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BG Staffing Inc  (NYSE:BGSF)
Q1 2020 Earnings Call
May. 07, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by. This is the conference operator. Welcome to the BG Staffing Q1 2020 Financial Results Conference Call. [Operator Instructions] 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.

Terri MacInnis -- Vice President of Investor Relations

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 US 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.

Dan Hollenbach -- Chief Financial Officer

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, layering -- excuse me -- 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-esseintial capital expenditures, 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 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 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 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 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 were fueled by 4.4% growth in Real Estate, and $6.9 million from our two recent acquisitions.

Net income for Q '19 was -- 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, $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 '20 was $5.27 million, slightly higher than $5.16 million in '19. Adjusted EPS in '20 decreased to $0.28 versus $0.31 in '19 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 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 EdgeRock 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.

Beth Garvey -- Chief Executive Officer and President

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.

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 [Phonetic] apartments. In addition, the leasing side of the business moved to virtual tours in some locations, and community shutdown 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 light -- some slight movement in the right direction. I've always believed that the best lessons come out of the most difficult times, and is 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 study. We launched our first ever Companywide cross sales training and sales blitz that resulted in a 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 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 included apply and onboarding capabilities that were complementaries 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 US 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 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.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]

Your first question comes from Howard Halpern from Taglich Brothers. Please go ahead.

Howard Halpern -- Taglich Brothers -- Analyst

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.

Dan Hollenbach -- Chief Financial Officer

Thanks, Howard.

Howard Halpern -- Taglich Brothers -- Analyst

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?

Beth Garvey -- Chief Executive Officer and President

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.

Howard Halpern -- Taglich Brothers -- Analyst

Okay. 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?

Beth Garvey -- Chief Executive Officer and President

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

Howard Halpern -- Taglich Brothers -- Analyst

Okay. 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?

Beth Garvey -- Chief Executive Officer and President

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.

Howard Halpern -- Taglich Brothers -- Analyst

Got it. 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 color around what is...

Dan Hollenbach -- Chief Financial Officer

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 of our -- it's off of average of our first quarter without transaction fees in it, so.

Howard Halpern -- Taglich Brothers -- Analyst

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

Beth Garvey -- Chief Executive Officer and President

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.

Howard Halpern -- Taglich Brothers -- Analyst

Okay. And one last one. I think you had talked about it in your -- 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?

Beth Garvey -- Chief Executive Officer and President

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.

Dan Hollenbach -- Chief Financial Officer

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.

Beth Garvey -- Chief Executive Officer and President

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

Howard Halpern -- Taglich Brothers -- Analyst

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

Dan Hollenbach -- Chief Financial Officer

Thank you.

Operator

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

Sarra Schuster -- Roth Capital Partners -- Analyst

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?

Beth Garvey -- Chief Executive Officer and President

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 we -- and as soon as somebody makes a decision, we're ready. We do think it's going to come back fairly quickly.

Sarra Schuster -- Roth Capital Partners -- Analyst

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

Beth Garvey -- Chief Executive Officer and President

Fairly quickly once the communities begin to open up.

Sarra Schuster -- Roth Capital Partners -- Analyst

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?

Beth Garvey -- Chief Executive Officer and President

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 most part, those things can come back. They'll come back limited. And 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 cutting everybody lose. 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.

Dan Hollenbach -- Chief Financial Officer

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

Sarra Schuster -- Roth Capital Partners -- Analyst

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?

Beth Garvey -- Chief Executive Officer and President

[Indecipherable] I? I mean, everybody has to pivot back. And I think everyone had to really think creatively. And 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 -- deemed essential, and IT kept working. So I feel like it just kind of the clients -- while 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 go by the CDC guidelines in 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.

Sarra Schuster -- Roth Capital Partners -- Analyst

Yeah, that's 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 going back to the covenant?

Dan Hollenbach -- Chief Financial Officer

Yeah. Absolutely. So we're running with -- on average around $20 million of availability within our revolver. We've talked to the bank Syndicate, BMO, Citi and underpin them. They are well-situated to provide 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 -- an ongoing sort of business thing. And so they are open to discussions, depending on where we end up in second quarter, so.

Sarra Schuster -- Roth Capital Partners -- Analyst

Okay. Thank you very much [Speech Overlap] very supportive. No. Thank you very much, and I hope everyone's well.

Dan Hollenbach -- Chief Financial Officer

Great. Thank you.

Beth Garvey -- Chief Executive Officer and President

Thank you.

Operator

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.

Beth Garvey -- Chief Executive Officer and President

Thank you, and thanks to all of you for joining our call today. Of course, 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 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.

Duration: 31 minutes

Call participants:

Terri MacInnis -- Vice President of Investor Relations

Dan Hollenbach -- Chief Financial Officer

Beth Garvey -- Chief Executive Officer and President

Howard Halpern -- Taglich Brothers -- Analyst

Sarra Schuster -- Roth Capital Partners -- Analyst

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