GEE Group Inc. (JOB) Earnings Call Transcript

Hello, and welcome to the GEE Group Fiscal 2023 Second Quarter ended March 31, 2023 earnings and update webcast conference call. I'm Derek Dewan, Chairman and Chief Executive Officer of GEE Group and will be hosting today's call. Joining me as a copresenter is Kim Thorpe, our Senior Vice President and Chief Financial Officer. Thank you for joining us today. It's our pleasure to share with you GEE Group's results for the 2023 fiscal second quarter ended March 31, 2023, provide you with our outlook for the remainder of the 2023 fiscal year in the foreseeable future. Some comments Kim and I make today may be considered forward-looking, including predictions, estimates, expectations and other statements about future performance. These represent our current judgment of what the future holds and are subject to risks and uncertainties that actual results may differ materially from our forward-looking statements. These risks and uncertainties are described below under the caption forward-looking statements, safe harbor and in Monday's earnings press release and our most recent Form 10-Q, 10-K and other SEC filings under the caption Cautionary Statements regarding forward-looking statements and forward-looking statements, safe harbor. We assume no obligation to update statements made on today's call. During the presentation, we also will talk about some non-GAAP financial measures. Reconciliations and explanations of the non-GAAP financial measures we will address today are included in the earnings press release. Our presentation of financial amounts and related items, including growth rates, margins and trend metrics around it are based upon rounded amounts. For purposes of this call in all amounts percentages and related items presented or approximations accordingly. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website, www.geegroup.com. We once again achieved very good results in the fiscal 2023 second quarter, beginning with consolidated revenues of $38.9 million. Our consolidated gross profit and gross margins were $13.2 million and 34%, respectively. Our consolidated non-GAAP adjusted EBITDA for the fiscal 2023 second quarter was $1.7 million. We achieved consolidated net income of $700,000 or $0.01 per diluted share for our fiscal 2023 second quarter. As Kim will explain further, the prior year's fiscal second quarter results were well above normal due to much higher-than-expected demand for direct hire placement services and a significant amount of higher-margin nonrecurring COVID-19 related project work. With the fiscal 2022 second quarter performance was outstanding, the current fiscal second quarter still compares favorably, taking into account the discrete opportunities present in last year's second quarter, particularly in terms of the double-digit growth achieved in our combined professional IT contract businesses in the fiscal 2023 second quarter. Before I turn it over to Kim, I want to say thank you to our wonderful dedicated people. They work extremely hard every day to ensure that our clients get the best service. There are the key in our outstanding performance for GEE Group and what we achieved in fiscal '22 and so far in fiscal 2023, we will continue to have the most important drivers of our company's future success. At this time, I'll turn the call over to our CFO, Kim Thorpe, who will further elaborate on our fiscal 2023 second quarter results. Kim?

