BG Staffing, Inc. (NYSEMKT:BGSF) Q1 2019 Earnings Conference Call May 9, 2019 4:30 PM ET
Terri MacInnis - Vice President of Investor Relations
Beth Garvey - Chief Executive Officer and President
Dan Hollenbach - Chief Financial Officer and Secretary
Conference Call Participants
Jeffrey Martin - Roth Capital Partners, LLC
Howard Halpern - Taglich Brothers, Inc.
Daryl Davis - Private Investor.
George Melas-Kyriazi - MKH Management Company
Thank you for standing by. This is the conference operator. Welcome to the BG Staffing First Quarter 2019 Financial Results Conference Call. [Operator Instructions]
I would now like to turn the conference over to Terri MacInnis, VP of Investor Relations at Bibicoff + MacInnis, Inc. Please go ahead.
Thank you, Savvy. It's my pleasure to welcome you to the BG Staffing conference call to discuss Q1 financial and operating results and the progress report on the company's business strategy.
With me today on our call is Beth Garvey, President and CEO; and Dan Hollenbach, Chief Financial Officer.
By now you should have seen a copy of this morning's press release announcing BG's Q1 financial results as well as the Form 10-Q. If you do not have a copy of either, you can find it in the Investor Relations section on BG's website at bgstaffing.com.
I remind you that this call is being webcast live and recorded. A replay of the event will be available later today on the company'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 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 expressed 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 of Directors and investors about our operating activities and business trends related to our financial condition and results of operations. These not GAAP measures are intended to supplement GAAP financial information and should not be considered in isolation, as a substitute for or as superior to financial measures circulated in accordance with GAAP. For reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please see today's earnings release posted on the company's website.
I will now turn the call over to Dan Hollenbach, BG Staffing's Chief Financial Officer. Dan?
Thanks, Terri, and good afternoon, everyone. We appreciate your interest in BG Staffing. I would like to start again by taking a moment to acknowledge all of our team members at each of our BG Staffing business units for their hard work and dedication to our company's continued success and strong gross profit margins. Their contributions are vitally important and we're very proud of the job they continue to do for us.
As a reminder, BG Staffing provides contingent staffing services within 3 industry segments: our Real Estate segment, which operates in apartments via BG Multifamily and in commercial buildings via BG Talent; our Professional segment, which includes our Finance & Accounting, IT and creative group as well as our Light Industrial segment.
Today, BG Staffing operates 79 branch offices and 17 on-site locations providing services in 44 states. Our 2019 plan was to open 5 new Real Estate offices, excluding the recent expansion into California. And we have already opened 4 plus our first location in California. Beth will talk more about our recent entry into California in her remarks. After my review of our financial results, I'll turn the call over to Beth for her comments on the quarter just ended and our company's strategy, execution and outlook on current industry condition.
Our consolidated revenues for Q1 2019 were $68.8 million, up 2.9% from Q1 2018. Gross profit increased $1.1 million or 6.5% with gross profit percentage of 26.8% up from 25.9% in Q1 of '18.
Gross profit percent was up in all of our segments Q-over-Q, and this continues the string of quarterly increases in gross profit percent. While Q1 is typically our softest period due to seasonality in our Real Estate and Light Industrial segment, we were also impacted by weather in all of our segments.
Net income for Q1 2019 was $2.5 million, up slightly versus Q1 '18 and diluted earnings per share was $0.24 versus $0.27 in Q1 of '18. Customer sentiment remains positive and demand momentum was steady as we moved sequentially from Q4 into Q1 of '19.
Now turning to our segment results. Our Real Estate revenues, which continue to be from organic growth, increased $1.1 million or 6.3% to $19.2 million as we continue to scale this highest-profit margin segment of our business. Gross profit increased $507,000 or 7.4%. Gross profit percent was 38.5% for 2019, up from 38.1% for the same period in 2018. Operating income increased 8.2% to $2.8 million. Talent contributed $300,000 of the revenue increase, and Multifamily contributed $800,000. Today, Multifamily operates 49 offices and Talent has 6 offices, together servicing 28 states. Professional revenues for the quarter were $30.6 million, a decrease of $0.5 million or 1.6% compared with 2018. The revenue decrease was due to decreased volume in our IT group. Finance & Accounting was flat even with an $800,000 decrease from 1 client partner in 2019 versus 2018, a client we've discussed in previous Qs. While revenue decreased, gross profit increased $411,000 or 5.2%. Year-to-date gross profit percentage for the Professional segment increased to 27.1% from 25.3% in the prior year. Our operating income decreased 19.1% to $1.8 million.
