So.
Push out the margin and.
Right now we don't feel like there's a.
A reason for us not to think we can't maintain that based on the pipeline activity, we have right now.
Okay and.
Are there theyre perm revenue almost doubled Q over Q. So yes go ahead.
And have you laid out and I know you.
Open.
Number of blocks as you said you are so far.
Is there is there a plan or a hint of how men.
Any new offices or split officers, you're going to have heading into next year.
We're in the process of doing our budgets right now so we are identifying new opportunities for the future. So I think it's kind of early for me to answer that can save some ad.
Definitely.
There definitely will be box office openings that will definitely be expansions in markets. We're in we just haven't noticed them completely.
Okay, and you talked about.
Essentially you have partnerships.
Because you announced it.
Interplay in developing Europe .
Talent pool.
<unk> actually begun or is that in the process of being developed to begin at a certain point.
It has begun we just finished the pilot program. We found it to be successful and that we are working with interplay to expand that throughout our markets.
Okay.
Youll be able to add.
Okay.
Okay.
I'm, sorry, Howard you cut out.
Alright.
Yes.
I guess that was the thought process in developing these partnerships.
Howard I'm, sorry, you cut out when we missed half of what you said.
Sorry.
With.
The partnerships that you have.
Alright.
Developing.
And the deficit.
In housing going forward.
The segment that you are in.
I mean is this that's the forward thinking that you have in place to maintain.
Yes.
I mean to get new employees basically.
Add the talent pool.
Once those.
If the housing deficit begins to close.
Obviously.
It's I guess, it's all about the talent pool correct, that's what you're driving for it is.
The short the shortage of where in the workforce right now is something thats painful for everybody, so, which we really strategically spend a lot of time figuring out.
We can either sit back and be like everybody else in and wait for it to.
Hopefully get better or we can start really aggressively moving forward and we decided to aggressively move forward. So we're upskilling and reskilling people. So we're creating.
And group of people, who not only weaken in helping place on for ourselves with our customers. We are helping our customers <unk> their work as well their workers as well.
Okay, and just one last one on <unk>.
Essential services.
Youre seeing a robust pipeline from your customers.
Projects and.
And still maintaining some of the cross selling opportunities that you previously talked about.
Currently we signed more new contracts and adding more logos, which we called the company in third quarter than in the history of the company.
Okay.
Okay, guys keep up the great work.
Thanks.
Thank you.
The next question today comes from the line of Brian <unk> from Alliance Global Partners. Please go ahead. Your line is now open.
Hi, good morning, nice quarter and thanks for taking my question.
First many of the services contract Hey, Brad.
First many of the it services companies talking about a slowdown in growth and budgets are pressuring.
Sorry budgets are being pressured and therefore projects that have been delayed.
The only real area of strength is digital transformation I Didnt hear such comments from you other than you know youre not immune to recessionary pressures. So can you touch on changing the pipeline sales cycles and what are you experiencing any of those trends.
Right now we are not experiencing a slowdown I think the only area we see.
We might have a little bit is indirect higher I think some of your customers are taking a little bit longer to make a decision.
On that but in all the other areas of our business, we're not feeling that and we still have many.
Rfps that are in the works right now.
Great to hear and then can you talk about spreads.
The it staffing side, how are they being impacted and I guess how are they historically had they've been impacted during recessionary times.
Okay.
Well Q over Q spreads in the professional side were up 17%, primarily because of the strategic direction of this shift our model from lower.
Uh huh.
Lower type roles to more consulting type roles and with the addition of momentum solutions, which is a managed service product where we are.
All of our customers through through the whole project base. So that's been the driver of that.
Spread increase as well as the average bill rate.
It is up dramatically.
It is therefore, a shift towards a consulting model.
Great.
Last question is you touched on M&A you also touched on.
Office openings.
Strategic regions, where you want to expand or open up we'll M&A, possibly play a role in that that was office openings.
Not.
Do you expect in the early <unk>.
Timeframe of next year, there'll be a little bit of pressure on margins.
Are you open offices had a business just how do you think about you to note. Thank you so much.
Joe M&A side, what we're focused on the professional side. So it doesn't impact US opening the territories are officers on the real estate side, because that's where the focus is on that.
Alright, okay.
Okay.
We did have we have a robust.
M&A pipeline, we're probably just seeing about 100 deals.
We continue to remain interested in a couple of those.
Sure.
And we fully expect M&A to be.
Part of our ongoing growth model.
Yes.
I think as Beth has mentioned on calls before when we opened the new territory or a new market. If you will for real estate really to talk about that in a salesperson, so theres, no brick and mortar or anything like that and generally.