Thank you, Derek, and good morning, everyone. Once again, consolidated revenue for the fiscal 2023 second quarter was $38.9 million, which is $700,000 or 2% lower compared to fiscal 2022 second quarter revenue of $39.6 million. However, as Derek mentioned, our fiscal 2022 second quarter included above average performance in our direct higher placement revenue as well as professional contract services revenue generated from COVID-19-related projects and COVID-19 responders. Excluding the effects of the certain nonrecurring COVID-19-related projects alone, which generated $835,000 and $3.2 million in professional contract services revenue in the 3-month and 6-month periods ended March 31, 2022, respectively. Professional contract services revenue remaining professional contract services revenues increased $1.6 million or 5% during the fiscal second quarter on March 31, 2023, and $3.1 million or approximately 5% during the first half of fiscal 2023 over the comparable 2022 fiscal second quarter and first half, respectively. Professional and industrial contract staffing revenue for fiscal 2023 second quarter were $34 million, which is $231,000 or 1% higher as compared with fiscal 2022's second quarter contract staffing service revenues. Professional contract services revenue, which represents 91% of all contract services revenue and 79% of consolidated revenue increased $1.6 million or 5% quarter-over-quarter, again, before the effects or excluding the effects of the nonrecurring COVID-19-related project revenue. The bright spot in our contract services revenue growth was our professional IT contract services revenue, which grew 11% quarter-over-quarter and is up 13% in the first half of fiscal 2023 over fiscal 2022 first half. IT contract services has grown to represent 60% of all professional services contract revenue in the March quarter. IT direct hire and contract services revenue represented 50% of consolidated revenue and is our highest priority growth especially. The increase in our quarter-over-quarter professional contract staffing services revenues and then our professional IT contract staffing services sector, in particular, are the result of increasing demand and our ability to adapt to meet the demand in the new post-COVID-19 U.S. economic and workforce environments. As I said last quarter, 2 recent indicators, the recent outstanding jobs reports and in contrast to that, recent significant layoffs of IT professionals by larger employers, also each are positive indicators for the remainder of fiscal 2023. Rising employment suggest increasing demand for services, while IT corporate downsizing actions means more IT candidates available to fill that demand. Direct hire placement revenue for the fiscal 2023 second quarter was $4.9 million compared with fiscal 2022 second quarter revenue of $5.9 million. As indicated in our release, fiscal 2022, again, was a record high year for direct hire placement services for us, and our March 2022 quarter set a record as our highest March quarter ever for direct higher placement services revenue. Our direct higher placement revenue for the first half of 2023 was $10.6 million. Although not as robust as 2022 performance, we are pleased with this level of direct hire placement production. And despite the macroeconomic environment and potential headwinds we all are aware of, we remain cautiously optimistic about our overall direct hire placement revenue potential for the remainder of fiscal 2023. Industrial staffing revenues were $3.2 million and represented 8% of total revenue for fiscal 2023 second quarter ended March 31, 2023. We continue to experience growth challenges in our light industrial markets, which we attribute to the continued presence of some COV19 and unemployment relief program funds available to workers in Ohio, which tends to cause them not to seek employment. Recent inflation also has led us to increase hourly wages and benefits for contingent workers in our light industrial business in Ohio. We believe that it found that this motivates some of our light industrial temp workers to seek to moderate or reduce their work hours in order to balance income streams in favor of preserving their subsidized benefits, which they may lose if their income is too high. This, in turn, tends to increase competition among staffing firms in Ohio, in particular, for labors to fill temporary staffing jobs. We are actively introducing new sales and recruiting programs to attract candidates and restore growth in our industrial business as well as implementing price increases where possible to mitigate the impact of inflation. Gross profit for fiscal 2023 second quarter was $13.2 million compared with gross profit of $14.5 million in the fiscal 2022 second quarter. Our overall gross margins were 34% and 36.6% for fiscal 2023 and 2022 second quarters, respectively. The declines in gross profit and gross margin, again, are mainly attributable to lower direct higher placement business, which has 100% gross margin. On the contract side, increases in contractor pay associated with recent inflation also have resulted in some spread compression within our professional services businesses. The company in response has stepped up counter-inflationary increases in markups, bill rates and spreads in order to address this recent margin compression. However, despite lower quarter-over-quarter gross profit and gross margins, our current margins remain high compared with our peer group. Selling, general and administrative expenses, SG&A for fiscal 2023 second quarter ended March 31, 2023, decreased by $523,000 or 4% compared with fiscal 2022 second quarter. SG&A expenses were 30% of revenue in the 2023 second quarter compared with 31% for the second quarter of fiscal 2022. In late February and March of 2023, the company implemented certain cost reductions with estimated annual savings of approximately $4 million. The company monitors operating costs, including the impacts of inflation with a view towards identifying and taking advantage of potential cost reductions on a routine basis. In addition, we expect to implement that we expect the implementation of the counter inflationary measures I mentioned a minute ago, which included increases in markups, bill rates and spreads and other targeted cost reductions to help improve our expense ratios and margins going forward. We achieved net income in fiscal 2023 second quarter of $700,000 or $0.01 per diluted share as compared to $1.1 million or $0.01 per diluted share for fiscal 2022 second quarter. Adjusted net income, which is a non-GAAP measure for fiscal 2023 second quarter was $849,000 or $0.01 per diluted share compared with $2.2 million or $0.02 per diluted share for the fiscal 2022 second quarter. Adjusted EBITDA, which is a non-GAAP measure for fiscal 2023 second quarter was $1.7 million as compared with $3.4 million for the fiscal 2022 second quarter. Our current working capital ratio at March 31, 2023, was a healthy 3.6 to 1, up 90 basis points from 2.7 to 1 at September 30, 2022. Free cash flow from operating activities for the 6 months ended March 31, 2023, was $1.4 million, which included the effects of the second and final installment of deferred FICA taxes of $1.8 million that were deferred under the CARES Act and increased cash bonuses of $1.2 million in the first quarter of this fiscal year following record financial performance in fiscal 2022, both these which were paid in December 2020. Our liquidity position is strong. We have no outstanding debt. Our book value per share was $0.90 at March 31, 2023, and our tangible net book value per share was $0.28, both up nicely since September 30, 2022. Finally, as capital allocation strategy, our Board of Directors has authorized a share repurchase program, whereby the company can subject to certain limitations, repurchase up to $20 million of common stock in the open market between now and December 31, 2023. We would expect to commence the repurchase of shares in the near term following our earnings release and conclusion of the related blackout period around this release. To conclude, we remain positive in our outlook for fiscal 2023 with appropriate consideration for lingering uncertainty regarding the overall economy. Before I turn it back over to Derek, please note that reconciliations of our non-GAAP financial measures discussed today with their GAAP counterparts can be found in the supplemental schedules included in our earnings release. And so with that, now I'll turn it back over to Derek.

