Transcript
Hello, and welcome to the GEE Group Fiscal Fourth Quarter and Year End September 30, 2023 Earnings and our update for 2024 Webcast Conference Call. I'm Derek Dewan, the Chairman and Chief Executive Officer of GEE Group, and will be hosting today's call. Joining me as a co-presenter is Kim Thorpe, our Senior Vice President and Chief Financial Officer. Thank you for joining us today. It is our pleasure to share with you GEE Group's results for the fiscal year and the fourth quarter ended September 30, 2023, and provide you with our outlook for the fiscal year 2024 and the foreseeable future. Some comments Kim and I will make may be considered forward-looking, including predictions, estimates, expectations and other statements about our future performance. These represent our current judgments 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, Form 10-K and other SEC filings under the captions, Cautionary Statement Regarding Forward-Looking Statements and Forward-Looking Statements Safe Harbor. We assume no obligation to update statements made on today's call. During this presentation, we will also talk about some non-GAAP financial measures. Reconciliations and explanations of the non-GAAP financial measures that we address today are included in our earnings press release. Our presentation of financial amounts and related items, including growth rates, margins and trend metrics are rounded based upon rounded amounts for purposes of this call, and all amounts, percentages and related items presented are approximations accordingly. For your convenience, our prepared remarks for today's call are available in the Investor Center of our website, www.geegroup.com. Having turned in record performance and results for the fiscal 2022 year, we encountered significant macroeconomic and staffing industry headwinds in fiscal 2023, which negatively impacted our full fiscal year and fourth quarter ended September 30, 2023. Consolidated revenues were $152.4 million for the fiscal year, and revenues for our fiscal fourth quarter were $34.3 million. Gross profit and gross margins were $52.9 million and $11.6 million, and 34.7% and 34% for the fiscal year and fourth quarter ended September 30, 2023, respectively. Our consolidated non-GAAP adjusted EBITDA for fiscal 2023 was $7 million, down $5.5 million or 44% compared to fiscal 2022. Non-GAAP adjusted EBITDA for the fiscal 2023 fourth quarter was $1.2 million, up $0.2 million or 23% compared to the fiscal 2022 fourth quarter. We were able to achieve consolidated net income of $9.4 million or $0.08 per diluted share for the 2023 fiscal year. Consolidated net income for the fiscal 2023 fourth quarter was $0.2 million and slightly above breakeven per diluted share. As Kim will explain further, the prior fiscal year’s results were well above normal, led by record-high demand for direct hire placement services fueled by a post-COVID-19 bounce upward in hiring. The pullback in demand for direct hire placement services and in certain administrative, clerical, and light industrial contract services in 2023 contributed to the shortfall in 2023 results compared with last year's numbers. Fiscal 2023's performance still compares favorably with our industry peers, taking into account the operating environment, and particularly, in terms of the growth we achieved in our combined professional IT contract services businesses and brands. Before I turn it over to Kim, I would like to share some important achievements and milestones during the quarter. First, the September 2023 quarter was our ninth consecutive quarter of profitability and free cash flow generation since we completed our deleveraging initiatives in June of 2021. Despite fiscal 2023's lower results compared to fiscal 2022, our operating performance and financial results have been on par with and better in certain respects than our larger industry peers. We believe our IT contract services brands demonstrated the ability to grow under difficult conditions and in particular, positions us well for future growth and further increasing shareholder value. We implemented our $20 million share repurchase program in late April 2023, which has served as a key component of our capital allocation plans in fiscal 2023. As of September 30, 2023, we had repurchased 3.4 million shares of our common stock, and as of December 15, 2023, we have repurchased 5.8 million JOB shares or 5% of our outstanding shares at the beginning of the program. I want to assure everyone that we believe our stock is undervalued and has substantial room to grow. As a matter of fact, many, if not most publicly traded staffing firms, are trading below market indices and their 52-week highs due to economic concerns. Measuring forward from the time we announced the funding of our follow-on offering on April 19, 2021, GEE Group stock has outperformed most of its public staffing industry peers, including several of the largest players. Despite the macroeconomic and staffing industry-specific headwinds facing us, we are continuing to focus on the growth of our businesses and taking other definitive actions to help grow shareholder value. In addition to repurchasing 5% of our outstanding shares in 2023, we added three new independent directors to our board in the fall, including the managing director of our largest shareholder appointed a lead independent director and committed to undertake a review of strategic alternatives available to us with a view towards unlocking shareholder value. Most recently, we have engaged the investment banking firm of DC Advisory to assist us with the review of strategic alternatives, which includes capital allocation strategies, mergers, acquisitions, etc. And finally, before I turn it over to Kim, I want to once again thank our wonderful dedicated employees and associates. They work extremely hard every day to ensure that our clients get the very best service. They are a key factor in our achievements and the most important driver of our company's future success. At this time, I'll turn the call over to our Senior Vice President and Chief Financial Officer, Kim Thorpe, who will further elaborate on our fiscal 2023 annual and fourth-quarter results.