Light Industrial revenues increased $1.3 million to $19 million or 7.2% versus 2018, outperforming the industry expectation. Gross profit increased $211,000 or 8.2%. Light Industrial gross profit percentage was 14.6% compared with 14.4% for the prior year period. Operating income increased 13.9% to $1.2 million.
Turning now to selling expenses, which increased approximately $1.1 million or 10.8% over 2018 due to continued expansion in the Real Estate segment, including $112,000 attributed to new offices and accelerated office openings in '19. As mentioned, we have 5 set to open and we've already opened 4 in the first quarter. Professional segment increased - expenses increased $746,000 or 17.1% primarily result of compensation adjustment in our commission plan driving higher-margin business. We continue to review our compensation plan. Light Industrial segment increased $91,000 or 6.5%. G&A expenses increased $273,000 or 16.8% due to increased spend in our IT and HR support units, and Beth will discuss both of these strategic initiatives in her remarks. G&A expenses were 2.8% of revenues in Q1 of '19, which compares to 2.4% for the first quarter of '18.
Our effective income tax rate was 22.8% for 2019 compared with 22.1% for 2018. And we currently estimate a 22.8% effective rate for the rest of the year.
Cash provided from operations increased $1.8 million over the same quarter in 2018. We continue to generate robust operating cash flows as a result of our strong balance sheet, effective working capital management and solid earnings, allowing us to reduce debt, invest in technology and while at the same time, returning capital to our shareholders in the form of a regular quarterly dividend currently set at $0.30 per share and approximate yield of 5.5%. BG Staffing has now paid the dividend for 18 consecutive quarters.
Our current debt to adjusted trailing 12 EBITDA is 0.71%. Adjusted EBITDA for the quarter was $5.2 million or 7.5% of revenues in 2019 compared with $5.5 million or 8.2% of revenues in 2018.
We believe that adjusted EBITDA is useful performance measure and is used by us to facilitate comparison of our operating performance on a consistent basis from period to period and to provide 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. Additionally, the financial covenants in our credit agreement are based on adjusted EBITDA. Reconciliations of adjusted EBITDA to net income or available in our latest quarterly report on Form 10-Q and our earnings release, both of which are available on our website.
Now I'd like to turn the call over to Beth.
Thank you, Dan. Good afternoon, everyone, and thank you for joining our discussion today. Our first quarter operating results, particularly revenue and gross profit growth coupled with the promising runway before us, support my confidence about the remainder of 2019. The staffing industry outlook for 2019, subject to normal seasonal pattern, is optimistic and the present economy and labor market remains positive for staffing overall. Strong customer demand continues to fuel our success and is led by solid operational performance by our management teams in the field. We are proud to have reported 26.8% consolidated quarterly gross profit, our eighth consecutive quarter with consolidated gross profit percentages in excess of 25%. We believe that our historic strong and steady revenue growth continues to benefit from our laser focus on the strategic priority of growing returns, which benefits our shareholders with sustained value creation. Our focus remains on achieving increasing margins, which we continue to do through focused operational discipline, organic growth initiatives and selective value-creating M&A. Our goal is to seek acquisitions primarily in the Professional segment that will expand our footprint into new geographic markets or provide a skill set that helps to complete our talent offering puzzle. We feel this provides an ease of use for our client partners offering a total solution to their staffing needs. We are a disciplined acquirer and our pipeline remains very full and active. Each and every week, we evaluate opportunities for accretive businesses that we believe will complement both our existing market exposures and our diversification strategy. In addition, it strengthens our cross-sell efforts around the country as this effort continues to build momentum with 5% of our organic growth in Q1 coming from cross-sell.
On the operational side of our business, we've made meaningful progress in Q1 on our 2,319 [sic] [3 2019] initiatives, which as a reminder were getting into California, technology enhancements and culture. So starting with California, I'm happy to announce that in Q1, our Real Estate BG Multifamily division entered the California market, which is the largest U.S. apartment market with 6.8 million units in the state.
