BGSF, Inc.

Thank you for standing by. This is the conference operator. Welcome to the BG Staffing Second Quarter 2020 Financial Results Conference Call. As a reminder, all participants are in 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 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. I would now like to turn the conference over to Terry McInnis, Vice President of Investor Relations at Bibicoff & McInnis, Inc. Please go ahead.

Thank you, Operator. It's been a pleasure to welcome you to the BG Staffing Conference Call to discuss Q2 and six-month 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 is available in the investor relations section on BGSF's website at bgstaffing.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 BGSF 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 reports on Form 10-Q 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 BGSS 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 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 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, and we appreciate your interest in BGSF. First of all, I'd say we normally would have filed our 10-Q this morning. The additional review disclosures required for the impairment and swap accounting were new to us, and we wanted to ensure that they were complete and useful to the reader. We are planning on filing tomorrow. As I did last quarter when this COVID pandemic descended upon us all, I'd like to start today's call by acknowledging our exceptional team. It's due in large part to their agility, responsiveness, and hard work that we were able to continue to keep everyone safe while working remotely, all the while consistently providing the highest level of service and support to all of our stakeholders and shareholders. The actions taken earlier this year in response to the growing impact of the COVID-19 outbreak have served us well. Organic selling costs decreased 12.4% and recurring home office costs decreased 16.7% sequentially from Q1. We are closely scrutinizing all facets of the current environment and are ready to take further actions that alter our business operations as the federal, state, and local authorities may require. While returning capital to shareholders remains an important part of our capital allocation framework, maintaining a strong balance sheet is primary. Remaining cautious, the board has approved a $0.05 quarterly dividend for Q2. We're encouraged by a consistent week-over-week sequential growth in our business segments. For the last week of June, overall revenue was at 91% of pre-COVID levels. That's the first three weeks of March is what we measure by, up from 71% at our low point in mid-April. Light industrial is back to pre-COVID revenue numbers. and, in fact, in July was over their pre-COVID numbers. Although the virus has flared up and impacted various regions across the U.S., we are not seeing any particular geographic pressure on business as a result. And now for our Q2 numbers. Revenues for 2020 were $62.6 million, down 15.2% from Q2 2019, while gross profit was $16.9 million, down 19%. The overall decrease in revenues was fueled by a 52% decline in real estate, offset by $9.8 million from our two recent acquisitions. Gross profit percent of 27% was down from 28.2% in 2019, impacted by a 52% decline in term placements and a decrease in real estate noted. We incurred a net loss for the quarter due to the impairment of certain intangible assets of $5.4 million net of tax in our finance and accounting division. The net loss for Q220 was $4.8 million, or minus $0.47 per diluted share, compared with net income of $3.8 million, or $0.37 per diluted share in 2019. It should be noted that net income before the impact of the impairment was $600,000. Our effective tax rate was 25.9% versus 22.8% last year. Adjusted EBITDA was $3.3 million, down from $6.9 million last year. Adjusted EPS decreased to $0.16 from $0.44 last year. Our SG&A expenses for the quarter were flat in 2019 due primarily to a $2.6 million decrease in legacy organic costs offset by our two acquisitions, a $404,000 increase related to the IT roadmap initiative started in Q2 2019. Sorry, hand that. A breakout of our SG&A for both the Q and year-to-date are included in the management discussion section of our quarterly report on Form 10Q. And now for year-to-date. Revenues for the year were $136.7 million, down 4.2% from 2019, while gross profit was $37.2 million, down 5.4%. The overall decrease in revenues was fueled by a 27% decline in real estate, offset by $16.7 million from our two recent acquisitions. Our gross profit percent of 27.2% was down slightly from 19, impacted by a 24% decline in per placements, the decline in real estate. We incurred a net loss for the year due to the impairment. That was 3.3 million, or minus 32 cents per diluted share, compared with net income of 6.3 million, or 61 cents per diluted share, in 19. Our effective tax rate was 22.8% for both periods. Net income before the impact of the impairment was $2.1 million. Adjusted EBITDA was $8.5 million versus $12 million in 2019, and adjusted earnings per share decreased at $0.51 versus $0.76 in 2019. Our SG&A expenses for the year increased $2.7 million, primarily due to our acquisitions, an $863,000 increase in the IT roadmap initiative, and $532,000 increase in transaction fees, offset by a $3 million decrease in legacy or organic costs. Although we have delayed new initiatives on our IT roadmap, we continue to spend on projects that were active, as we feel they are critical to our success in the short term, and Beth will comment on those later. Cash generated from operations increased $5.9 million over 2019, primarily as a result of increased receivable collections offset with decreased sales. Day sales outstanding at the end of June was 51 days versus 50 at March. Please note that our balance sheet remains strong. Total senior debt was just under $40 million, and we had $24.6 million available under our revolver. Our debt to pro forma adjusted trailing 12-month EBITDA at the end of Q2 was 1.72. And finally, we entered into a three-year fixed rate swap on an initial notional amount of $25 million of our debt in early June. This completes my financial review. Before I turn the call over to Beth, I'd like to take a moment to welcome our two newest board members announced recently. Our CEO, Beth Garvey, and Cynthia St. Marshall, the current CEO of the Dallas Mavericks, have joined the board. Supporting diversity and inclusion throughout BGF is essential to our board, and these two appointments are significant from both the governance and corporate culture perspective. And, of course, I don't want to miss the opportunity to congratulate Beth on recently being named a finalist in the EY Entrepreneur of the Year 2020 Award for the Southwest region. This is the world's most prestigious awards program for entrepreneurs. We are proud of you, Beth, and we're looking forward to the contributions you and CENT bring to the BGF quadrant. And now I'll turn the call over to Beth.

