BGSF, Inc.

Thank you for standing by. This is the conference operator. Welcome to the BG Staffing Q1 2020 Financial Results Conference call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need any assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Terry McInnes, VP of Avista Relations at Biblicoff and McInnes, Inc. Please go ahead.

Thank you, Taylor. It's my pleasure to welcome you to the BG Staffing Conference Call to discuss Q1 financial and operating results and an update on operations in the COVID-19 environment. With me today on our call is Beth Garvey, President and CEO, and Dan Hollenbach, Chief Financial Officer. A question and answer session will follow their prepared remarks. This morning's news release announcing the company's financial results, as well as the Form 10-Q, are available in the Investor Relations section on BGSS' website at bgstacking.com. Our call today is being webcast live and recorded. A replay will be available later today on the company's website and will remain available for at least 90 days following the call. Discussions today include forward-looking statements, which are based on certain assumptions made by DGSS 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, in the quarterly report on Form 10-Q filed today, 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 DGSS 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 express written permission. During our call, we will discuss some non-GAAP measures, which we use for internal evaluation and to report the results of the business as useful information to management, our board of directors, and investors of our operating activities and business trends related to our financial condition and results of operations. These non-GAAP measures are intended to supplement GAAP financial information and should not be considered in isolation as a substitute for or is superior to financial measures calculated in accordance with GAAP. For reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please see today's news release and Form 10-2 posted on the company's website. It's now my pleasure to turn the call over to Dan Hollenbach, Chief Financial Officer. Dan?

Thank you, Terri. Good afternoon, everyone. We appreciate your interest in BGSF. In these unprecedented times where everyone is impacted by the COVID-19 pandemic, our heartfelt thanks and appreciation to each and every member of our extended BGS family have even deeper meaning. Their invaluable contributions made our swift and successful response to the pandemic possible, allowing us to keep everyone safe, to work remotely, and to continue to provide the highest level of service and support to our stakeholders and our shareholders alike. When we reported our year-end results in March, we noted that the impact of the COVID-19 outbreak on the labor market with Japan, among other things, on the length of time it disrupts the economic activity. While Q1 results were in line with our expectations, we started seeing the first COVID-19 impact the last week of March as overall revenue dropped 15% from pre-COVID-19 levels. As a result of these workforce trends and the continuing social distancing and shelter-in-place orders, We took actions in late March to reduce actual and planned operating costs by approximately 10% compared with pre-COVID levels. These actions included eliminating all travel, client visits, meals, and entertainment, as well as conferences and associated events, implementing a hiring freeze, laying off lower-performing team members, and delaying the start of any new IT roadmap initiatives. In April, the first month of Q2, overall revenues had declined 26% from pre-COVID-19 levels. We had significant revenue declines in the real estate and light industrial segments of 54% and 26%, respectively, while the professional segment revenue was down 11%. Early in Q2, we also took steps to fortify our balance sheet and liquidity, including funding $4 million on our term loan and reducing our revolver balance, delaying non-essential capital expenditures, increasing emphasis on our liquidity forecasting, stricter compliance with vendor payment terms, and our election to delay the payment of the employer's share of Social Security under the CARES Act. To further preserve near-term liquidity, our Board of Directors has temporarily reduced our regular quarterly cash dividend to $0.05 per share from its normal $0.30. While return to shareholders remains an important part of our capital allocation framework, maintaining a strong balance sheet right now is primary. Also under the CARES Act, we may qualify for the employee retention tax credit, which is a fully refundable tax credit equal to 50% of up to $10,000 of qualified wages paid to team members. We are currently gathering the information necessary to utilize this credit. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, and local authorities, or that we determine are in the best interest of our stakeholders. It's too early to gauge the continuing impacts from disruptions to the labor market and business operations, and we can't know the full impact on our financial condition or results of operations. What we can do and what we are doing is stay close, stay in close regular contact with our team members and our client partners while carefully monitoring and managing this fluid situation. And now for our numbers. Revenues for Q1 2020 were $74.1 million, up 7.7% from Q1 2019, while gross profit increased $1.8 million, up 10%. Our gross profit percentage was 27.4 versus 26.8 for the first quarter of 2019. The increase in revenues was fueled by a 4.4% growth in real estate and $6.9 million from our two recent acquisitions. Net income for Q19 was $1.5 million, or $0.14 per diluted share, with a net income of $2.5 million, or $0.24 per diluted share, for Q1 2019. On a comparative basis, Q1 this year was impacted by transaction fees and IC roadmap expenses, $979,000 greater than last year, as well as an effective tax rate of 31.9% in 2020 versus 22.8% last year. Adjusted EBITDA for Q1 of 2020 was $5.27 million, slightly higher than $5.16 million in 2019. Adjusted EPS in 2020 decreased to 28 cents, versus $0.31 in 2019, primarily due to the higher tax rate. Our SG&A expenses for the year increased approximately 2.6 million, or 19% over 2019, due primarily to our two acquisitions, which added $1.9 million of selling costs, $520,000 higher transaction fees, and $459,000 related to the IQ Roadmap Initiative, which we started in Q2 last year. A breakout over SG&A is included in the management discussion section of our core report on Form 10-Q. Although we have delayed new initiatives on the IT roadmap, we continue to spend on projects that were active as we feel they are critical to our success in the short term. We anticipate the impact of this spending on remaining 2020 earnings per share of approximately three to four cents per quarter. Our higher effective income tax rate for 2020 is primarily due to the non-deductibility of transaction costs related to the EDGROC acquisition and a higher state tax rate. We are currently estimating 26% effective rate for the remaining periods in 2020. We continue to generate robust operating cash flows as a result of our strong balance sheet, effective working capital management, and solid earnings. Cash generation operations increased 1.3 million over Q1-19. Our debt to pro forma adjusted trailing 12-month EBITDA at the end of Q1-2020 was 1.64. Day sales outstanding at the end of March was 50 days, in line with the industry. However, we have seen a deterioration during April to 58 days, a slowdown we anticipated. Explanations of our use and reconciliations of adjusted EBITDA to net incomes as well as adjusted earnings for shared and net income for diluted share, are available in our latest quarterly report on 10Q and in our earnings release, both of which are available on our website. This completes my financial review. Now I'll turn it over to Beth.