In addition, our IT division secured its first start in California with a start date of next week. As discussed last quarter, we brought on a new CIO at the beginning of the year. With his help, we have developed a technology road map focused on 3 things: reduced cycle time to fill orders and onboard talent, improved operational efficiencies through automation, scalability and securing leveraging - and security-leveraging cloud solutions. The investment is meaningful and is expected to leverage new technologies for efficiencies, drive incremental revenue, boost overall performance and increase talent and client loyalty. By focusing on making it easy for our new talent to acquire and onboard, we are going to improve our ability to fill our customers' orders faster with the best candidate available. We are putting technology in place that responds to feedback from recent surveys of both talent and client who want ease of engagement along with speed.
We've identified opportunities for improvement in our operations teams by automating routine tasks, such as payroll fund for collection, candidate prescreening and consolidating on middle-office systems from prior acquisitions. The time we save by eliminating manual and duplicate data entries will allow future growth while leveraging operational efficiencies.
Finally, by utilizing proven cloud-based technologies for our communications and data centers, we will improve our ability to scale quickly, improve analytical data and reduce risk of downtime and emergency - emerging security threats.
We presented the road map at our recent board meeting and received approval for a 3-year estimated spend of $9 million of which approximately 50% will be capitalized and 50% will be increased operating expense. Before any operational efficiency, this could impact diluted EPS by $0.06 per quarter for the next year and $0.04 in year 2 of implementation.
Some of our larger competitors have already begun this initiative with one reporting recruiting efficiencies of 11%. While these are important tools to help our company grow, we focus our attention on the fact that we are in the people business. While technology enhances the process, recent candidate surveys tell us that speed mixed with personal interactions from our teams would result in the most engaged talent resource.
Company culture remains a priority for us as well. Our goal is to attract the best in the industry, and we believe that a strong culture that supports the work-life balance and engages the team in overall direction of the company builds the stronger organization.
With that said, we thank you on completing our first ever strategic plan. Although there were many pieces to the process from interviewing client partners, field talent and our team associates, we were able to identify areas of growth for our teams through financial segmentation of the business. The outcome resulted in divisional scorecard with road map to the overall company goal allowing the organization to see the road map for the future. I'm so proud that we play a role in contributing to the livelihood of more 3 million temporary and contract workers who work in American staffing companies during an average week. In 2018, BG Staffing averaged 6,600 pay checks a week, resulting in paying close to 30,000 people. Not only are we in the people business but we're in the purpose business as it all begins with a job.
For the remainder of the year, we'll continue to proactively identify areas across all segments in which we can provide additional staffing services, and we will continue to invest in these incremental growth and - activities. We anticipate revenues from cross-selling, our entry into California market as well as technology enhancements will be needle-moving initiatives in 2019 and beyond.
And now I'd like to turn the call back over to the operator for the Q&A session.
[Operator Instructions] Our first question comes from Jeff Martin with Roth Capital Partners.
Beth, I was wondering if you could elaborate on that last comment, your first ever strategic plan. What were some of the high-level things that came out of that? And over what time frame do you expect to start to implement some of those things?
We put it together - we kind of ended that getting our results back towards the end of April. And we put together a 3-year plan on how that would run - work for us. Technology being the biggest piece of that, the rest of the organization kind of will run through some operational efficiencies and being able to go in and build a road map for people to have a plan for growth within the organization. But truly, we feel like it's going to be in the third quarter when we start to see some results from technology. As we unfolded everything, we really realized that's where the majority of the attention needed to go. So we see results coming in Q4 - or Q3.
Yes. One of the biggest tools we got from it, Jeff, was the ability. So we did an NPS study, if you're familiar.
NPS. Net Promoter Score.
Net Promoter Score study. And we now have a tool where we can link the Net Promoter Scores with the profitability of our customers and tell our operational people where to target those customers who not only are profitable but also love us, which, of course, are all our customers. But we can now segment them literally into 9 different sectors. If nothing else, that was one of the best things we got out of it
It sounds encouraging. I was wondering if you could elaborate a bit on the California market entry in terms of opening the first office. I believe you said that's kicking off the first engagement next week? What are some of the lessons learned in the process of - even that's very early, but some lessons learned to this point and any expectations in terms of maybe 4 or 12 months, what kind of contribution you're expecting from that market?
