Earnings Call Transcript - JOB Q1 2024

Derek Dewan, Chairman and CEO

Hello, and welcome to the GEE Group fiscal 2024 First Quarter Ended December 31, 2023 Earnings and Update Webcast Conference Call. I’m Derek Dewan, Chairman and Chief Executive Officer of GEE Group. I 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 2024 first quarter ended December 31, 2023, and provide you with our outlook for the remainder of the 2024 fiscal year 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 Tuesday’s earnings press and our most recent Form 10-Q, 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 also will talk about some non-GAAP financial measures. Reconciliations and explanations of the non-GAAP 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, are rounded, or 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. We faced significant difficulties in the fiscal 2024 first quarter ended December 31, 2023 mainly stemming from economic and labor market instability and uncertainty. Economic and market conditions for us and our industry began to worsen earlier in calendar 2023 following a COVID-19 bounce in 2022, and it worsened even more in the second half of calendar 2023, leading to the significant decline in results from the comparable fiscal 2023 first quarter ended December 31, 2022. Consolidated revenues were $30.6 million for the fiscal 2024 first quarter. Gross profit and gross margin were $9.7 million and 31.8%, respectively, for the fiscal 2024 first quarter. Consolidated non-GAAP adjusted EBITDA was minus $200,000 and we reported a net loss of $1.6 million, or $0.01 per diluted share, for the fiscal 2024 first quarter. The prior fiscal 2023 first quarter results were above normal led by record high demand for direct hire placement services in 2022, driven by the post-COVID recovery bounce at that time. The pullback in demand for direct hire placement services, in particular, contributed to the significant shortfall in fiscal 2024 first quarter results relative to those of the first quarter of fiscal 2023. Our performance still compares and tracks consistently with our industry peers as we all are facing similar challenges. The challenges being faced by the US Staffing Industry, as a whole, including us, are expected to continue through at least the first half of calendar 2024. Before I turn it over to Kim, I would like to touch on some recent achievements. We concluded our share repurchase program on December 31, 2023 under which we purchased 6.1 million shares of JOB common stock, or just over 5% of our outstanding shares at the beginning of the program. In December 2023, our M&A Committee of the Board of Directors engaged the investment banking firm, DC Advisory, to assist the Company with the review of strategic alternatives, which includes capital allocation strategies, mergers, acquisitions, and others, including future share repurchases. We expect to receive DC Advisory’s initial findings to be presented to the M&A Committee as soon as this week or next. I want to assure everyone that our sole focus now and into the immediate future is to manage this downturn with the objective of minimizing its negative impacts on our businesses and preparing for an eventual recovery. We have hardened our balance sheet with substantial liquidity in the form of cash and borrowing capacity and are very well prepared to successfully navigate our present poor economic conditions. We also continue to believe that our stock is undervalued and has substantial room to grow. 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 2024 first quarter results.

