Earnings Call Transcript - BGSF Q2 2025

Operator, Operator

Good morning, everyone. Welcome to the BGSF Inc. Fiscal 2025 Second Quarter Financial Results Conference Call. As a reminder, this conference is being recorded. Now I will turn the call over to Sandy Martin, Three Part Advisors. Please go ahead.

Sandra J. Martin, Three Part Advisors

Good morning. Thank you for joining us today for BGSF's Second Quarter 2025 Earnings Conference Call. With me on the call are Keith Schroeder, Interim Co-CEO and CFO; and Kelly Brown, Interim Co-CEO and President of Property Management. After our prepared remarks, there will be a Q&A session. As noted, today's call is being webcast live. A replay will be available later today and archived on the company's Investor Relations page at investor.bgsf.com. Today's discussion will include forward-looking statements, which are based on certain assumptions made by the company under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including those listed in the company's filings with the Securities and Exchange Commission. Management's statements are made as of today, and the company assumes no obligation to update these statements publicly even if new information becomes available in the future. Management will refer to non-GAAP measures, including adjusted EPS and adjusted EBITDA. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release. I'll now turn the call over to Keith Schroeder.

Keith R. Schroeder, Interim Co-CEO and CFO

Thank you, Sandy, and thank you all for joining us on today's call. I will start today's call with some opening comments and discussion points. Kelly will then cover the Property Management Group performance and discuss strategic initiatives. I will then cover the financial results. After Kelly and I have finished our prepared remarks, we will open the call up for analysts and investor questions. First, I will start with an update on the previously announced proposed sale of our Professional division to INSPYR Solutions. We filed a proxy statement on July 25, which established a meeting date of September 4 for a special meeting of shareholders to vote on the sale of the Professional Group. That process is moving along as planned, and both companies are preparing for the proposed sale. We will not be taking any questions on the proxy or sales process on this call. I would now like to address the question of what the business will look like post the closing of the sale of the Professional Group. Referring to previous SEC filings, we have been providing segment information that reports the profit contribution, or what we call contribution to overhead by segment to cover head office G&A expenses. With a smaller business post-closing, we will be taking and have taken actions to reduce our head office G&A expense. We have a path to reduce head office G&A expense following the completion of the TSA period to around $10 million annually and are aggressively pursuing that path. The $10 million figure includes roughly $1.5 million of public company costs. We currently estimate the Property Management's contribution to overhead for 2025 to be in the $11 million to $12 million range. Looking back on the contribution to overhead provided by the Property Management group in 2022 and 2023, we were providing over $20 million of contribution to overhead. While our revenue has dropped during 2024 and 2025 due to market softness, our gross profit margins have held fairly steady. So top line growth is the key. And as a result, Kelly and team are aggressively pursuing various strategic actions to improve top line from its current run rate, which she will cover shortly. Also, Kelly and I are continuing to review other avenues to further reduce SG&A expenses. Under GAAP, we will be reporting the financial performance of the Professional Group as discontinued operations, thus leaving the Property Management group as our sole segment. For clarity, in the MD&A section of our Form 10-Q, we are breaking out SG&A expenses into two main sections: selling costs for the Property Management group and G&A for the head office function. This will allow you to build a model to forecast the future success of the company. Following close, we will be performing under a TSA agreement for up to six months or longer to help INSPYR stand up the business in their operating environment. This means we will be hanging on to certain expenses longer than we would without the TSA. However, we will be paid for those services, which will be reported as a reduction of our G&A expenses. As a result, our results may be a bit lumpy during this transition period. With that, Kelly will briefly cover the Property Management results and our strategic initiatives that are underway.