Thank you, Derek, and good morning. As Derek mentioned, revenues for fiscal 2023 were $152.4 million, down 8% as compared with fiscal 2022 revenues of $165.1 million. Revenues for the fourth quarter of the fiscal year were $34.3 million, down approximately 18% as compared with the fourth quarter of fiscal 2022. The lower revenues in fiscal 2023 were primarily the result of the macroeconomic forces, including inflation, rising interest rates, and the resulting negative impacts on the labor market and hiring environment, which impacted the entire staffing industry. Fiscal 2023 followed a period of recovery experienced in 2022, which was primarily due to a post-COVID-19 bounce upward in employment. As Derek mentioned, the pullback in demand for direct hire placement services and in certain administrative, clerical, and light industrial contract services in 2023 that contributed to the shortfall in 2023 results were primarily the result of these headwinds. While fiscal 2023 results were lower overall, the company once again was profitable and generated good positive cash flow from operations, as it has consistently done since completion of the significant deleveraging initiatives and a follow-on offering during the quarter ended June 30, 2021. We also believe our top-line performance has been in line with our industry peers and above average in certain respects, including the performance of our IT brands. Our lowest-performing businesses continued to be those serving light industrial and administrative and office clerical markets. At this stage, we remain cautiously optimistic about our ability and timing to return to overall growth once again, which we expect to be led by our IT brands and our other professional services businesses, and with the anticipation that the uncertainties and unknowns about the economy and labor environments weighing on the businesses today begin to lessen during fiscal 2024. Professional and industrial contract staffing services contributed $133 million and $30.7 million or 87% and 90% of revenues for the fiscal 2023 year and fourth quarter, respectively. Professional contract services revenues, our largest contract services segment, represent 86% of all contract services revenue and 79% of consolidated revenue, and decreased $2.5 million or 2% compared to fiscal 2022. The bright spots in this comparison were the professional IT brands’ contract services revenues, which grew 3% year-over-year. IT contract services revenues were 59% of all professional services contract revenue, and IT direct hire and contract services revenue combined represent 49%, nearly half of the consolidated revenues for fiscal 2023. Direct hire revenues for fiscal 2023 were $19.4 million, down $7.2 million or 27% compared with fiscal 2022. Direct hire placement revenues for fiscal 2023 fourth quarter were $3.6 million, down $2.9 million or 45% as compared to the fiscal 2022 fourth quarter. As Derek and I have mentioned earlier, fiscal 2022 was a record high year for direct hire placement services. Industrial staffing services revenues were $13 million and $3 million, representing 9% of total revenue for both fiscal year and fourth quarter ended September 30, 2023, respectively. We continue to experience growth challenges in our light industrial markets, which we attribute to increased competition for business and temporary labor, which again has occurred since the COVID-19 pandemic. Among the newer post-COVID-19 competitors for labor are emerging B2C firms, such as UBER, Lyft, and Door Dash. These firms were able to compete effectively due to the additional independence and flexibility they offer workers. Recent inflation also has led us to increase hourly wages and benefits for our temporary workers in our light industrial business in Ohio. These conditions also have helped drive increased competition among staffing firms in Ohio for laborers to fill staffing job orders. We are continuing to actively develop and implement new sales and recruiting programs to help attract and retain candidates and restore growth in our industrial business. We also have implemented price increases in Ohio, which have improved spreads and helped to mitigate the impact of inflation on labor conditions there. Consolidated gross profits and gross margins were $52.9 million or 34.7% and $11.6 million or 34% for the fiscal year and fourth quarter ended September 30, 2023, respectively. The declines in gross profit and gross margin, again, are mainly attributable to lower revenues, including most notably direct hire placement business, which has a 100% gross margin. On the contract side, increases in contractor pay associated with recent