Kim Thorpe, CFO

Thank you, Derek, and good morning. As Derek mentioned, revenues for the fiscal 2024 first quarter were $30.6 million, down 26% as compared to the fiscal 2023 first quarter revenue of $41.1 million. Results for the fiscal 2024 first quarter declined in comparison to those of fiscal 2023's first quarter, due mainly to the significant worsening of economic conditions. We also achieved record performance in the 2022 calendar year, including the fiscal 2023 first quarter ended December 31, 2022, driven by what some in our industry refer to as, as Derek mentioned a minute ago, a post-COVID-19 bounce in employment recovery trends. This gave way to returning concerns about uncertainties surrounding the economy that have negatively impacted labor markets throughout 2023, and worsened in the later portion of calendar 2023, leading to further decreases in orders and placements for our businesses through the first fiscal quarter of 2024. Professional and industrial contract staffing services revenues for the fiscal 2024 first quarter were $27.6 million, down 22% as compared to the fiscal 2023 first quarter. Professional contract services revenue, which represents 91% of all contract services revenue and 82% of total revenue, decreased $6.7 million, or 21%, quarter over quarter. Industrial contract services revenue, which represents 9% of all contract services revenue and 8% of all revenue, decreased $1.1 million, or 31%, quarter over quarter. Again, the economic and labor market factors previously discussed contributed to a decline in orders from clients, as well as temporary labor to fill those orders, leading to the decrease in contract revenues. Direct hire revenues for the fiscal 2024 first quarter were $3.1 million, down 47% as compared with fiscal 2023 first quarter direct hire revenues. As Derek and I mentioned earlier, the fiscal 2023 first quarter ended December 31, 2022, was part of and at the end of a record high calendar year for direct hire placements. Furthermore, direct hire placements versus temporary placements are usually the first to be negatively impacted in an economic downturn, such as that experienced since 2022’s post-COVID-19 bounce, to the resurgence of economic and labor uncertainties in 2023. Gross profit for the fiscal 2024 first quarter was $9.7 million, down 32% as compared to the fiscal 2023 first quarter gross profit of $14.4 million. Our overall gross margins were 31.8% and 35% for the fiscal 2024 and 2023 first quarters, respectively. These decreases in gross profit and gross margin are mainly attributable to the decline in direct hire business for the fiscal 2024 first quarter. Our Professional Contract Services gross margin was 25% for the fiscal 2024 first quarter compared with 25.4% for the fiscal 2023 first quarter, a decline of only 40 basis points. Our Light Industrial Services gross margin was 16% for the fiscal 2024 first quarter, compared with 15.5% for the fiscal 2023 first quarter, which was an increase of 50 basis points. Despite lower quarter-over-quarter overall gross profit and gross margins, our current margins remain relatively high as compared with those of our competitors. Selling, general and administrative expenses, SG&A for the fiscal 2024 first quarter were $10.6 million, down 17% as compared with the fiscal 2023 first quarter. SG&A expenses were 34.6% of revenues for this fiscal 2024 first quarter, compared with 31.1% of the fiscal 2023 first quarter. The increase in SG&A relative to revenue is primarily attributable to fixed costs, including personnel-related expenses, occupancy costs, software subscriptions for applicant sourcing and tracking, and others, which increased proportionally relative to lower revenues, and to a lesser extent, certain other non-recurring expenses associated with core business operations. We reported a net loss for the fiscal 2024 first quarter of $1.6 million, or negative $0.01 per diluted share, down $2.3 million as compared with net income of $700,000, or $0.01 per diluted share for the fiscal 2023 first quarter. Adjusted net loss, which is a non-GAAP financial measure for the fiscal 2024 first quarter was a negative $900,000, or a negative $0.01 per diluted share, down $2 million as compared with $1.1 million, or $0.01 per diluted share for the fiscal 2023 first quarter. Our reported net losses for the fiscal 2024 first quarter again are mainly the result of the decreases in revenues and gross profit, and gross margin on lower direct hire placement business previously discussed. Adjusted EBITDA, which is a non-GAAP financial measure for the fiscal 2024 first quarter, was a negative $200,000, down $2.2 million as compared with $2 million for the fiscal 2023 first quarter. Our current or working capital ratio as of December 31, 2023, was 4.2-to-1, up 60 basis points from 3.6-to-1, as of September 30, 2023. We reported negative cash flow from operating activities of $900,000 for the fiscal 2024 first quarter ended December 31, 2023. Our liquidity position remains very strong and we have no outstanding debt. Our net book value per share and net tangible book value per share were $0.93 and $0.33, respectively, as of December 31, 2023. To conclude, we’re disappointed with our fiscal 2024 first quarter results, and we remain cautious in our outlook for the remainder of fiscal 2024, considering current economic and labor market uncertainties. Importantly, however, we do remain optimistic for the long-term and have demonstrated we can produce earnings consistently under better economic conditions. Before I turn it back over to Derek, please note that reconciliations of GEE Group's non-GAAP financial measures discussed today, 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.