Kelly Brown, Interim Co-CEO and President of Property Management

Thank you, Keith, and good morning, everyone. Total revenues from continuing operations, which exclusively represent property management, were $23.5 million for the second quarter, down 8.6% from the prior year. Sequentially, revenues improved by 12.6% over the first quarter, evidence of a seasonal lift from the higher apartment turnovers as we typically see based on previous year's performance. Last fall, we realigned the sales organization and reduced direct and indirect operating costs for better alignment with revenues. However, we know that we cannot reduce or cut our way to profitability. So we have and are investing in tools and technologies to change the trajectory of our sales trends going back 18 months or longer. As mentioned on past earnings calls, our industry has been under tremendous pressure from higher interest rates, higher-than-expected insurance rate premiums and an overall malaise in the industry because customers have a wait-and-see attitude about spending cash or staffing at typical levels. Today, I want to address strategic initiatives that we are currently rolling out to grow revenue, work more effectively and efficiently, and focus on areas within our control. As we have discussed in the past, we continue to implement and expand our sales territory mapping initiatives and our proprietary training platforms, which are a competitive advantage for our business. We also continue to work on adding exclusive and semi-exclusive Property Management service agreements. This work continues in earnest, but I also want to share new initiatives that we have invested in for Property Management. We are now building on the strength of our existing technological infrastructure. We are implementing two AI-powered platforms this quarter that will drive speed and efficiency in two of our most critical functions, sales and recruiting. Our investments in AI are more than tech upgrades. They are about meeting our customers where they are and providing the experience they expect from a modern, innovative workforce partner like BGSF. With the challenges that we have experienced on the macro level within the industry, delivering talent quickly and expedited communication in response to client needs remain the priority, and these enhancements will keep us at the forefront in both of those areas. We expect to go live on these technologies by mid-Q4. The team and I are very excited about these tools and are confident that they will support and drive incremental top line revenue and generate good returns from our investments. We also plan to continue to evaluate costs to rebaseline carefully against our projected revenues. We have received positive feedback and excitement both among the internal team as well as from external sources for the phase we are approaching as an organization. We anticipate this expressed excitement to continue as we strategize our post-closing structure and planning for the future of Property Management. With that, I will turn the call back to Keith.

Keith R. Schroeder, Interim Co-CEO and CFO

Thank you, Kelly. As Kelly mentioned, second quarter revenues were $23.5 million, down 8.6% compared to the $25.7 million in the year-ago quarter. We are seeing evidence of improvements as revenues per billing day continued to increase during the second quarter, which resulted in a sequential sales lift of 12.6% from the first quarter. This is basically in line with the expected seasonality increase. Our gross profit margins in the second quarter were $8.4 million and 35.8% as compared to $9.6 million and 37.3% in the year-ago period. On a sequential quarter basis, gross profit margins were down slightly at 40 basis points. I want to call out that our results include a $980,000 additional reserve taken in the second quarter against our accounts receivable balances. After taking over as CFO in March of this year, we took a deep dive into our aged receivables. We have changed our processes and have become more aggressive in pursuing all receivables, both current and aged. In evaluating our success rate in collecting the aged receivables over the last four months, we determined an additional reserve of $980,000 was appropriate. The additional reserve is for receivables in the Property Management business. SG&A expenses for the second quarter were $12.6 million, which includes the $980,000 previously discussed additional reserve, compared to $10.7 million in the prior year's quarter. Excluding the additional reserve of $980,000 in the current year quarter and excluding strategic restructuring costs of $1.6 million and $280,000 in the second quarters of '25 and '24, respectively, SG&A costs were below the year-ago quarter by $1.8 million. Our second quarter adjusted EBITDA was $1.1 million or 4.9% of revenue compared to $300,000 or 1% in the year-ago quarter. We reported a second quarter GAAP loss from continuing operations of $0.44 per diluted share and adjusted earnings per share loss from continuing operations of $0.18. Total adjusted earnings per share for the quarter was a positive $0.03 per share. During the first six months of 2025, we generated $3 million in continuing operations cash from operating activities, which is encouraging. Our capital expenditures were small at $13,000. Finally, the team is working very hard to deliver on our strategic initiatives and accomplish the heavy lifting from the spin-off of the Professional Group. Kelly and I are very grateful for the team's hard work and dedication. Kelly and I will update you each quarter on our progress, and we hope this has been helpful for you today. With that, now we'd like to open the call for questions.

Operator, Operator

Certainly. The floor is open for questions. Your first question is coming from Howard Halpern with Taglich Brothers.