inflation have also caused some spread compression within certain professional services businesses. The company continues to focus on counter-inflationary measures, including increases in mark-ups, bill rates, and spreads in order to improve margins and profitability. Despite lower year-over-year gross profit and gross margins, our current margins remain relatively high and are very competitive compared with the company's industry peers. Selling, general and administrative expenses, SG&A, for the fiscal year and fourth quarter ended decreased $4.3 million and $3.2 million respectively as compared to the comparable fiscal 2022 periods. SG&A expenses were 31.2% and 33% of revenues for the fiscal year and fourth quarter ended September 30, 2023 respectively as compared with 31.4% and 34.8% of revenues for the fiscal year and fourth quarter ended September 30, 2022, respectively. In the fiscal fourth quarter of 2023, the company's SG&A included $700,000 in legal and corporate expenses related to negotiations with shareholder activists and associated compliance matters. Excluding the effect of these SG&A expenses, the ratio of SG&A expenses to revenue would have been 30.9% and 30.7% for the fiscal year and fourth quarter ended September 30, 2023, respectively. In late February and March 2023 you will recall, the company implemented certain cost reductions with an estimated annual savings of approximately $4 million. Despite the significant declines in revenues in 2023, these cost reductions have helped achieve lower SG&A and total operating expense ratios in fiscal 2023 versus fiscal 2022, again, despite lower revenues. The company monitors operating costs, including the impacts of inflation with a view towards identifying and taking advantage of possible cost reductions on a routine basis. We achieved net income for the fiscal 2023 of $9.4 million or $0.08 per diluted share as compared with net income of $19.6 million or $0.17 per diluted share in fiscal 2022. Adjusted net income, which is a non-GAAP financial measure, for the fiscal year and fourth quarter ended September 30, 2023 was $11.1 million or $0.10 per diluted share and $1.1 million or $0.01 per diluted share respectively as compared to $7.7 million or $0.07 per diluted share and a $400,000 loss or just under breakeven per diluted share for the fiscal year and fourth quarter ended September 30, 2022, respectively. The company recognized a net deferred tax benefit of $7.2 million for the fiscal year ended September 30, 2023, which accounted for approximately $0.06 of this period's earnings per diluted share. The elimination of our former longstanding 100% deferred tax asset valuation allowance that resulted in this large net deferred tax benefit has been another positive achievement for our company. Adjusted EBITDA, which is a non-GAAP financial measure, for the fiscal year and fourth quarter ended September 30, 2023 was $7 million and $1.2 million as compared with $12.5 million and $1 million respectively for the comparable fiscal 2022 periods. Several factors we've covered, including notably the decrease in fiscal 2023 revenues from fiscal 2022's record highs, as well as economic headwinds, inflationary pressures, and rising interest rates present this year account for these declines. As I mentioned a moment ago, we continue to monitor operating costs for possible cost reductions on a routine basis and also will take other definitive actions in order to improve our margins and profitability. Our current or working capital ratio at September 30, 2023 was a strong 3.7:1, up 100 basis points from 2.7:1 as of September 30, 2022. Free cash flow, a non-GAAP financial measure for the fiscal year ended September 30, 2023 was $5.8 million as compared with $9.1 million for fiscal 2022. Our liquidity position remains strong. We have no outstanding debt. Our net book value per share and our net tangible book value per share were $0.98 and $0.36 respectively as of September 30, 2023. Net book value per share is up $0.10 and net tangible book value per share is up $0.11 compared with $0.88 and $0.25 respectively as of September 30, 2022. To conclude, as Derek said, we remain cautiously optimistic in our outlook for fiscal 2024 with appropriate consideration of macroeconomic and labor market-related uncertainties and unknowns that exist in our operating environment. Before I turn it back over to Derek, please note, again, that reconciliations of GEE Group’s non-GAAP financial measures discussed today and in our earnings release with their GAAP counterparts can be found in supplemental schedules included in our earnings press release. Now, I’ll turn the call back over to Derek.