Derek Dewan, Chairman and CEO

Thank you, Kim. At December 31, 2023, the company had $19.9 million in cash and another $9.3 million in availability under its bank ABL facility. Despite economic headwinds and staffing industry-specific challenges impacting demand for our services, we are aggressively managing and preparing our businesses for an inevitable recovery. We will continue to work hard for the benefit of our shareholders, including consistently evaluating strategic uses of GEE Group's capital to maximize shareholder returns. Before we pause to take your questions, I want to again say a special thank you to all of our wonderful employees for their professionalism, hard work and dedication. Without them, we could not have accomplished all the good things we have shared with you today. Now, Kim and I will be happy to answer your questions. Please just ask one question and rejoin the queue with a follow-up as needed. If there is time, we will come back to you for additional questions. Thank you. So the first question is regarding the stock buyback that expired by December 31, 2023. Would we consider reinstating a buyback plan and the thought process? We are waiting for the findings from our investment bank, DC Advisory, which will set forth strategic alternatives including maximum use of our capital. They will evaluate all the options we have with respect to utilization of our capital, and we expect that settlement either the latter part of this or next week. We will communicate back also with you regarding the findings there. So we are well-positioned cash-wise and credit-wise. We have no debt. So we're in very good shape. And by that, I mean long-term debt. Kim, would you like to add anything to that?

Kim Thorpe, CFO

No, I think it's important to point out that while this quarter is disappointing, we are very well prepared for it. We have faced similar situations before and emerged stronger after the pandemic than we were before. So I don’t have anything to add.

Derek Dewan, Chairman and CEO

Thank you. One of the questions relates to the strategic alternatives again. We are going to wait for our report to discuss those further. How much did the company spend on DC Advisory's strategic review? I believe that information is confidential based on the agreement with DC Advisory. However, we were very cost-conscious, and they worked with us at a low rate, which made me feel good about the process. We look forward to their findings. A question is what outcomes the strategic review will produce. As I mentioned, this will help us identify the best use of our capital. We'll talk about our M&A strategy and other related matters when the time is right. Regarding stock buybacks, if you want to buy your stocks back, would you be willing to do so at $0.37? Personally, I would prefer to buy at $1, but the stock buyback program has been successful so far. I would also like to address recessionary trends. The trend for our business shows a decline in 2000-2001 and again in 2008-2009, and we are currently experiencing a similar dip. The positive aspect is that previous recoveries have seen a quick increase in business volume. We are preparing for this anticipated surge by hiring sales and recruiting personnel. We have also managed our SG&A effectively, which dropped significantly by almost $2 million this quarter. Although it increased as a percentage of revenue due to the revenue drop, we have options to further manage SG&A. However, we don’t want to reduce SG&A excessively if we expect a demand recovery in the near future. This could mean six or nine months, but we see it reflected in our backlog of job orders. We will keep you updated on this situation, and I can share from my experience that I enjoy the recovery period.

Kim Thorpe, CFO

Hello. Derek, are you there? I think Derek has had some difficulty with his mic. So, I'll have to step in and take over a couple of these questions. The repurchase program expires December 23. With the new plans at these levels, does it make sense to buy more stock? The DC Advisory is definitely looking at that along with the other portions of the review. As Derek said, they intend to complete the review and have a report to us either this week or next week to our M&A Committee. Our M&A Committee is leading that project. It's comprised entirely of independent directors. And so it's something that we take very seriously in the realm of governance. Does the strategic alternatives review include a serious look at selling the company? All pathways will be reviewed in the strategic alternatives review. Although there's another question here: would you consider selling the company under these conditions? My own personal opinion, I think I speak for Derek as well, I prefer to buy low and sell high rather than the opposite.