Thank you, Dan. Good afternoon, everyone. I hope you and your loved ones are staying healthy and safe. As Dan said, since the very beginning of COVID-19 pandemic, our first priorities have been the health and safety of our teams while continuing to support our clients who are also navigating these uncertain waters. I, too, want to take a minute to welcome our board members at Marshall. We are a workforce solutions provider, finding 28,000 people jobs a year, and I feel like since business acumen, based on her 36-year career at AT&T, including her final role as Senior VP of Human Resources and Chief Diversity Officer, will help strengthen the BGSS Foundation for years to come. I am very grateful to have such a dynamic woman and business leader join our team. As we've navigated our business operations during this economic disruption over the past several months, I have to commend our team as well as our client partners for their resilience and fortitude. The dedication of the business community to come together to support each other and share lessons learned has made us all better leaders. Our team has kept their finger on the pulse of the community and the business as it evolves, and I believe that that has helped position ourselves to offer new services, provide thought leadership, and relevant content through webinars, social media education, and outreach. It's too early to have reliable visibility in the potential impacts from the disruptions to the labor market and business operations, and we can't know what the full impact of the financial conditions or results of operations will be. This gives us yet another reason to remain in close, regular contact with our team members and client partners while carefully monitoring and managing this fluid situation. As most of our teams have become accustomed to working remote, we have been able to virtually come together to complete several initiatives in Q2 that will continue to support our platform of growth for the future. As you recall, we launched the IT Roadmap. Many of those initiatives went live in Q2, and I'd like to highlight some of those. We had the launch of the new ERP system that went live in July. We had the implementation of a Power BI tool for better reporting and development metrics, a new client contract management system that will increase the speed and compliance in which new business contracts are executed. We completed the integration of our latest acquisitions with LJ Kushner and EdgeRock Technologies. We launched our automated time card solution for the real estate division. We developed a back-to-the-office COVID playbook. and we established a diversity, equity, and inclusion committee. Managing 89 branch offices in 12 on-site locations in 44 states in the District of Columbia during this time has its own challenges. Dan already talked about the numbers, so I'd like to make some overall observations about our business divisions each, which continue to be impacted in various degrees. Our professional divisions who launched a strategic account team mid-last year, has continued to see their efforts reap rewards. This team works across all the BGSS brands, offering solutions and cross-sell opportunities. They oversee 33% of the professional division revenues and is instrumental in the success of our cross-sell efforts, which made up 7% of revenues and 8.5% of gross profit in Q2. The entire division has done an excellent job in ending the and managing ends and educating our client partners on benefits of national talent pool available to them virtually. The finance and accounting segment is maintaining the temporary sales list we spoke of in Q1 with business from a client supporting the SBA loan process and has recently expanded the relationship to support our client who was awarded a contract from the USDA to deploy a digital records management system. In addition, many of the efforts from the strategic accounts team has opened doors for additional roles in F&A in companies that historically saw us as only an IT solutions provider. The IT segment of professional remains strong, especially in ERP and CPM initiatives. We have seen a rise in orders in ServiceNow, cloud migration, and cybersecurity, largely due to the webinars and white papers the team launched during the quarter. We now have a very active sales pipeline and professional and are cautiously optimistic that subject to inherent uncertainties of the COVID-19 environment, this division could close with a really strong year. Even though the majority of our clients in light industrial division were deemed essential, we did experience limited orders as a result of COVID-19, particularly early in the quarter. Since June, we have seen increased sales activity, and many of our client partners have returned to pre-COVID numbers and, in some cases, have exceeded them. With a shortage of available employees for a variety of reasons, I'm pleased enough that this division has reached pre-COVID revenues and, as Dan pointed out, in July has surpassed them. Our real estate division, which operates two brands, has felt the greatest impact as a result of the pandemic. Multifamily communities shifted to non-emergency maintenance support as well as providing virtual leasing options. Following was BG Talent's immediate decline as many companies shifted to remote work and office buildings were left relatively empty. In response to the decline, the team launched new services including many concierge offerings, social distancing monitors needed for public spaces such as pools and gyms. Additionally, there was a shift in expense management by consolidation of management teams, delaying new office expansion, and holding back on open orders, open internal orders. In mid-June, we began to see an increase in orders, which resulted in the division doing a company-wide sales and recruiting blitzes, which they continued to do and have success with. The real estate division has not come back as anticipated in Q2. There are a variety of factors affecting the slower recovery, including the surges of the virus and resulting government restrictions, rent abatements, moratorium on evictions, fewer people are moving, and complexes generally have less money for CapEx expenditures. On a consolidated basis, On a consolidated business level across all divisions, we continue to see sequential movement in the right direction and are hopeful that we've seen the bottom. While we eagerly await our economy to rebound, BGSF is resolved to diligently protect our current financial stability and stay resilient and prepared to quickly respond to opportunities as business returns to the new normal. We are laser focused on the business at hand, and we're still actively evaluating the landscape for future prospects to open new markets and to assess M&A opportunities. And now, Ariel, I will turn it back over to you for question and answers. Thank you.