Thank you, Kim. The fiscal 2023 fourth quarter marked our ninth consecutive quarter of strong operating performance since deleveraging the company. Having consistently achieved higher margins and free cash flow over the years, we continue to build a positive track record, as well as positive momentum for the future. As of September 30, 2023, the company had no debt and approximately $22.5 million in cash with $11.3 million in availability under its bank ABL credit facility. GEE Group’s prospects today for future profitable growth continue to expand and improve. Despite macroeconomic headwinds, staffing industry-specific challenges, and unforeseen events, we will continue to work hard for the benefit of our shareholders, and we expect to deliver solid results for the upcoming fiscal 2024 year and beyond and significantly increase shareholder value. Before we pause to take your questions, I want to again say a special thank you to all our wonderful people for their professionalism, hard work, and dedication. Without them, we could not have accomplished all the good things that we have shared with you today. Now Kim and I would be happy to answer your questions. Please ask just one question and rejoin the queue with a follow-up as needed. If there’s time, we’ll come back to you for additional questions. So the question-and-answer period will now start. One of the initial questions is about comparing a stock buyback to the possibility of a dividend payment. We have partnered with DC Advisory to investigate various strategic options, including how to allocate our capital and the optimal use of our resources. This will be a part of the analysis, and we anticipate receiving this information at the end of the project, which should be in about 45 to 60 days. They will thoroughly review all options, including the potential for dividends. The next question is why we didn't start on time. I delayed the start for the benefit of our shareholders who were logging in quickly. We monitor logins, and I wanted to ensure all shareholders had a chance to join, so we commenced around 11:03. Regarding company performance, this year was challenging. Are we satisfied? Certainly not. Did we perform reasonably well under the circumstances? Yes, we managed to generate cash flow and maintain profitability, but we will never be content. Complacency leads to poor performance, which is not acceptable to us. Moving forward, winning is our priority, and as Vince Lombardi famously stated, winning isn't everything; it's the only thing. I believe that with time, we will meet the expectations of our shareholders and my own. Both Kim and I are significant shareholders, and we will persevere with the support of our largest shareholders on the Board of Directors, who have approved our strategy and are fully behind our progressive direction. Why should you invest in our company? We believe in our long-term success based on our strategies and execution. We have several strategies ready to ensure success and are committed to that goal. We are not complacent or content with our performance, as mediocrity is not part of our ethos. For peer group analysis, we can provide that information separately if desired, and we're open to discussing it further. You can reach out should you wish to have a conversation about industry comparisons. Although it might seem that others are performing poorly due to external challenges, this does not reflect our mindset, and we are dedicated to achieving strong results. We recognize that this year wasn’t exceptional, but we feel it was a solid year given the situation. Regarding the decline in stock price, the explanation is straightforward: while last year's results were significantly better, some interpret the current performance as an indication of ongoing issues, which is not our view. We are confident we will return to our desired trajectory. As for revenue projections, we do see Q3 as a potential baseline for the upcoming year. The industry has clearly faced some downturn this year, notably in permanent placements or direct-hire revenue, which has decreased significantly. Additionally, hiring in the labor market has stalled partly because of economic uncertainties and high-interest rates, resulting in delays for projects and minimal hiring, particularly in our fourth quarter. Someone asked if Q3 is indicative of future performance. It is, but the timing of recovery is uncertain. It could happen in the first quarter, which has seasonal variations, or perhaps in the second or third quarter. The key is that we have a positive short-term outlook, and we believe a turnaround is coming. We are also focused on managing SG&A expenses carefully; however, we are hiring to drive revenue, which is crucial for preparing for growth. This industry has seen cyclical patterns over the years, and we can discuss those privately, as I prefer not to elaborate excessively here. Historically, firms experience initial downturns before temporary staffing services feel the pinch, while in recoveries, contract work tends to rebound first, followed by firm placements. This pattern has consistently appeared in earlier economic cycles. The goal is to normalize profitability alongside revenue growth. Which sectors are showing improved demand? The IT sector, which previously faced a decline of 10% to 12%, is now showing signs of recovery. The pace of decline has decreased, and we are beginning to see an upward trend. I'm focused on both growth and profitability, and I believe demand is improving. As for when we might expect a more pronounced recovery, we anticipate it may occur in the second quarter of 2024. The March quarter should be stable, and the upcoming quarter ending December 31 should reflect an increase in demand. Importantly, we are well-positioned with no debt, cash reserves, good operating margins, and gross margins that surpass those of our peers. I can provide more details if needed, but I prefer to focus on our own goals rather than comparisons to the competition. Are we exploring M&A opportunities? Yes, DC Advisory is assisting us in assessing potential tuck-in acquisitions and other strategic options. Another point is how we can better manage expectations. While macroeconomic challenges complicate things on a quarterly basis, we can handle expectations more effectively on an annualized scale. Regarding cash flow, we observe that the industry is indeed improving, and we feel we are emerging from the lowest point of the cyclical downturn in staffing, with signs of gradual recovery. Although improvements do tend to be slow, we hope to see a more significant positive shift as we approach the spring and summer months. Lastly, a person mentioned they appreciated the comments, including the Vince Lombardi reference, and I must say, I have a deep respect for consistent winners; that's a principle I stand by. I’m not satisfied with current results, yet I recognize that our strong positioning for growth is a strong indicator of future stock performance. On internal headcount, how are we doing? Are there any sectors that have grown more than others? Kim, could you comment on the growth we've seen in the IT sector? We actually experienced growth there, even amidst prevailing challenges.