I will say that we put together California task force and they were quite amazing. So we brought on a new HR person in January as well as our new CIO. All of the efforts put were going into getting into California in a safe way from a compliance perspective. We entered with Multifamily at the end of March and as of this morning, they had 5 people out working and then the IT division has their first person actually supposed to start tomorrow. We feel like that this is going to be such a huge opportunity for us. We have had many, many of our current property management companies - if you recall management companies own several properties across the U.S. So we've had many management companies wanting us to go to California. So we spent a lot of time getting the word out that we're there. So we feel very encouraged about the fact that when people are asking me to be there, we see the growth is going to be quite strong for us.
A little too early probably to gauge growth, may have a little better idea 3 months from now.
Okay. And then in regards to the Real Estate segment in general, about the 50.3% year-over-year in the first quarter. Would you characterize that as up against the tough comp which was up almost 38% year-over-year in Q1 last year? And where do you think that growth potential - what level of growth are you expecting from Real Estate? I was thinking it'd be more in the 10% to 15% range.
We actually had 7 markets that were without a salesperson in Q1. That was unusual for us. So that - we are now fully staffed in that area. So that kind of led to some of the downturn from what we expected. I think that your projections of what you thought are probably safe. We do know that they had struggled with getting some of the markets covered.
And what is that due to? Is that attrition related or is that new offices - some of them might be new offices where you haven't staffed them yet. Help us understand why 7 markets would go without a salesperson.
Some of it was promotions that we had some turnover where we gave people an opportunity to move to a different market which left the market uncovered. So we still were able to fill jobs from the recruiting hubs that we had, but we didn't have active salespeople for a period of time. So the other part was even - as Dan said, we did escalate our openings for Multifamily in the first quarter. So we opened 4 already and we only have one more left for this year that was part of our budget, so that was part of the picture as well.
Our next question comes from Howard Halpern with Taglich Brothers.
Congratulations on nice solid quarter to start the year. The 4 openings and the entry into California, that is really - at least on the Real Estate side, that should impact top line results in the second half of the year. Is that correct?
Yes. Second half of the year particularly and probably more so into the first quarter and second quarter of next year.
Okay. And in terms of you talked about the impact of executing you technology road map plan and such. When is that really going to kick off? And could you talk a little bit about how it might ramp at least in the first couple of quarters?
Yes. We had a little bit of spending in the first quarter, that and building our infrastructure in the HR side had a little bit of impact on earnings per share number. As I said, we got approval last week. Our IT CIO is in the process of putting together the project, sort of, map and when we're going to start those. So we would expect pending on that to begin probably within the next 2 to 3 weeks. We do have 2 resources in here now that has started that, what we call, the middle-office sort of infrastructure build. We call it source of one truth, which will be our database for extracting management data.
Okay. And in terms of the Professional services, gross margin is really good in the first quarter. Is that general area above the 26% into the 27% sustainable going forward?
We think so. We've been pushing our sales force and recruiters to fill higher margin. We instill them to fill higher margin and we're getting a little bit of a boost because our perm placement market remains very positive. And we don't - with 2.5 million more job openings in the fillings going on right now, we don't see a softness of that now.
Okay. And one last one in, I guess, the Commercial Real Estate. What is, I guess, the run rate for the year? And is it really going to be more in the second half of the year that we'll see impact of the revenue in that division?
Yes. Based on - their current run rate is $5 million plus-ish. So yes, I think we'll continue to see an uptick in that as it gets more mature and as that market - that group does a better job of educating that market in what we do.
Our next question is from Daryl Davis, a private investor.
So congrats on another great quarter. As we've seen from so many of your domestic peers this earnings season, it's common to extend your gross margins in '19, but it is uncommon to grow top line organically. Well, you did both, so way to go.