We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. Our first question comes from Jeff Martin of Roth Capital Partners. Please go ahead.

Hi, this is Sarah Schuster calling in on behalf of Jeff. Beth, congratulations. for the board appointment and being named to the SIA 2020 Staffing 100 List and for being a finalist in the EY Entrepreneur of the Year 2020 Award for the Southwest region. That's a lot of accomplishments. Congratulations. Thank you so much. With the recent acquisition of Edrock and LJ Kushner, could you provide a sense of how those businesses are performing?

Absolutely. Edge Rock, they both, we still believe, are very good acquisitions for us. Edge Rock Technologies has really kind of maintained where they were. We didn't really see a dip in what they were doing. They had projects that didn't end when COVID hit. They've had a dynamic sales team that has lots of things in the pipeline. So they've remained strong. LJ Kushner took a bigger hit. A lot of his contacts were in the New York region, and so some of the orders that he was working on in his retained search business were put on hold. So he has now started to see activity rebound on that, and we feel good about where he's going to fall in August and September for the rest of the year.

Thank you. Could you please characterize each of the three segments in terms of the monthly progression from April through July? And have you experienced restarts and pauses with these segments?

Yeah, so I will give you the progression. As mentioned earlier, we're tracking revenues against the first three weeks of March. So what I'm going to give you is a percentage for April, May, June, and July of each of our three segments in order. So our light industrial segment in April was 74%, went to 80%, to 95%, to 105% in July. Our real estate, 46% in April, to 48%, to 72%, to 86% in July. And our professional was 89% in April, 90%, 91%, Saw a hair in July at 86. Pretty consistent.

Thank you. Let's see. To the extent that you're saying client orders come back, have you faced challenges in workers' motivation to return to work in the environment where unemployment benefits have kind of been a disincentive to return to work?

We have, but only in the real estate and light industrial sectors. It really hasn't played a part in the professional brands, but we are struggling with the extra unemployment benefits that are being paid right now. We're just having to be creative. Companies are being creative. I believe they're going now and raising their rates, you know, their pay rates. We're seeing some of our customers, you know, do $2, $3, $4 an hour pay rates to try to overcome it. But we are seeing it, but only in those divisions.

Okay, got it. Thank you. Okay. You historically have had a very high client retention of over 90%. How much of that has shifted in the current environment, and what is your outlook on how client retention could permanently shift as a result of this recession?

Yeah, absolutely. So as of June, our light industrial had a 96% retention, and our professional group had an 85% retention. We don't track real estate because of a the nature of the 8,000 customers that we serve at every community in America. And those numbers are consistent with prior periods. Other than one of our offices, we're not seeing a decline in retention.

Okay.

And we don't expect that. We don't expect those percentages to change because of this.

Okay, got it. Thank you. And then lastly, could you provide detail on what factors triggered the impairment of intangible assets in the period?

Yeah, so we do this test every quarter. It's normally just a qualitative. been able, because of either where we were historically or where we were forecasting or where we were from a client retention standpoint, able to support the intangible values. At the end of June, it became apparent from the last 18 months in our finance and accounting group, and based on the retention factors for our smart acquisition, that the numbers needed to be tested. six to 18 months on those two divisions. We calculated it based on various fair value factors and determined the write-off from that. So SMART, there was a, and I'll give you a history on SMART. So since we bought SMART three years ago, four, yeah, We've tried to change the direction of that business to make it a little bit more of an upper end, which has driven a lot of the client change. So when we bought them, they had a 90% retention factor. And so we expected that client base to last a while. As we've now transitioned that business, we're moving to a different client base, higher growth margins, better business.

Well, thank you for that explanation. Thank you very much.

Thank you.

This concludes the question and answer session. I would like to turn the conference back over to Ms. Garvey for any closing remarks.

Thank you, Ariel. 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 leaning on the valuable experience earned by navigating through prior downturns, and we remain grateful for the lessons learned that guide us today. We appreciate your continued support of BGSF, and we look forward to updating you in the near future. Have a great day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.