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Operator: Good morning, everyone. Welcome to the BGSF Fiscal 2023 First Quarter Financial Results Conference Call. After the speakers’ remarks, there will be a question-and-answer session. As a reminder, this conference call is being recorded now. I will turn the conference call over to Sandy Martin, Three Part Advisors. Please go ahead.

Sandy Martin: Thank you. Good morning, and welcome to the BGSF 2023 first quarter earnings conference call. With me on the call today are Beth Garvey, Chair, President and Chief Executive Officer; and John Barnett, Chief Financial Officer. After our prepared remarks, there will be a question-and-answer session. As noted, today’s call is being webcast live. A replay will be available later today and also archived on the company’s Investor Relations page. Today’s discussion will include forward-looking statements, which are based on certain assumptions made by BGSF under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including those listed in the company’s filings with the Securities and Exchange Commission.

Management’s statements are made as of today and the company assumes no obligation to update these statements publicly even if new information becomes available in the future. During the call, management will also reference certain non-GAAP financial measures, which can be useful in evaluating the company’s operations related to the financial condition and results. These non-GAAP measures are intended to supplement GAAP financial information and should not be considered as a substitute. Reconciliations of GAAP to non-GAAP measures are provided in today’s earnings press release. I’ll now turn the call over to Beth Garvey. Beth?

Beth Garvey: Thank you, Sandy, and thank you for joining us today for our first quarter earnings discussion. In late April, we announced our acquisition of a Royal Consulting. I’m excited about the strategic and high value addition to our offerings. We believe that Arroyo strengthens our go-to-market cross-sell efforts by providing current and future clients with cost-effective alternatives through nearshore and offshore IT resources, extending the GSF delivery platform to include Latin America and India add strategic capabilities and expands our IT talent recruitment reach as well. Our teams are working well together and we believe that adding these deeper specializations and global reach were a strategic imperative and we are encouraged by our clients’ responses to the addition.

Turning to our quarter results. First quarter results were in line with our expectations for both professional and real estate. As you can see in our release, the Professional segment benefited from incremental revenues related to our acquisition of Horn Solutions and we are excited about the cross-selling and expanded wallet share opportunities it will provide. We are cycling against tougher sales comparisons this year as our team is highly focused on pricing spreads and overall cost structure as market dynamics evolve. Since the fourth quarter of last year, we have seen longer decision time frames in the selling cycle, which impacts our professional side. However, we continue to see solid demand for ERP and cloud migration services and importantly, we have consulting and managed service specialties in top enterprise wide technologies.

Today, we reported revenue of $75.3 million, up 9.9% and we also expanded gross margins to 35.6%. Delivery margin expansion was at the core of our professional growth strategy as we journey from a staffing company to a high value consulting and managed services business, delivering expertise to our clients, while also maintaining our solid margin profile in our real estate sector. Now I will turn the call over to John. After he covers our financial results for the quarter, I will come back and discuss our 2023 business outlook and provide comments on our strategic initiatives for this year. John?

John Barnett: Thank you, Beth, and good morning, everyone. As Beth mentioned, we completed and announced the acquisition of Royal Consulting on April 24. The purchase price was $8 million and provides for earn-out payments up to an aggregate of $8.5 million based on agreed upon performance targets. We funded $6.8 million of the acquisition price at closing with a total of $1.2 million held back related to working capital adjustments and partial security for any outstanding seller obligations. We will be thrilled if we pay the all-in purchase price of $16.5 million. Turning to our first quarter results. Total revenues were $75.3 million. The Real Estate segment was up 9.6% compared to the prior year quarter, and the Professional segment increased 10.1%, which included incremental revenue from the Horn Solutions acquisition that closed in December of last year.

Excluding Horns Solutions, the Professional segment was down 5.9% compared to the prior year quarter. As we signaled last quarter, professional revenues experienced headwinds due to fourth quarter project ends and lengthening time lines related to budgets and new project starts. That said, project starts in the Professional segment began to rebound in late first quarter. We believe that companies in general will prioritize capital spending on ERP implementation and cloud migration work, which aligns with our specialization. As Beth mentioned, total revenues for the first quarter met our expectations, especially given the tougher comparisons in 2022. As a reminder, starting in the first quarter of ’22, sales were up 38% over the prior year and continued with strong increases of 29%, 22% and 14%, respectively, in quarters two, three and four.