You can get 10% to 15 people working in three or four month period.
The return on that is pretty quick so.
Understood. Thank you so much.
You bet.
Thank you.
The next question today comes from the line of Jeff Martin from Roth Capital Partners. Please go ahead. Your line is now open.
Thank you good morning, Dan.
Good morning, gentlemen.
Okay.
Hoping.
Beth you could give us.
Maybe some discussion or maybe some key performance indicators relating to your technology investment and Nike roadmap.
I would imagine one of those is yes.
Earnings versus fill rates and trying to fill those sorts of things. It's just was curious what you're experiencing and if you think thats contributing to the nice growth that youre seeing.
I don't think we're saying.
A whole lot of the efficiencies as I've said in the past, we really think that we will start seeing major efficiencies due to the technology in going into the first quarter.
However, I will say that we are seeing efficiencies in the profession with Brexit how quickly that can get things moving.
Moving in the process, so and Theyre doing more revenue with less people than they were a year ago and so we feel like thats positive that the worst of offsetting a lot of the kpis.
And what the growth projections can be and getting the efficiencies remembering we just went live in June we're still in hyper care, which we're hoping to come out of hyper care.
By Thanksgiving and then we really we have a pretty robust kpis dashboard that we are building right now to be able to really kind of see what where we are but to your point. We are doing in our fill ratios time to fail.
What's the sales pipeline that give us how quickly do we close the deal.
Should be able to do some projections and whatever is in the final what percentage, we think will kick out.
So we'll be able to do a lot more financial planning future.
Okay, Great and then I was curious on the professional side, if youre seeing extended.
<unk> duration people are paying.
Got to work on projects that go longer does that increase the visibility of.
The segment.
For a better period of time.
And we do have several long term customers, where we have people that are.
They've outsourced their whole project or their health.
Department to us.
So, but the rest of them are probably in there it's still running in the seven to nine months project range, depending on what the what the implementation or project, we're working on where we are.
So Brian about the way the way we always have.
Okay, Great and then last question on the market and fiber security is a massive labor shortage and cyber security and that's going to be probably a hot segment for many years to come I was just curious if youre doing anything in cyber security now and if that's a focus strategically for you going forward.
We are we do have a lot of security folks that are data security folks that are working within our division one of the other things that we'll be able to get out of our technologies, we're going to start being able to separate how much of the business is and how much of it is an article that work day or service an hour or so.
We do have it is youre definitely right. It is something that everybody talks about it is something that our teams are constantly working on filling and doing a really good job in providing those resources to our customers.
And it is on our own.
Yes.
<unk>.
Yes, it's on our wish list for on the M&A side.
As well, Jeff So as we talk to our partners out there who.
We are in the market on the broker side.
That's certainly we would love to find a cyber company.
Consulting company on the M&A side.
Yeah.
Great Great and then one more if I could.
Entry for real estate in Canada, which just curious how you think about that market in terms of.
Longer term opportunity relative to the U S market.
Okay.
And we're pretty optimistic about the Toronto area, and we're going to see how.
That pans out before we start looking at other provinces in Canada and.
Ed.
All indicators are it.
Should be beneficial for us.
Great. Thanks for taking the questions.
Thank you.
Thank you.
Our final question today comes from the line of Bruce Geller from Keller benches. Please go ahead. Your line is now open.
Hey, good morning, guys. Congratulations on the impressive earnings progress.
Good morning.
Youre welcome.
The question related to the M&A discussion you mentioned.
That earnings multiples are getting a little bit more reasonable which is favorable.
But I am curious how you Jeff.
Just for or address the fact that.
The Feds clearly stated intention.
As to weaken the job market.
In order to get inflation under control.
So is that saying.
Some of the multiples or valuations youre looking at.
Maybe based on.
Inflated trailing earnings which are at risk.
Weakening job market again since that is a clear intent of the fed so how do you adjust for that.
Evaluating potential acquisition.
We do look at that and we try and go in and understand certainly if we get into an active deal.
We spent a lot of time on due diligence to ensure the celebrity certainly of the numbers.
There are still the last number I saw $10 million open jobs out there. So even if you cut that back by 20% and there are still 8 million jobs. So in the world that we work in sort of higher end accounting consulting.
Consulting side, particularly its 60% over revenue unemployment there is less than 2%.
We see demand.
Uh huh.
Continuing as Beth mentioned.
<unk>.
And it's still hard to find resources so.
They've been raising rates for six months now or to our nine months in and we're still signing more logos than we ever have.
Yeah, that's great I appreciate that I, just don't want to.
See situations, where you make an acquisition.