Howard Allen Halpern, Analyst

Encouraging results on the top line sequentially. As we approach the end of this year and transition into 2026, what adjusted EBITDA as a percentage of sales are you aiming for after right-sizing the company and achieving positive revenue growth?

Keith R. Schroeder, Interim Co-CEO and CFO

You should consider the past few years. As I mentioned in the script, in 2022 and 2023, the contribution to overhead was over $20 million. With a $10 million cost of overhead, that would lead to an EBITDA of around 10, or about 10%, maybe even 8%. However, this won't happen until we can improve the top line from its current position. So, the growth would be steady rather than slow.

Howard Allen Halpern, Analyst

Okay. And then in terms of unlocking the top line growth, are you in the current customer base, are you seeing that there is pent-up demand and they're just waiting to get some sort of nod to unlock that spending because spending will have to occur at some point. Am I correct on that?

Kelly Brown, Interim Co-CEO and President of Property Management

Yes, Howard, you're correct to some extent that we may see a bit of pent-up demand. However, what we're observing is that operators are primarily reallocating within their existing portfolios to maintain their asset levels. It's beneficial for us to have a strong strategic partnership with all of our key clients, allowing us to closely monitor how they manage their portfolios, their upcoming needs, and their expectations for Q4 and Q1. Therefore, we remain cautiously optimistic about a gradual recovery. Still, it's difficult to predict how swiftly this will occur due to the overall economic outlook, which shows a trend of caution across various sectors, not just in Property Management. Conversations with our clients indicate that they are focused on optimizing their current teams as effectively as possible. Thus, I wouldn't anticipate a significant amount of pent-up demand, unlike the post-COVID surge we experienced in 2022. This situation is expected to unfold differently this time.

Howard Allen Halpern, Analyst

You might feel optimistic about next year if interest rates decrease and we avoid any significant storms that could raise property insurance rates. If conditions stay somewhat stable in one area and consistent in another, you might observe some gradual spending increases within your clients' portfolios.

Kelly Brown, Interim Co-CEO and President of Property Management

I believe so. I think that's a very safe statement.

Howard Allen Halpern, Analyst

Okay. And then in terms of finding new customers, how is that process going?

Kelly Brown, Interim Co-CEO and President of Property Management

In many ways. The property management industry is characterized by ongoing changes within portfolios, management, and ownership. We continue to see transactions occur regularly. Our team, utilizing the technology and data investments we've made, is well-equipped to track these changes. Our active involvement in the industry allows us to participate in discussions that keep us informed about where these movements are occurring, enabling us to capture market share as it develops.

Howard Allen Halpern, Analyst

Okay. And I guess for Keith, in terms of the strategic spending that's gone on, is that level going to start to come down by the fourth quarter from current levels?

Keith R. Schroeder, Interim Co-CEO and CFO

You're talking about the cost for the deal, gosh?

Howard Allen Halpern, Analyst

Yes, strategic...

Keith R. Schroeder, Interim Co-CEO and CFO

Yes, exactly. Yes. So Q2 was obviously a big spend. We'll see a fair amount still in Q3. But post close, that should basically be gone.

Howard Allen Halpern, Analyst

That will be the only unusually high spending going forward in Q3, and then it will trend down in Q4. There's nothing else to report on, except for some variability, as you mentioned, once the agreement to continue working with INSPYR is finalized.

Keith R. Schroeder, Interim Co-CEO and CFO

Yes, that should be it.

Howard Allen Halpern, Analyst

Okay. Are there any other ways you're considering to reduce spending for the home office beyond what might be considered normal?

Keith R. Schroeder, Interim Co-CEO and CFO

We are continuously evaluating our expenses, particularly in the area of software costs, which is one of our major expenditures. We are carefully considering what type of technology platform we require, and we plan to implement measures to reduce costs in this regard.

Howard Allen Halpern, Analyst

Okay. And I guess one last question. Post close, are you going to just use the cash on hand for normal activities? Or are you going to seek maybe a small revolving credit line or something like that? Or will the balance sheet be basically totally clean of debt?