First quarter gross profit margins expanded by 140 basis points to 35.6% compared to the prior year quarter. From a segment perspective, Professional grew 130 basis points to 32.9% and Real Estate was up 150 basis points to 39.9%. The margin increase in the Professional segment was entirely driven by the addition of Horn Solutions, which has a higher gross profit margin profile than the existing professional business. SG&A expenses for the first quarter were $23.2 million, up $3.5 million. Of the $3.5 million, selling expenses were $2.7 million of the increase, of which Horn Solutions selling expenses were $2.2 million. As previously mentioned, Horn Solutions has a higher gross profit margin than the existing professional business. Horn Solutions also has a higher selling expense as a percentage of revenue.

Transaction costs were approximately $300,000 in the quarter and the remaining increase represents investments in people and technology. As we messaged last quarter, operating results for the first quarter included a non-cash charge related to the rebranding and subsequent intangible asset impairment of trade names that we used in the business. During the first quarter, we wrote-off trade name intangibles of $22.5 million, which negatively impacted net income by $16.9 million or $1.58 per share. Our non-GAAP adjusted measures for EBITDA and earnings per share exclude the impact of acquisition amortization, the trade name impairment charge and acquisition transaction costs. Adjusted EBITDA for the first quarter was $4.3 million compared to $3.9 million in the prior year quarter.

Adjusted earnings per diluted share was $0.16 compared to $0.23 in the prior year quarter. The difference in adjusted earnings per share is largely driven by higher interest expense in the current quarter related to Horn Solutions acquisition financing and higher interest rates. At the end of the first quarter, accounts receivable totaled $62.5 million with days sales outstanding remaining consistent with the end of last year. Our working capital ratio strengthened from 2.7 at year-end to 2.9 and our leverage ratio of funded debt to trailing 12 month pro forma adjusted EBITDA was 2.6 times. We returned capital to shareholders in the first quarter via a cash dividend and announced our 34 consecutive cash dividend late last week. And with that, I will turn the call back to Beth.

Beth Garvey: Thank you, John. Last quarter, we talked about our four strategic initiatives for 2023, which included M&A growth, the rebranding project as well as process improvements and shared services, which I will address more fully on future calls. I’m pleased to report that the branding of all our trade names to BGSF is well underway. We believe that one brand voice may enhance our brand power, but even more importantly, we believe that it cuts out confusion in the marketplace. Going to market as BGSF, a single brand platform should be an enabler as we continue to expand our offerings on a global stage. The cost to transition to a single brand is minimal. We continue to move forward with our technology efforts. Moving from our go-live with a minimal viable product focused on payroll and billing into operational enhancements to benefit the sales and recruiting sides of our business.

Commenting on our recent acquisition activity, we are pleased and excited about our recent transactions with Horn Solutions and the Royal Consulting. Both were cultivated over time and fit well strategically with our acquisition criteria, meaning the cultural and capabilities were right as well as the right financial profile. We will continue to proactively search for deals that are accretive, add to our client base, talent resource footprint and/or expand our expertise. The pipeline continues to be active and M&A remains an important component of our long-term growth strategy. Based on our outlook for 2023, we expect to continue to see normalization of our revenue seasonality. First quarter is typically a low point for a revenue standpoint for a normal year, and we are starting to see consulting projects ramp in the second quarter.

Real estate is expected to grow this year and we anticipate some macro headwinds on the professional side, but expect our high value consulting business practices and managed services to be resilient and grow in 2023. Finally, as John mentioned, we are up against difficult comparisons in the second quarter with revenues up 29% last year versus 2021. We remain realistic around the growth rates and we’ll carefully manage expenses to align with our business growth. With that said, we can open the call up for questions. Operator?

Operator: Thank you. With our first question comes from Howard Halpern from Taglich Brothers. Howard, your line is now open.

Howard Halpern: Congratulations. Nice start to the year, guys.

Beth Garvey: Thanks, Howard.

Howard Halpern: In terms of the recent acquisitions, the recent acquisition of Arroyo, could you talk a little bit more about, I guess, their gross margin profile? And if there’s any — if there tends to be any seasonality in their business?

Beth Garvey: And they — their gross margin profile is pretty in line with where we are in the rest of the business. And as far as what we expect from them, there’s not really seasonality. These are really project driven type assignments that are pretty consistent. So we haven’t seen any seasonality in there.

Howard Halpern: Okay. And with that acquisition and the Horn acquisition, you talked a little bit about cross-selling. What type of activity has just started and what type of goals do you have over the next 12 months to 18 months to, I guess, educate your own client base and what you could do for them?

