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.

[Operator Instructions] I would now like to turn the conference over Terri MacInnis, VP of Investor Relations at Bibicoff & MacInnis 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 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 and 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 BGSF 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 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 a superior to financial measures calculated in accordance with GAAP.

For a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures, please see today's news release and Form 10-Q 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, and 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 BGSF 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 would depend 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 the 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 the 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 has 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 our 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 expenditure, increasing emphasis on our liquidity forecasting, stricter compliance with vendor payment terms and our election to do away with 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 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 believe 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 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 in close regular contact with our team members and our client partners while carefully monitoring and managing this fluid situation. 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 were fueled by a 4.4% growth in real estate and $6.9 million from our two recent acquisitions. Net income for Q1 '20 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 IT roadmap expenses of $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 2020 was $5.27 million, slightly higher than $5.16 million in 2019.

Adjusted EPS in 2020 decreased to $0.28 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 cost, $520,000 higher transaction fees and $459,000 related to IT roadmap initiative, which we started in Q2 last year.

A breakdown of our SG&A is included in the Management Discussion section of our quarterly 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 the spending on the remaining 2020 earnings per share of approximately $0.03 to $0.04 per quarter. Our higher effective income tax rate for 2020 was primarily due to the non-deductibility of transaction costs related to the Edrick 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 generated from 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. Days 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 income, as well as adjusted earnings per share to net income per diluted share are available in our latest quarterly report on 10-Q 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 begin to navigate the impact of 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 build 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 workspace.

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, our recent partnership with the clients supporting the SBA loan process has resulted in placements exceeding 100, with the potential of 200 more in the coming week.

The IT side of the business remained strong, especially in and around ERP and APM 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 chain slowed down.

In recent days, we started to see recalls of let off workers, and have closed on several new business opportunities. [indiscernible] 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 community shutdown he 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 at 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 study.

We launched our first ever companywide cross sales training and sales blitz that resulted 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 unchartered waters of the pending, 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 included apply and onboarding and capabilities that were complementary to remote interviewing. And last week, we launched time keeping 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, L.J. 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 discussing opening new markets, as well as any M&A activity, 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 our 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 through. 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. [Operator Instructions]. Your first question comes from Howard Halpern from Taglich Brothers. .

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.

I guess, and 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 we are finding out that 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 if 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 at.

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..

And is there a, or have you explored an opportunity with the talent division, 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 are keeping in touch with all of the big players and what their plans are..

And in terms of the recent acquisitions, how have they performed, and how do you envision them 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 that --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, L.J. Kushner has got some great deals that are coming up. They had a little bit of 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. So 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 those manage this process..

And in terms of the 10% cost reduction, is that going to be off of the first quarter base because most of it was pre-COVID? Or is now that $16.2 million, or would it be off of that $15.2 million because you did have transaction fees and IT roadmap costs in there? If you can give some detail around what….

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 average of our first quarter without transaction fees in it..

Okay. Net sales 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 call backs.

Is that a trend that you would guess should continue through the balance of the quarter?.

In the last week, we've seen a lot of activity in LI. So one of the companies that was the largest -- got hit the largest, it 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..

Okay. And one last one. I think you had talked about in the last call.

Has there been any change in the process of -- 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 relax as well. So that was sort of the last little technical piece that got fixed..

Yes. Took them a few weeks to get that down, but there were enough of us screaming about it, they finally loosed up..

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

Yes. Thank you. .

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

Hi, this is Sarra Schuster on for Jeff Martin.

How are, you may have touched on this, but one of the questions was, you detailed the April impact on the business in 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 back to my prior answer on, in states opening and properties deciding, or 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 jump on board.

Although it is down right now, and we do feel like there is going to be a major need very quickly, and we 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 that'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? Additionally, are there any potential reductions you could make if the situation warrants it?.

I think some of the big travel will come back to our association, which is big for real estate. Our association meetings will come back and conferences. Who knows what's going to happen with conferences. I don't know that anybody is going to schedule a conference this year but we'll wait and see. But for my part, those things can come back.

They'll come back limited. We're not planning on allowing any kind of non-essential travel at least until the fourth quarter and then we'll evaluate it at that point. So it's not going to be turning on the faucet and cutting everybody lose. The other part of it is some of the positions that we have let go we 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..

Then we delayed some of the costs related to the IT road roadmap but once business gets back to some semblance of normal volume we would certainly like to re-initiate 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?.

Everybody has to pivot fact. I think everyone had to really think creatively. From our perspective and businesses, we didn't see a lot of our client reacting immediately any different than they ever had been. Real estate is a little bit slower to go ahead and close down.

Light Industrial was a little bit slower because most of our business was deemed not being essential and IT kept working. I feel like it just kind of the clients, well, 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 go by the CDC guidelines and social distancing. 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..

Makes sense. Then the last question.

Could you touch on liquidity specifically currently availability in the revolving credit facility and where you stand with that going back to the covenant?.

Absolutely. We're running on average around $20 million of availability within our revolver. We've talked to the bank syndicate BMO City and underpin that. They are well situated 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 forecast where we're going to be in two months. They are cognizant of the fact that this is a temporary decline in business and not an ongoing business thing and so they are open to discussions depending on where we end up in second quarter..

Okay. Thank you very much, very supportive. Thank you very much and I hope everyone's well..

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. Of course, with the thought that our people in 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 so well today. Thank you for your continued support of BGSF.

We look forward to updating you in the very near future. Have a great rest of your afternoon..