Keith R. Schroeder, Interim Co-CEO and CFO

We will be debt-free and plan to pay off all our outstanding debt upon closing. We will establish a small revolving credit line that we do not intend to utilize unless necessary. The remaining cash will be held for a period while the Board evaluates the best options for maximizing value for our shareholders.

Howard Allen Halpern, Analyst

Okay. Well, I wish you luck. And I think the Property Management segment has a lot of opportunities. So good luck to both of you.

Operator, Operator

Your next question is coming from Bill Dezellem with Tieton Capital.

William Joseph Dezellem, Analyst

Kelly, I’d like to follow up on something you mentioned in response to a previous question. You indicated that your customers are adjusting their projects and that there isn't a significant amount of pent-up demand. However, it seems to me that adjusting projects typically implies a delay in spending, which could suggest pent-up demand. Could you clarify what you were trying to convey or address the reasoning I just presented?

Kelly Brown, Interim Co-CEO and President of Property Management

Certainly, yes. Thank you for the question. And whenever I mention shuffling, really, I'm referencing the employees that they are utilizing to maintain and manage their portfolios. In the last couple of years, we've seen a trend where certain aspects of how the portfolio is operated has had room for centralization. So for instance, a role on site that may have been responsible for some of the accounting areas of the property, some things like that. So we're seeing some technology trends and how people are being used within the portfolios. But then also when it comes to maintenance, that was really more specifically where when I mentioned shuffling, if you look across a portfolio in a certain location, they may just be able to utilize the employees that they have in place in addition to our services, but just the utilization of our services might be at a slightly lesser level for the sake of saving on spend if they can use their current workforce at multiple sites to maintain the communities. Does that clarify my statement a little bit?

William Joseph Dezellem, Analyst

It does. It's a lot more of the shuffling of who's doing the work rather than what work is being done.

Kelly Brown, Interim Co-CEO and President of Property Management

That's exactly right. And so to my earlier comment, that's not to say that there may not be some things that they are postponing or doing at a lesser level, but that's just very hard to predict right now because based on the feedback that we're getting from clients, they really are just trying to, to my point earlier, use the people that they have to keep up as best as they can on the properties while being mindful of the bottom line in lieu of some of the heightened costs that they've experienced the last couple of years.

William Joseph Dezellem, Analyst

Yes. And probably a natural outcome would be that there is some delay in project activity that's taking place or maintenance, but it's not, to your point, the log jam maybe that we saw coming out of COVID.

Kelly Brown, Interim Co-CEO and President of Property Management

Yes, I think that's accurate.

William Joseph Dezellem, Analyst

Okay. That's helpful. And then in the press release and your opening remarks, you referenced the AI-powered sales and recruiting tools. Maybe I wasn't paying attention as well as I should have in the opening remarks or maybe there's more that you can dive into in terms of what you're hoping to accomplish with those tools once you institute them and how those tools are different from what you're currently doing today? Would you walk through those, please?

Kelly Brown, Interim Co-CEO and President of Property Management

Certainly. Looking at how AI is being used, obviously, it varies widely and depending on how an operation is being ran. But for us specifically, we see an opportunity based on the need to quickly respond to client needs to quickly pick up on client needs whenever they do have a need, they want to spend, they expect it quickly. So that's the sales piece being able to utilize AI to pick up on just buying signs, buying activity and just provide a quicker response whenever we see that need indicated. On the recruiting side, it's really to help candidates get a response quickly when applying for jobs to help them get an instant response so that they know that, hey, BGSF does have a need that I may be able to fulfill. So it helps the people part of things get quicker. If you're relying on your people to respond to applicants and you see a bottleneck happening, that's where you might have an opportunity to plug in some AI tools to help that candidate get a quicker response. So it's things like that, that we're looking at just to help, like I said, overall theme is the speed with which we can transact and the speed with which we can help connect people to jobs is the primary priority there.