Thank you, Dan. Good afternoon, everyone. I hope that you and your loved ones are healthy and safe. Since the beginning of the COVID-19 pandemic, our first priorities have been the health and safety of our teams. while continuing to support our clients as they too began to navigate the impact of the pandemic. Although we are reporting on Q1, I'd like to begin with an overview of our current state. As Dan reported earlier, we started seeing the impact of COVID-19 in late March. In mid-March, we activated a COVID-19 task force team to launch business continuity planning. This team included members from all aspects of our business, including operations, human resources, IT, finance and accounting, and marketing. The operations team shifted sales efforts to remote while immediately starting campaigns to keep clients and field talent engaged. HR began managing data on shelter-in-place orders in all of our locations, in addition to developing communication pieces around CDC guidelines, and how to report and react to potential positive cases, not only for our team, but for our clients as well. Keep in mind, on average, we send out 6,800 employees into someone else's environment every week. The accounting team was quick to explore and react to options for protecting our liquidity, and our marketing team began turning entire social media campaigns around for the ops team in work speeds. In large part due to the IT team and the initiatives that were implemented in the last 12 months, we were able to shift over 80% of our internal team members to work remote, and we worked diligently with many of our clients to assist our billable consultants to do the same. The professional division has seen a modest drop, mainly on the finance and accounting side. However, a recent partnership with a client supporting the SBA loan process has resulted in placements exceeding 100th. with the potential of 200 more in the coming weeks. The IT side of the business remains strong, especially in and around ERP and EPM initiatives. Our light industrial division was not immediately impacted, as the majority of our clients were deemed essential. However, we began seeing reductions in late March and early April as supply chains slowed down. In recent days, we've started to see recalls of laid-off workers and have closed on several new business opportunities. Real estate, however, has experienced the largest impact, as 70% of the business is in maintenance, and properties made decisions to stop non-essential work orders, which reduced our ability to enter apartments. In addition, the leasing side of the business moved to virtual tours in some locations, and communities shut down the leasing offices to walk-in vendors. We do anticipate that once communities begin to make decisions to open their doors, we should see an increase in orders to satisfy the backlog of non-essential maintenance orders as well as new leasing opportunities as many who have been affected by COVID-19 will be relocating for new job opportunities. We don't know if we've hit the bottom, but we do feel that we are seeing some slight movement in the right direction. I've always believed that the best lessons come out of the most difficult times, and as unpredictable as the last several weeks have been on businesses and our everyday lives, there are some highlights. Business as usual obviously stopped. However, our teams have come together to work on initiatives that were on the back burner due to time constraints. We've identified new potential business lines and have begun feasibility studies. We launched our first ever company-wide cross-sale training and sales blitz that resulted in 182 new orders, 1,900 conversations, and 13 cross-divisional sales pitches in one afternoon. As business shifted to a virtual environment, our response was immediate. Virtual sales meetings and interviews are being mastered by the team. We are conducting webinars in our professional brands with record attendance, and our social media education and outreach programs have expanded in the last month, jumping 21.6% in social media followers and a spike of 145% to 1.6 million impressions or clicks across our brand sites. I cannot express the amount of gratitude that I have for this BGSF team. As we have navigated the uncharted waters of the pandemic, the team has stayed engaged and powerful. Many of our IT projects have launched in the last two months, including the complete rollout of the Microsoft Teams and Cloud Voice, which allowed us to quickly go remote. Our new website went live at the end of March and includes the apply and onboarding capabilities that were complementary to remote interviewing. And last week, we launched timekeeping automation that will go fully live in the real estate division next week. These initiatives will support us not only in the current environment, but will be part of a strong foundation as we move forward. In addition, our latest acquisitions, LJ Kushner made in late Q4 and EdgeRock Technology Partners made in Q1, for the most part, have been fully integrated. As we look into the coming months, we cannot determine how the U.S. economy will rebound. Our goal is to remain diligent in the balance of protecting our current financial stability and being prepared to react quickly as markets reopen and businesses begin to return to a new normal. This includes assessing opening new markets as well as any M&A activities should there be opportunities in the future. However, for now, we remain focused on business at hand, supporting and protecting our clients, our talent, and our teams. In closing, we are committed to managing our business with integrity and transparency as we navigate new operational and financial norms. And although our future results may look different than in the past, we plan to communicate with investors and stakeholders to facilitate an understanding of our company's unique challenges and opportunities as we move forward. We recognize that we are all in this together, and our open and cooperative efforts will get us throughs. With that in mind, we will be releasing monthly updates following the close of our financials during this economic downturn in an effort to keep you apprised on our efforts and our results. And now I'd like to turn it back over to the operator for the Q&A session.