In hindsight it turns out to be based on peak earnings because again.
I mean, the fed stated it very clearly yesterday, they're not going to stop in their mission until the job market weakens and there is a long lag effect, so even though they've raised rates a bunch to now in the market is still strong.
I don't think we can assume that it is.
Going to stay that way indefinitely. So I guess I guess my my concern.
Would be.
Paying for something based on peak earnings and so I just wanted to understand how you adjust for that in your in your acquisition model.
We'll certainly look at it and make sure we're.
We're paying what we believe to be a fair price based on what we see.
And we spend a lot of time talking about the pipeline with potential targets.
Thank you.
Thank you.
Thank you.
Thank you okay.
Daily do we have anybody else.
We do have some more questions here guys.
Question today comes from the line Daryl Davis. Please go ahead. Your line is now open.
Good morning, Dan.
Good morning.
Hey, so I'm going to dovetail on that last question last question was really a forward looking question. This is going to be a backward looking question.
If you look at the light industrial sale early this year.
And then multiple you garner there.
Uh huh.
Multiples are run the marketplace has certainly changed over the past eight months.
You talked about a lot of industrial to market today, what sort of a.
Sort of price do you think you could get and you may not have woken up. This morning, we're ready for that question. So if you have to give me a range big range is much appreciated.
If I had to guess I would probably say that would trade at five to $5 five today. So.
Or does that translate to $1.
So 20% less.
$207 million less so.
Got you very good great.
Great quarter guys.
Thank you Dan.
Thank you.
The next question today comes from the line of Bob <unk> from tax Brothers. Please go ahead. Your line is now open.
Hi, guys. This is Mike I stole Bob's phone first of all congratulations on an excellent quarter.
And I'm looking forward to more of these in the future.
It's all due to the steady steady leadership on your part guys. So my question is.
Another three months into the technology.
And just seeing some results from your technology spend.
Can you put a guess about how much of that came from that this quarter and how much more that I have to look forward to rolling it to the next.
Three four quarters.
Yes, so we were.
We pretty much wrap that up at the end of.
At the end of Q2, we went live with the last piece of that.
At the beginning of Q3, so the big spending if you will created a roadmap is over.
We've forecasted.
Currently we are working on next year's forecast and we have about $2 million in capex relative to probably close to six this year.
For next year for just steady state and enhancements to our current products.
So from a return standpoint.
What kind of returns are we getting.
If we see the return this quarter.
No I think I think Michael we talked about that.
I've mentioned this quarter were in what we're calling hyper care.
Trying to make sure that the product is working as we anticipated fixing.
When you do a massive.
Migration like that there are things you want to fix so we're doing that this quarter fourth quarter. We will look at processes. We expect those efficiencies I think it was as we've mentioned on calls before to begin in early to mid 'twenty three so.
Okay. So no efficiencies in this quarter just expense same thing in Q4.
In early to mid next year, we'll start seeing some return on them.
While we are seeing efficiencies I think I mentioned earlier that we are being we are able to do more revenue with less people and I think part of that is.
A little bit a little bit because of the system, but a lot of it has to do with identifying our processes, because we really had to.
Work on our processes before we went live on the system. So we can make sure and you can put a system in but you don't have a process that works with it you're wasting your money. So we did a lot of work and processes in preparation for the system. So we are doing more revenue with less people. So we are seeing that either.
So this is these are base system Theyre still baby, we're still working on getting all the kpis in place and making sure things are working the way we are getting into.
And I think that we will get more solid data that we'll be able to track in the future but for right now we're just seeing it from our perspective at less people more revenue.
Right, which usually means more money mornings.
[laughter].
So when does it for me.
Okay.
Alright, so what so what's the in the quarter or not I mean, when it's all said and done we spent some money we had a good quarter.
Or choice see significant productivity increases from here.
Which is sort of what Dan said.
But I don't want to try it again, they only care about the number of trying to figure out much more money you can make next year with the listing on a run rate basis.
We expect to see efficiencies and improvements in both the Coa, It's what we call the Coa sort of the operating EBIT line as well as the bottom.
<unk> next year, so yes, okay.
Okay I was going to ask the same question in the next three conference calls Youll see it in our guidance.
Thanks, It was a great quarter.
What the good work guys.
Thank you Sir.
Thank you.
There are no further questions registered at this time, so I'd like to pass the conference over to Beth Garvey for any closing remarks. Please go ahead.
Thank you Balan and thank you for your time today and we appreciate your continued support for the uptake of new on our fourth quarter in a few months.
Good day.
This concludes today's conference call. Thank you all for your participation you may now disconnect your lines.
Okay.
Yeah.