William Joseph Dezellem, Analyst

That's really helpful. Looking at your segment reporting, you had corporate general and administrative expenses of $6.2 million, which is distinct from the property segment. As you referenced in the opening remarks, corporate G&A is important. The operating loss for the property division, including that corporate G&A, was $4.4 million. To be clear, without the corporate burden, the property business would have been profitable by $1.8 million this quarter.

Keith R. Schroeder, Interim Co-CEO and CFO

Yes, that's correct.

William Joseph Dezellem, Analyst

Great. And then essentially, in response to the prior questioners questioning, you're looking to increase revenue, increase EBITDA margin, and therefore, that number would increase even further as you build the business?

Keith R. Schroeder, Interim Co-CEO and CFO

That is correct.

Operator, Operator

Your next question is coming from George Melas with MKH Management.

George Melas-Kyriazi, Analyst

Quick question, and I don't know if you can tell us that, Keith, but what do you expect to be the cash on hand once the transaction is completed and you've paid down the debt?

Keith R. Schroeder, Interim Co-CEO and CFO

Sure. So post close with the cash coming in from the sale, less course fees, less all of our outstanding debt, we should have around $45 million on hand.

George Melas-Kyriazi, Analyst

Okay. So $45 million, so that's roughly $4 per share.

Keith R. Schroeder, Interim Co-CEO and CFO

Yes, around $4 or something like that, but yes, in that range.

George Melas-Kyriazi, Analyst

Okay. Very good. Kelly, during the quarter and during the month of July, what were the trends in terms of year-over-year revenue change? For the quarter, it was minus 8.6%. But how did that progress in April, May and June? And maybe if you can tell us in July.

Kelly Brown, Interim Co-CEO and President of Property Management

April, May and June, particularly through June, we did see a positive trend when it comes to the year-over-year gap. And so looking into Q3 and beyond, clearly, as I mentioned earlier, just with some of the economic uncertainty that we continue to hear and see in the market, we anticipate being able to continue to increase that. I am not able to obviously share July figures just yet. However, in June, we definitely saw a positive trend for the quarter.

George Melas-Kyriazi, Analyst

Okay. So that sort of means that April and May were probably down double digits, and then you said June was positive. Did I understand that correct?

Keith R. Schroeder, Interim Co-CEO and CFO

Okay. April was a good increase. May was somewhat flattish. June was a very strong increase. July is an increase over June. And the last part was that based upon years past, the seasonality lift in the quarter of around 9% versus Q2, but we have to see what the rest of the quarter does.

George Melas-Kyriazi, Analyst

Okay. So let me just quickly do my math and try to translate that into a year-over-year number. Bear with me. So we still have a pretty meaningful decline year-over-year, right, in the third quarter.

Keith R. Schroeder, Interim Co-CEO and CFO

We would still be behind prior year unless we get a big lift in share gain, okay? But the key is we have to keep gaining on it, right? And that's what we're focusing on. That's the reason we have invested in new tools that are coming online so we can gain share.

George Melas-Kyriazi, Analyst

Okay. Very good. Kelly, if I remember correctly, the revenue mainly comes from leasing and maintenance. Can you share some insights on where we see strength and where there are weaknesses? Additionally, when we compare this to '24 or even '22, how have these two parts of the business performed?

Kelly Brown, Interim Co-CEO and President of Property Management

Well, we don't necessarily have that level of detail available here on the call. However, as mentioned before, it's really been an overall softening in the industry the last 18 months due to the heightened costs that operators are facing in a big way in the insurance and interest areas.

Keith R. Schroeder, Interim Co-CEO and CFO

That's just something we haven't ever broken apart in the information that we put out to the public. So it's just to get into this morning.

George Melas-Kyriazi, Analyst

Okay. Very good. Fair enough. And just to repeat what you said, Keith, and make sure I understand it correctly, you expect that post close and post transaction services, the G&A would be roughly $10 million and that includes $1.5 million of public company expenses.

Keith R. Schroeder, Interim Co-CEO and CFO

That is correct.

George Melas-Kyriazi, Analyst

That's okay. And so if we adjust the current results for the additional reserve that you took on the AR, we have a contribution to overhead sort of for the first half that's roughly a little bit north of $5 million.