Shifting from BGSF, so shifting from micro to macro, let me ask both of you first in context on the tightness of the labor market, hopefully you're comfortable giving macro opinions here. And I'll read this so I don't forget anything. Over the decades, cyclical companies like those in the staffing industry see substantial swings in valuations based on where we are in the so-called economic cycle. For valuation, similar to what we've seen in the staffing industry has battled with since last summer, our sensible investors' feared pending recession in cycles past. I've seen staffing companies slow their revenue growth in the latter portion of the expansion and into recession caused primarily by depleted demand, but that is not what's going on today. Today, we have slow and negative growth for staffing companies caused by depleted supply. Has the leadership team of BGSF seen anything comparable to this situation historically? Personally, I don't see an imminent recession but that is a very hard event to sense. I sense an incredibly hot job market with low inflation and improved productivity which spells a continued expansion in my book. Yet investors and staffing companies price the industry as if we are closer to a pacifist van and extension. By the way, I'm not complaining about that. Again, do you have any experience with similar circumstances historically? What are your macro thoughts and, of course, your macro thoughts can play a big role when contemplating acquisition?
Wow, that's a lot. We would agree with you immensely on the fact that we are not feeling a softness in market. Demand is incredible. Both our Real Estate, our - all 3 of our segments run with unfilled orders because of talent acquisition walls, I would call it. So - and as we go to the industry events over the last 3 or 4 months, it's the same thing. Talent acquisition and keeping up with technology are the biggest hurdles that all of us are facing. So we live in that world of either too many people and not enough orders or lots of orders and not enough people, and fortunately for the industry, we're at that other side of lots of demand and talent acquisition shortage. There is a slide that we used in our investor that shows open jobs versus filled jobs and that's what I mentioned earlier. There's currently 2.5 million difference between job availability and job filling.
Yes. And that was just guided at the end of April. So it's the biggest gap ever.
So people are working today. They either can't work, don't want to work or they're in the wrong place. And - because there's job opportunity for them. So - but you're right. The industry, as a whole, when there's a hint of a slowdown or a recession, gets taken to the cleaner.
So what - so, listen, I'm not complaining at all about the lack of acquisition. I trust your judgment and I don't want you to overpay. But is it the case that insiders in the industry who would otherwise sell their companies see the hot job market and they're asking for too much or investors like me here at the inlet recession, we price it too low. Is that delta happening?
We've seen a couple of - the demand at a premium, we passed on those. But I think we mentioned, we saw 99 opportunities last year. Someone with we talk more deeply, about a few of them, someone were priced what we considered to be reasonable with multiples that we've paid in the past and someone were at a premium to that and we've elected not to go that route. So...
I ran into someone in an event not long ago who has Light Industrial and he has got people talking to him at 7 times. And I was stunned that you could - that anybody would talk to him for 7 times. So I think to your point, there are people that are willing to do it, but we aren't going to be one of them.
Our next question comes from George Melas with MKH Management.
I think Beth, you talked about the increase in IT spend over the next 3 years. And I just want to make share I understood the numbers and maybe I can ask some - a little additional color. Did you say that it was $9 million over 3 years?
Okay. Great. So it's roughly $3 million per year or is it spread equally among those 3 years? Or is it...
It's more front-loaded, so we feel year 3 will get the major people getting in the training aspect of it. So it is more front-loaded.
Okay. Okay. And how much are you spending right now on IT? And that incremental spend, can you sort of break it down into - is it - some of it is going to be customer software development or you're purchasing various applications? Trying to understand where you think that $3 million is going to go.
Yes. So there's internal development, there's external software purchases, that's the CapEx part of it. And then there's bringing in resources to help develop processes and procedures around managing all of those projects. Because we've identified - what is there?
23 different projects that need to occur over the next 3 years primarily in the next 2 years, if we want to stay competitive in this market. So to give you an idea, in year 1, the total of the $9 million is - about $5 million of that will be spent in the first year, about $3.7 million in year 2 and $1.2 million in year 3. Hopefully, that adds up to $9 million. We currently spend $1 million plus in our IT and our current CapEx budget is about $1 million a year. Part of that will be diverted over to cover this - the CapEx side of this. There were things in there that we won't need. For instance, we had money budgeted for servers and we're going for the cloud, so we won't have to spend that money so. Does that help?
This concludes the question-and-answer session. I would like to turn the conference back over to Beth Garvey for any closing remarks.
Thank you, operator. And thanks to all of you for joining our call today. I look forward to reporting our progress to you as we continue to drive forward our 3-year goal of generating $500 million in revenues with 10-plus adjusted EBITDA. Have a great afternoon. Thanks.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.