Thank you. We will now begin the question and answer session. During the question and answer session, you will hear a tone acknowledging your request. If you are using a speakerphone, please pick up the handset before pressing any keys. To withdraw your question, please press star, then two. Your first question comes from Howard Holpern from Taglich Brothers. Please go ahead.

Congratulations on the first quarter and all the information you provided on how you're navigating through this environment that we're going through right now.

Perfect.

I guess you'll be tracking it too, I guess, but for modeling purposes, should we be looking at, especially in the real estate area, how and when states are progressing in their reopening plans? Is that the best way to look at how it will come back in real estate?

I think what's important, Howard, is as we're finding out that And states who are opening up, they're just getting permission. So it doesn't necessarily mean that the properties are jumping on board with it, that the state has opened up. I think we're all finding that nobody wants to be – this is one case nobody wants to be first. And I think that we've really been doing a lot of communicating with the apartment communities and what their thoughts are and where they're going. So I think that we've positioned ourselves very, very well. for when the communities themselves decide to make the decision.

Okay. And is there or have you explored an opportunity with the, you know, talent division, you know, the larger commercial buildings that will eventually have to reopen that have been dormant, I guess, for a while? Is that an opportunity that you've been exploring as those eventually reopen, hopefully by the end of the year?

Of course, of course. We're keeping in touch with all of the big players and what their plans are.

Okay. And in terms of, yeah, the recent acquisitions, how have they performed and how do you envision them, you know, growing as time goes on and as the evolution of the workforce, I guess, might change in 2021 and where we're actually located when we work?

Fortunately, both of our acquisitions are in the IT sector, and we're not seeing hardly any decline in that area. I mean, we've got a lot of new businesses coming on. EdgeRock is continuing to be strong. LJ Kushner has got some great deals that are coming up. They had a little bit of a hit because a lot of their business has been in New York, but he's been able to manage through that, and we've already got some things that we know that are going to be hitting in June and July. It's just a delay, but one we expected. But we feel very, very good about both of the acquisitions and what they've been able to contribute and how they've managed through this process.

And in terms of, you know, the 10% cost reduction, is that going to be off of the first quarter base because most of it was pre-COVID or – Is that $16.2 million, or will it be off of like the $15.2 because you did have transaction fees and the IT roadmap cost in there? If you can give some color on what this is.

Yeah, we took out transaction fees, Howard, but we left the IT roadmap in there because part of that cost is continuing on. So it's off the average of a first quarter without transaction fees in it.

Okay, okay. That sounds good. And in terms of what I guess you said in this first week or so in the light industrial, you're seeing more and more callbacks. Is that a trend that you would guess should continue through the balance of the quarter? Sure.

In the last week, we've seen a lot of activity in L.A. So one of the companies that was the largest, I took the largest, that had the biggest impact on us, they actually went back yesterday. So we are seeing a lot of new businesses coming out of it. Some of the supply chains seem to be loosening up, so some of our bigger clients that were waiting for product to get in. So just in the past three days, I've taken several calls with some good news around it.