Thank you, Kim. The fiscal 2023 second quarter marked our seventh consecutive quarter of strong operating performance since deleveraging the company. Having consistently achieved higher margins and free cash flow for the last 7 quarters, we continue to build a positive track record as well as positive momentum for the future. As of March 31, 2023, the company has no debt and over $20 million in cash with $13.3 million in availability under its bank ABL facility. GEE Group's prospects today for future profitable growth continue to expand and improve. Despite macroeconomic headwinds and unforeseen events, we believe we can continue to deliver solid results in fiscal year 2023 and beyond and increase shareholder value. Before we pause to take your questions, I want to again say a special thank you to all of our wonderful people for their professionalism, hard work and dedication. Without them, we could not have accomplished all the good things we have shared today. Now Kim and I would be happy to answer questions. Please ask one question and rejoin the queue with a follow-up if you have any further questions. If there's time, we'll come back to you. Thank you.

Okay. We have our -- Derek, are you on?

Yes. First question, that's a common question. I was trying to aggregate similar questions. We announced a $20 million stock repurchase plan through 12/31 of '23 this year. The stock purchase plan is for open market transactions, and we do not -- we have not bought any shares yet because we want to report our numbers first because we were in a blackout period. But the share buyback program will commence after these earnings have been adjusted, which we reported. So probably the latter part of this week is we'll begin the program, and we'll be judicious in how we execute it, but we are absolutely pursuing the plan as described previously. And it's not an end all. Fortunately, we're able to generate significant cash. So we plan on keeping our capital allocation program in place and continuing forward with it. Another question that came up, Kim, was our SG&A cuts. If you'd like to comment on that and also the impact on the next several quarters' results?

Yes. Thank you, Derek. Yes, the predominant source of the cost cuts was really an acceleration of a reduction in force, which was comprised of basically performers who were not meeting their minimum commitments, and that was probably 80% of the number, 85% of the number. And as far as the margins go, the number is calculated based on their actual current pay, including, in some cases, commit some commission the effect -- the impact on the margin is, we expect it to have about a 2% increase in our EBITDA margins this fiscal year. Of course, that's going to depend on volume during the rest of the year. And of course, we're all looking at -- we're all cautiously optimistic about the economy and the environment. However, assuming everything goes as planned, it should provide us about a 2% increase in the EBITDA margin this year, which would bring our EBITDA margin somewhere between 6% and 7%, 7% on the high end. And then going forward, we believe that margin would move up somewhere between 7% and 8% in the near term based on the cost cuts.

Okay, Kim. Another question revolved around acquisitions or potential acquisitions.

As we have stated previously, to the extent that we have availability of cash, and the company is performing well, we'll augment our capital allocation strategy with strategic acquisitions, but only if the price point is appropriate and would be accretive to earnings. So the multiples have to be in line with where we're trading, and that can be accomplished with synergies and so forth. However, fortunately, we're able to execute a buyback program and also be opportunistic on strategic acquisitions at the appropriate time, particularly some tuck-ins that were less risky, easier to integrate and so forth.