Keith R. Schroeder, Interim Co-CEO and CFO

For the first half of this year?

George Melas-Kyriazi, Analyst

The first half of yes.

Keith R. Schroeder, Interim Co-CEO and CFO

Yes. I think you need to look forward, not backwards, okay?

Operator, Operator

Your next question is coming from Steve Cole with MKH Management.

Unidentified Analyst, Analyst

Let me open up with a couple of things. Looking at exclusive versus nonexclusive agreements with the property management companies, can you address where we are with that and how much of your business comes from those arrangements?

Kelly Brown, Interim Co-CEO and President of Property Management

Certainly. When we refer to exclusive versus semi-exclusive agreements, we consider factors such as the size of our clients' portfolios and their specific business needs. Our strategic team has effectively engaged with our client partners to establish agreements that align with their requirements. This has led to a preference for a simplified approach, where clients can work with a single partner and clearly understand how we deliver our services. We have developed strong relationships with the employees involved, fostering a healthy interest in this area. Overall, while the strategic portfolio may fluctuate year-over-year, we expect it to represent approximately 11% to 15% of our total business revenue.

Unidentified Analyst, Analyst

So among those top 10 companies, you're only getting 11% to 15% of total revenues. Am I hearing that right?

Kelly Brown, Interim Co-CEO and President of Property Management

No, it varies from client to client. For some clients, we have exclusive agreements, and if they're spending on staffing, they spend it with us, so we capture all of that. With other clients, it may not be an exclusive agreement, so the percentage we capture could range from 5% to 50% of their spending. That varies from client to client.

Unidentified Analyst, Analyst

Got it. What I'm trying to get on, maybe I didn't ask the question right, is isn't this an advantage? Let's say, BGSF obviously is one of the biggest players in this business. So the way that you can leverage that is obviously becoming one of these exclusive or semi-exclusive. There can't be more than a handful, right, per the client. So the question is, is this a good or bad? I would think this is a significant differentiator is what I'm trying to get at. versus you and, let's say, a local provider in a market versus other nationals. Am I missing that? Or how do you view that, I guess, is what I mean.

Kelly Brown, Interim Co-CEO and President of Property Management

Yes. Our geographic spread throughout the country is definitely an advantage competitively, especially whenever you're dealing with a company that has a portfolio across the country, to my point earlier, that makes it very appealing for them to work with BGSF because they know they're going to come to one source for all of their needs. So that's certainly been a strategic advantage that the team is leveraging whenever they're engaging in discussions with companies to gain the agreements for exclusive or semi-exclusive agreements.

Keith R. Schroeder, Interim Co-CEO and CFO

No, you are right. So I would say the best way to look at that, the margin lift as sales dollars go up, it's going to be around 35%. That would just fall straight through. Sales dollars go up about 35% of that margin should essentially fall straight through because the selling costs are relatively fixed G&A as well. So building sales will quickly drive a much higher margin and EBITDA.

Unidentified Analyst, Analyst

Okay. Great. And I guess the last question, I'm just trying to understand, when you look at that, and we've already hopped in this a little bit, but the company cost, the G&A cost as we go forward, I always thought property management, correct me if I'm wrong, how much of these folks are actually working from home versus from offices? And how much of the total G&A cost is embedded in lease costs to these offices? And is that an opportunity we can look at?

Keith R. Schroeder, Interim Co-CEO and CFO

The office cost for this group is not included in general and administrative expenses. That's what we have separated. The selling costs cover various areas, including sales and recruitment, among other things. So when you review the quarterly report, that is categorized as selling cost. General and administrative expenses primarily consist of finance, accounting, HR, and related functions.

Operator, Operator

There are no further questions in queue at this time. I would now like to turn the floor back over to Kelly Brown for any closing remarks.

Kelly Brown, Interim Co-CEO and President of Property Management

Thank you for your time today. We appreciate your continued support and look forward to updating you on our third quarter results in a few months. Have a great day.

Keith R. Schroeder, Interim Co-CEO and CFO

Thanks, everyone.

Operator, Operator

Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.