And one last one. I think you had talked about it in the last call. Has there been any change in the process of, you know, I know the interview process, but the final hiring process where people don't have to produce the documents face-to-face? Was there some change that was going to occur that way?

I have to tell you, the timing of all this and the timing of all of the initiatives that we had in place and when they were launching could not have been married up more perfectly. The website going live at the end of March when all of this was hitting allowed for onboarding to be automated. It allowed for applications to be automated. We had just really gone into being able to do virtual interviews. And so it really put us in a very good position to be able to navigate through it.

And the government also relaxed the restrictions on the I-9, which used to be a physical need, and that got relaxed as well. So that was sort of the last little technical piece that got fixed.

Yeah, it took them a few weeks to get that down, but there were enough of us screaming about it, they finally loosened that.

Okay, well, keep up the good work navigating through this, and we'll all come out for the good in the end.

Thank you.

Thank you. Your next question comes from Jeff Martin from Roth Capital Partners. Please go ahead.

Hi, this is Sarah Schuster. I'm for Jeff Martin. Howard may have touched on this, but... One of the questions was, you detailed the April impact on the business and your 10-Q filing, and with real estate facing significant headwinds, how do you expect that business to rebound as states go through various phases of reopening? And where do your largest real estate markets stand with respect to reopening to the extent that this business will start its recovery?

I think that it goes to my prior answer on states opening and communities deciding to open are two different things. I do believe that, and we all believe, that once a big player decides to make the move, that everybody else will jump on board. Although it is down right now, we do feel like there is going to be a major shift need very quickly, and we've prepped for that. The larger markets, Houston being one of them, we just have to keep talking to people. And as soon as somebody makes a decision, we're ready. We do think it's going to come back fairly quickly.

You think it's going to come back, I'm sorry, when?

Fairly quickly, once the communities begin to open up.

Thank you. And with respect to operating cost reduction actions taken in March, how much of the reduction would you consider temporary in nature, and how much is permanent? And additionally, are there any potential reductions you could make if the situation warrants it?

I think some of the travel rules come back. Our association has which is big for real estate. Our association meetings will come back. Conferences, who knows what's going to happen with conferences. I don't know that anybody's going to schedule a conference this year, but we'll wait and see. But for the most part, those things will come back, but they'll come back limited. We're not planning on allowing any kind of non-essential travel, at least until fourth quarter. And then we'll evaluate it at that point. So it's not going to be turning on the faucet and turning everybody loose. The other part of it is some of the positions that we have let go will need to be backfilled. With the hiring freeze, we will have to go in and replace some of those people. But right now, we're just kind of hunkering down.

And then we've delayed some of the costs related to IT roadmap. But once business... gets back to some semblance of normal volume, and we would certainly like to reinitiate those programs.

Thank you. The next question is, what pivots in the business do you see or have you seen as natural evolution in response to client needs?

I believe I mean, everybody had to pivot fast. And I think everyone had to really think creatively. And from our perspective, businesses, we didn't see a lot of our clients reacting immediately any different than they ever had been. Real estate was a little bit slower to go ahead and close down. Light industrial was a little bit slower because most of our business was deemed essential. And IT kept rocking. So I feel like it just kind of, the clients, we're all in the same shape. Everybody needs to be able to do business. And everyone has done everything that they can to figure out how to do that in a safe way and safely. go by the CDC guidelines and social distancing. So, you know, it makes for communication really easy when you're talking to people and you all have the same thing that you're trying to accomplish.

Yeah, that makes sense. And then the last question, could you touch on liquidity, specifically currently availability in the revolving credit facility and where you stand with that to the covenants?

Yep, absolutely. So we're running with, on average, around $20 million of availability within our revolver. We've talked to the bank, syndicate, BMO City, and Independent. They're well-situated by whatever liquidity we need as we roll into the second and third quarter. We have discussed covenants with them. Although, as you can well imagine, it's very hard to sort of forecast where we're going to be in two months. But they are cognizant of the fact that this is a temporary decline in business and not a, you know, an ongoing sort of business thing. And so they are open to discussions depending on where we end up second quarter, second

Okay, great. Thank you very much. I hope everyone's well. Very supportive. No, thank you very much, and I hope everyone's well. Great.

Thank you.

Thank you.

Thank you. There are no further questions at this time. I would now like to turn the conference back to Beth Garvey for closing remarks.

Thank you, and thanks to all of you for joining our call today. I'll close with the thought that our people and our business are resilient, and we are learning on experience gained by navigating through prior downturns. We are grateful for the lessons learned that we are serving us so well today. Thank you for your continued support of BGSS. We look forward to updating you in the very near future. Have a great rest of your afternoon.