Happy to. We not only grew our IT contract services but also our engineering contract services, which is a smaller business, though it still experienced growth. Additionally, we expanded our accounting firm business, which is also small. IT is crucial because it is our primary focus area and has increased significantly as a portion of our overall business; when I joined, it was just under 40%, and now it’s approaching 50%. This sector tends to exhibit greater resilience during economic fluctuations. Although there was a slowdown in IT hiring that started in 2022 and continued into 2023, we have a strong mix of businesses focused on cutting-edge sectors like AI, generative AI, and cybersecurity. I’d also like to address the concerns regarding our stock price; currently at $0.49. If I factor in a reasonable control premium of around 30%, that brings the value to the mid to high $0.30 range. Our tangible book value, which includes cash and accounts receivable minus liabilities, stands at $0.36 per share. This indicates that no value is being attributed to our operating businesses. Even after a recent audit, we've demonstrated nearly $70 million in intangible assets supported by conservative cash flow forecasts. It seems there is a lack of recognition in the marketplace for our true value. Additionally, regarding the perception of a consistently hot job market, staffing industry analysts have forecasted a 10% decline in total industry revenue for 2023, which contradicts that notion. I wanted to present these facts to clarify the situation.
Let me emphasize that the term "job market" can be misleading. It's important to distinguish what type of job market we are discussing. The hospitality sector saw growth, and there was an increase in hiring for some entry-level positions, while the IT sector experienced declines due to layoffs. Despite these challenges in IT, we have managed to succeed and are actively reemploying many of those IT professionals on various projects. Additionally, many projects were delayed due to rising interest rates and uncertainties in the global economy, including situations in Ukraine and Gaza, which have created hesitance among CEOs in corporate America. Looking ahead to the upcoming election year, we anticipate that interest rates may decrease, and we believe the Federal Reserve will take the necessary steps to stimulate the economy. Once there is a sense of normalization, we expect to increase hiring for contract labor. However, as long as uncertainty remains, we will see slower hiring for permanent positions. Currently, we are bringing in new talent to enhance our business, focusing on increasing our per desk average, which is performing well, but we aim for further growth. We're launching a major sales initiative in IT and are implementing various strategies to boost our revenue. At the same time, we are being very mindful of our costs, especially in SG&A, to ensure they remain low while our top line is under pressure. We're taking substantial actions and doing so with both aggression and care. Regarding how the new directors have added value to GEE Group, during our recent board meeting, the insights from the new directors have proven extremely beneficial. They bring diverse perspectives, which are invaluable to our executive team. Their experience in the industry, particularly that of our largest shareholder among them, has significantly contributed to our decision-making process. As for the labor market, we acknowledge that some deals are now more affordable, and we have specific targets in mind that offer low multiples. Whether acquiring businesses is preferable to buying back stock will be assessed by DC Advisory, ensuring we don’t overpay while trading at a certain multiple. We remain focused on acquiring companies that can enhance our EBITDA and generate growth. I would like to conclude the call here. If you have further questions or wish to discuss, please reach out. We appreciate your support as shareholders and are committed to working hard to properly value our stock and create substantial value moving forward. Thank you, and have a wonderful holiday season. We are dedicated to delivering the results that you and we deserve. Thank you, and that wraps up our call.