Derek Dewan, Chairman and CEO

Well, Kim, I can also add. I've been on a little technical glitch for a second, but I've listened on the questions. And one thing people need to remember is that there are some ups and downs in the sector. It's an industry that has cyclicality, so based on demand and the macroeconomic environment. So, I've lived through multiple cycles and exited very successfully. So, the comment about that is, you know, as a public company, you have to maximize shareholder value, and at this point, we have to build our business back to at least where it was first, and then get to the next level, all of which is very possible for sure because of what we're seeing. We're pretty hopeful that we flattened out on the lower demand, and that we will catch the upswing towards the latter part of 2024, but it takes a little bit longer. That's fine. We're well-positioned to do it. We don't have to be rash about any decisions to do anything out of the ordinary, but we do have to be prudent in managing both the top and the bottom line and keep driving the business forward. We have a great value proposition in terms of our verticals; our margins, by the way, were either second or third in the peer group for the industry in gross margin even with the decline down from roughly 35 to 31.5, which is driven by perm placement; our volume influenced it. But our contract gross margins are also holding very well, and our pricing is also holding. Let me take another question.

Kim Thorpe, CFO

So to put this in perspective, I don't want folks to think that we don't take the loss this quarter seriously. We take it very seriously. But let me attempt to put some more perspective around this. In the last 10 quarters, since we did our follow-on offering, we generated $500 million in revenue and nearly $180 million in gross profit. Our gross margin across all 10 quarters was 35.6%, which is in the high-end of our industry. Our adjusted EBITDA over that period cumulatively has been just over 6%. I mean, we obviously need to work on getting that higher. And we will. Our net income over that period has been $27 million or 5.5%. Our cumulative earnings per share since the offering at $0.60 has been $0.27, 44% of the $0.60 share price that the follow-on offering went at. And last but not least, we generated $16.5 million in free cash flow over 10 quarters. This is the first loss we've had since the fourth quarter of 2023, the first quarter of 2023 which was a small net loss of about $300,000. So I smile right now that we are managing this company for the long term. And we believe that there's a lot more juice, and we're eager to get to the recovery.

Derek Dewan, Chairman and CEO

Thank you, Kim. So one of the other questions and it was repeated a few times, in a slightly different format was how are your business verticals and what do you think is going to happen going forward? So each business vertical had a decrease in demand, coupled with supply issues of getting labor teed up to fill some of the orders. That is slowly changing. And as you know, there were big layoffs in the Information Technology sector, and that halted some projects that were being done internally by our client companies; that is starting to warm up. So when will that take a real upward swing? We can't predict which quarter that will happen. But we do know that it happens, and it's happened historically time and time again. And we're prepared for it. The vertical of accounting finance, for example, also was impacted. But that turns as well. So I can tell you that we will position our Company for growth, and profitability, and have positioned it. And we'll continue to do so. And catch the upswing. And that will get the shareholders the value they need on price. Our strategic alternatives how we use our cash? What's pricing on acquisitions? Those questions have come up. Acquisition prices are somewhat muted now because of the downturn. So are they five times EBITDA or six times? They are. But with synergies and so forth, you have to bring the multiple down to the three or four range with the deals if that becomes an option for us. But again, we will review all the strategic alternatives when the report comes in and move forward judiciously with it. And we are well positioned. In my prior life, I was well positioned to capture the upswing and have done it the same with 2021. We had kind of a dot-com bust then. So the key for us is not to make rash decisions, but to be thoughtful in what we're doing with our strategic plan. And I can tell you there's active board participation including our largest shareholder. We have the horsepower to succeed, we have the guidance to succeed, we have the expertise internally in management, and we have the oversight in place by the board to help us drive the business forward. I'm very, very bullish on the long-term outlook and that can mean a couple of quarters, but we should see indicators coming up and we will report to you about those indicators. We're not satisfied in the least with our performance, nor our stock price. But as the leader of the company, I have an obligation to gut check every aspect of our business and also position our business for the success that we anticipate coming, and that is the most critical aspect of what I can deliver today. We are prepared, we will take advantage of growth, and we will not make rash business decisions when we don't have to, and we're well positioned to do that. I'm patiently waiting for.

