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BG Staffing Inc (NYSE:BGSF)
Q2 2020 Earnings Call
Aug 5, 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 Second Quarter 2020 Financial Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Terri MacInnis, Vice President of Investor Relations at Bibicoff & MacInnis, Inc. Please go ahead.

Terri MacInnis -- Vice President of Investor Relations

Thank you, operator. It's my pleasure to welcome you to the BG Staffing conference call to discuss Q2 and six months 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 and 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 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 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?

Dan Hollenbach -- Chief Financial Officer

Hey, thank you, Terry. 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 COVID pandemic descended upon us all, I'd like to start today's call by acknowledging our exceptional team. It's due on large part of 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 has served us well. Organic selling cost 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, but all 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 are encouraged by the 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 three weeks of March, first three weeks of March is what we measured by, up from 71% at our low point in mid-April. Light Industrial goes back to pre-COVID revenue numbers and in fact, in July, it was over the pre-COVID numbers. Although virus is fired 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 '19. Our 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 '19, impacted by a 52% decline in perm placements and the decrease in real estate noted.

We incurred a net loss for the quarter due to impairment of certain intangible assets of $5.4 million net of tax in our Finance & Accounting division. The net loss for Q2 '20 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 '19. 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 '19, due primarily to a $2.6 million decrease in legacy organic cost, offset by our two acquisitions, a $404,000 increase related to the IT roadmap initiatives started in Q2 '19 -- sorry, in 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 10-Q.

And now for year-to-date, revenues for the year were at $136.7 million, down 4.2% from '19 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% -- $0.32 per diluted share, compared with net income of $6.3 million or $0.61 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 '19 and adjusted earnings per share decreased to $0.51 versus $0.76 in '19. Our SG&A expenses for the year increased $2.7 million, primarily due to our acquisitions, a $863,000 increase in the IT roadmap initiative and $532,000 increase in transaction fees, offset by a $3 million decrease in legacy 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 '19, primarily the result of increased receivable collections, offset with decreased sales. Days sales outstanding at the end of June was 51 days versus 50 at March.

I'm pleased to 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 concludes 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 Cynt Marshall, the current CEO of the Dallas Mavericks, have joined the Board. Supporting diversity and inclusion throughout BGSF is essential to our Board and these two appointments are significant for 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 contribution that you and Cynt bring to the BGF boardroom.

And now, I'll turn the call over to Beth.

Beth Garvey -- Chief Executive Officer and President

Thank you, Dan. Good afternoon, everyone. I hope you and your loved ones are staying healthy and safe. As Dan said, since the beginning of COVID-19 pandemic, our first priority have been the health and safety of our teams, while continue to support our clients, here also, navigating these uncertain waters.

I too, want to take a minute to welcome our Board member, Cynt Marshall. We are a workforce solutions provider finding 28,000 people jobs a year and I feel Cynt's 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 BGSF 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 and 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 the split situation.

As most of our teams have come accustomed to working remote, there have been -- 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 have a 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 L.J. Kushner and EdgeRock Technology. 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 branches -- branch offices in 12 onsite 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 degree.

Our Professional division, who launched strategic account team mid last year has continue to see their efforts reap awards. This team works across all the BGSF 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 -- in managing end 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 lift we spoke out in Q1, with business from a client supporting the SBA loan process and has recently expanded their 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 and F&A and companies that historically saw us as only an IT solutions provider. The IT segment of Professional remain strong, especially in ERP and CPM initiatives. We have seen a rise in orders and ServiceNow, cloud migration and cyber security, largely due to the webinars and whitepapers the team launched during the quarter.

We now have a very active sales pipeline in Professional and are cautiously optimistic that subject to inherent uncertainties of the COVID-19 environment distribution to 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 are seeing increased sales activity and many of our client partners have returned to pre-COVID numbers and in some cases have exceeded them.

With the shortage of available employee for variety of reasons, I'm pleased to announce 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 community shifted to non-emergency maintenance support as well as providing virtual leasing options. Following was BG Talent's immediate decline and 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 offering, social distancing monitors needed for public spaces, such as pools and gyms. Additionally, there was a shift in expense management by consolidation of management team, delay in 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 during the companywide sales and improving glitches, which they continue to do and have success with. The Real Estate division has not come back as anticipated in Q2. There are variety of factors affecting a slower recovery, including the surges of the virus and results from 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've continued 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 the opportunities as business returns to the new normal.