Beth Garvey: I think from the Horn Solutions perspective, they have a lot of accounting financed managed services offerings, which we didn’t have before. And so those are things that actually fit very well into our profiles as we go in and implement an ERP system on the tech – on the IT side and then move it over into the accounting reporting side. So that’s a very good fit for us from a cross-sell perspective. And then in regards to Arroyo, there — we’ve had customers for several years and really more so recently ask us for nearshore/offshore and capabilities so that they can get cost effectiveness out of it. And so this has been highly – what’s the right word, popular with what our — when we’ve gone to market just in the baby two weeks we’ve had it now. So there is a lot of energy around the fact they want this business out there. So our customers are already very pleased that we made that acquisition.

Howard Halpern: Okay. And within the real estate segment, the growth that you’re seeing, is it — is it from expanding within your existing customer base or are you — or new customers? What kind of breakdown, I guess, would that be between that is propelling growth in that segment?

Beth Garvey: Our customer base pretty much remains consistent. There’s a lot of buying and selling. So we are seeing some things where one of our customers got bought by another customer. And so there’s movement in those areas. But there’s still relatively the same customers that we have. But the growth is really around the markets that we opened, starting to get some traction as well as we’ve talked about in the past that there’s markets around the U.S. that are starting to really start to rebound the way they want — they were pre-COVID. And then there’s other markets that are a little bit slower to react. So you can’t lay a blanket statement across the real estate as a whole segment is coming back. It just depends on where the markets are and what they’re doing.

Howard Halpern: Okay. And just one final one for me. With the Royal acquisition, will there be a little bit of a bump up in G&A costs, transaction-related costs from Arroy in Q2?

John Barnett: There will be some costs in Q2.

Howard Halpern: Okay. Congratulations and keep up the good work guys.

Beth Garvey: Thanks, Howard.

Operator: Thank you, Howard. We have our next question comes from Jeff Martin from Roth MKM. Jeff, your line is now open.

Jeff Martin: Thanks. Good morning, Beth and John.

Beth Garvey: Good morning.

Jeff Martin: The Royal transaction appears highly strategic. I want to get a sense of the potential to scale that business, I would imagine if you’ve got strong demand from your clients, and they’ve been asking for it for years. You’re probably going to have a lot of demand there. How do you see the growth potential for Royal and how easy is it to scale that business?

Beth Garvey: Well, I had the benefit of I just returned from Colombia to visit with the partners down in Latin America. And they have got a model that allows them to be able to train people up pretty quickly. So we are being very strategic on how we go roll that out so that our customers are calling wanting the business, but we have to make sure that we successfully grow the business at a pace that is successful for everybody. But they do have people in the wings ready to go and our customers — our professional team right now is in the process of getting ready to do an introduction and sales lift across our current customer base in the next couple of weeks to talk and introduce a Royal to the client base we have right now. So again, it’s going to be a balancing act, but the initial out of the gate comments that we’ve had from customers has been extremely positive.

Jeff Martin: Okay. Great. And then you mentioned you’re seeing good demand in ERP, consulting and managed services. What percentage of the business, given you’ve layered in Horn recently and what percentage of the business does that represent of the Professional segment?

Beth Garvey: We don’t have that track. We don’t have it broke out that way, Jeff, at the moment. I know that there’s some efforts in trying to be able to start to push those things out as we get more involved in our system. But right now, we don’t track to invite up of what the offerings are.

Jeff Martin: Okay. And then you touched on it a little bit in your prepared remarks in terms of finance and accounting side of professional projects coming back on starting up in terms of just pure finance and accounting, what’s your outlook in terms of year-over-year growth or comparisons as we progress throughout the year for that part of Professional?

Beth Garvey: I believe they’ll stay in line with what our industry is saying. John and I were just talking this morning about whether or not our industry has reset what the growth expectations are. So I haven’t had a chance to go in and look what they are, but we do expect them to stay in line. There will be some growth in them. But I don’t know if it will be at the pace we originally thought it was going to be at the beginning of the year.

Jeff Martin: Okay. Great. And then based on comments over the last couple of calls on the real estate side of the business, the commercial has been a bit more choppy and isn’t necessarily right for growth currently and maybe just give us an update on where the commercial side of your real estate segment is tracking?

Beth Garvey: I think they’re still where they have been. I mean, the — again, it’s pockets, pockets of success, but it just depends on the market. I know that they have slated to try to open two new markets this year on the commercial side of real estate, but we’re seeing consistency with what we’ve had talked about in the last couple of quarters.

Jeff Martin: That’s it for me. Thank you.

Beth Garvey: Thanks, Jeff.

Operator: Thank you, Jeff. We have no further questions on the line. I will now pass back to the management team for closing remarks.

Beth Garvey: Thank you all for your time today and we appreciate all of your continued support. We look forward to updating you on our second quarter results in a few months. Have a great day.

Operator: Thank you. Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.