Kim Thorpe, CFO

We're going to give Derek a second to get back on…

Derek Dewan, Chairman and CEO

I’m back on. I had a technical glitch there. But yes, we're good. But Kim do you want to take a shot at another question?

Kim Thorpe, CFO

Yes. I mean I hear it. Let's let me go to GDP grew by 4.9% in 3Q and 3.3% in 4Q. Whereas the economic weakness you're referring to, GDP does not alone dictate how the economy is. There's no question, we have rising inflation, high interest rates. There's still a threat of inflation out there. The job figures keep getting adjusted downward. That's not the panacea that you see on television all the time. It's not the only indicator. The indication you can look at to verify this is to look at our peers including the Robert Half, the Adecco's and others. And we’re all still being pinned down to some extent by broader economic uncertainty than just a quarter to GDP. So that's the answer to that. What are the trends looking like here in 1Q? Can you better do a job of setting expectations with analysts and Wall Street? You know, we’re trying to – we don't provide guidance as a policy because it's very expensive to maintain and create the systems you need to do that and it's – and then it's not always reliable. But we have given as much directional guidance as we can. We talked about the turn in the trends from 2022 to 2023. If you look at other releases of other staffing firms, that will bear out what we're saying on the staffing industry. Analysts are the largest trade associations. You can go online and read their publications; it will bear out what we're saying. Why were you so aggressive in buying back at $0.58 and then not buying when stock was lower? We bought back a lot of stock. We bought back steadily all the way from the time we implemented the program in 2023 to the time it ended as of December 31. Given the economy and the downturn that we're in the midst of that, and the fact that we are about to get a report from an independent expert on strategic alternatives, we felt like it was prudent to pause for a few weeks. It doesn’t mean that we’ll abandon it altogether. We’ll see what our adviser has to say and how our Board feels about it. That is not necessarily better than we bought it back at all kinds of prices that $0.58 – or I'm sorry $0.58 or lower? Yes, there is a lot – like I realize there are a lot of people upset about the stock price; we’re upset about it too. All I can tell you is our tangible net book value is $0.33 a share. The stock price selling at less than $0.40 a share means that you all are indicating, you are being, I think, a lot of speculators out there and people doing day trading and short-term are suggesting that our But yes, we could liquidate our company theoretically at $0.33 and then – and then the rest of our business, a $150 million revenue business that has produced $165 million over the last five years is only worth $4 million from us. We are confident that the stock is undervalued and we don't like taking this much more time either, but it’s going to come back up when the recovery hits. We've proven we can do that.