There lies a focus 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.

Questions and Answers:

Operator

Thank you. [Operator Instruction] Our first question comes from Jeff Martin of ROTH Capital Partners. Please go ahead.

Sarra Schuster -- ROTH Capital Partners -- Analyst

Hi, this is Sarra Schuster calling in on behalf of Jeff. Beth, congratulations for the Board appointment and being named 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...

Beth Garvey -- Chief Executive Officer and President

Thank you.

Sarra Schuster -- ROTH Capital Partners -- Analyst

Congratulations.

Beth Garvey -- Chief Executive Officer and President

Thank you so much.

Sarra Schuster -- ROTH Capital Partners -- Analyst

With the recent acquisition of EdgeRock and L.J. Kushner, could you provide a sense of how those businesses are performing?

Beth Garvey -- Chief Executive Officer and President

Absolutely. EdgeRock, they both, we still believe were very good acquisition for us. EdgeRock technologies has really kind of maintained where they were. We didn't really see a dip in what they were doing. Their -- 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 remain strong.

L.J. Kushner took a bigger hit. The heat -- a lot of his contacts were in the New York region and so some of the orders that he was working on and 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.

Sarra Schuster -- ROTH Capital Partners -- Analyst

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

Dan Hollenbach -- Chief Financial Officer

Yes, so I will give you the progression. As mentioned earlier, we were tracking revenues against the first three weeks of March. So what I'm going to give you is a percent 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%, fallen off a hair in July at 86%. But pretty consistent in itself.

Sarra Schuster -- ROTH Capital Partners -- Analyst

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

Beth Garvey -- Chief Executive Officer and President

We have but only in the real estate and Light Industrial sector, as it really hasn't been quite apart in the Professional brands, but we are struggling with the extra unemployment benefits that are being paid right now. We're talking to be creative, companies to the increase of -- I believe they're going now and raising their rates and their pay rates, we're seeing some of our customers do $2, $3, $4 an hour pay rates to try to over commit that we are seeing, it could only end in that division.

Sarra Schuster -- ROTH Capital Partners -- Analyst

Okay. Got it. Thank you. 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?

Dan Hollenbach -- Chief Financial Officer

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 the nature of the 8,000 customers that we serve at every community in America. And those numbers are consistent with prior periods, as of then, in one of our offices, we're not seeing the decline in retention. So...

Sarra Schuster -- ROTH Capital Partners -- Analyst

Okay. About the Professional...

Dan Hollenbach -- Chief Financial Officer

And we don't expect that -- those percentages to change because of this, so...

Sarra Schuster -- ROTH Capital Partners -- Analyst

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

Dan Hollenbach -- Chief Financial Officer

Yeah. So, we do this test every quarter, it is normally just a qualitative test and in the past, we've 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 & Accounting Group and based on the retention factors for our Smart acquisition that the numbers will be tested and I given the forecast the over the next 6 to 18 months on those two divisions, we calculated that based on various fair value factors and determine the write-off from that. So smaller there was a...

Sarra Schuster -- ROTH Capital Partners -- Analyst

Okay.

Dan Hollenbach -- Chief Financial Officer

And I'll give you a history on Smart. So since we bought Smart, three years ago, four -- 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 awhile. As we've now transitioned that business we're moving to a different client base, higher gross margins, better business.

Sarra Schuster -- ROTH Capital Partners -- Analyst

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

Beth Garvey -- Chief Executive Officer and President

Thank you.

Operator

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

Beth Garvey -- Chief Executive Officer and President

Thank you, Ariel. And thanks, to all of you for joining our call today. Up 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 with guidance today. We appreciate your continued support of BGSF and we look forward to updating you in the near future. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Terri MacInnis -- Vice President of Investor Relations

Dan Hollenbach -- Chief Financial Officer

Beth Garvey -- Chief Executive Officer and President

Sarra Schuster -- ROTH Capital Partners -- Analyst

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