Derek Dewan, Chairman and CEO

Certainly. Here’s the revised earnings call remark: Let me add a few things, Kim. We are well positioned to benefit from the upcoming upswing, although we can't predict exactly which quarter it will occur. It's typically a gradual process, and we’re beginning to see improved job orders. We believe we've reached a low point for now, barring any significant issues in the broader economy. One question raised was about the macro environment not appearing too negative. Our peers, however, have experienced revenue declines in the same quarters ranging from 12% to 50%, based on their geographic locations and industry sectors. This is widespread; I just returned from a meeting with industry CEOs, and it’s clear that the trend is consistent across the board. Economists have noted that currently, job growth is primarily in government, entry-level hospitality, and certain healthcare roles due to budget cuts. For instance, AMN Healthcare, a leading staffing firm in nursing and physician staffing, has seen a decline in revenues of 30% to 40%. Similarly, Robert Half's permanent placement business is down, reflecting our own situation. Larger staffing firms like Manpower are also seeing declines in the U.S. market, although their international operations have provided some cushion. These trends are not uncommon, as highlighted in discussions I attended with economists who indicated an expected recovery, albeit with some bumps along the way. It's essential to recognize that there was a hiring surge in 2022, referred to as the post-COVID bounce, and the adjustment in the labor force has begun, though it’s not complete. We believe it will level off before we see an upswing, with project initiation likely to follow. Rising interest rates have slightly dampened project activities for corporate America. Despite inflationary pressures on wages, we have managed to maintain our margins. In response to questions about our spreads, gross profits, and pricing, yes, they are holding steady. The effect on gross margins is primarily related to the permanent placement segment, which typically offers a 100% gross profit. While a decrease in perm placements impacts overall margins, I assure you that we are in a solid position moving forward. We are committed to taking necessary actions to restore profitability and stimulate top-line growth, which remains our focus. We appreciate our shareholders and stakeholders' support and ask for patience, as we are not satisfied with our current performance. However, we are hopeful about improving our situation and moving in the right direction. We are seeing signs of growth in various regions and sectors, although these are somewhat countered by areas that remain stagnant. We remain optimistic about the long-term outlook and can confidently say that our balance sheet is strong. I had anticipated this situation, having witnessed similar patterns in 2005 and 2006 when permanent placements peaked before decline. Typically, during employment cutbacks, temporary and permanent placements are the first to be affected. Companies are currently holding onto their core employees despite not needing them, as rehiring can be challenging. This trend continues. Eventually, activity will benefit our business; should significant layoffs occur, we will likely see an increase in demand for contract work initially, followed by permanent placements, which historically has been the case. Economists have analyzed the overall employment situation, which remains stable, but noted a drop in temporary and permanent staffing roles. At a recent meeting with C-suite executives, the optimism index was notably high, although there is uncertainty about the timing of the breakout. We believe we have reached a plateau and are starting to catch an upswing, with a consensus that significant improvements may materialize toward late 2024. We are well-prepared and will actively pursue strategies to enhance both our revenue and profit margins. We have exceptional talent within our team and are attracting additional skilled professionals, indicating that people view us as a desirable company to join. Currently, we are focused on hiring production personnel, recruiters, account managers, and sales staff to drive revenue growth and improve net income and EBITDA.

Kim Thorpe, CFO

Derek, and I know it's not directly...

Derek Dewan, Chairman and CEO

I covered AI at the recent meeting where we discussed the top 10 trends for staffing, and AI was a key focus. We are looking at how AI can benefit our business and help us place AI expertise with our customers. In the IT sector, our aim is to expand our capabilities in AI and cybersecurity by recruiting IT personnel for client companies. We are employing sophisticated recruiting methods and integrating AI into our processes. There are team members currently exploring various AI tools, and on the vertical leadership side, our IT leaders are addressing job orders we are receiving for these positions. It's crucial to note that technology is driving business across the board, and we are growing significantly in this area. We are tackling this challenge aggressively, both for our internal needs and for placing AI professionals, with cybersecurity being closely linked to both fronts. Kim, would you like to add anything?

Kim Thorpe, CFO

No, I believe many of these topics will be addressed and will be part of the discussion surrounding strategic alternatives. There are some valuable questions here. However, I don’t have any additional information at this time, Derek.

Derek Dewan, Chairman and CEO

Okay. Look, we're always available for follow-up as necessary. And the one thing I ask is that I believe that we are doing and we'll do everything that we can to get back to profitability, growth track that we need to be on and we will move forward aggressively, strategically and take advantage of opportunities which are out there. We will also be judicious in how we spend our money and have it. So we will be very, very prudent, and we are optimistic about the longer-term aspects of where this company will be. We will report back at some point on the strategic alternatives, after we've had a chance to look at those. And I anticipate that we'll have a broad plan to grow shareholder value, which is key to what we're doing. We also have a great team. Our employees are optimistic. They get paid on growth, so they are driven, and we all are connected to that. So, we're excited about future prospects. And the key now is to just buckle down and block and tackle and deliver the best we can for a macro environment that's choppy, high interest rates, some inflation, very specific employment statistics that you have to look at as very, very deceptive. And that's what these economists have done to prove out what's actually happening in the industry. So that concludes our call for now and we'll be in touch. We appreciate you joining us today, and we look forward to some good things. Thank you very much.

Kim Thorpe, CFO

Thank you, folks.