Earnings Call Transcript - JOB Q2 2023

Derek Dewan, Chairman and CEO

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 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's our pleasure to share with you GEE Group's results for the 2023 fiscal second quarter ended March 31, 2023, and provide you with our outlook for the remainder of the 2023 fiscal year and the foreseeable future. Some comments Kim and I’ll make today 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, 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 the presentation, we will also 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 around it are 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 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 margin 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 fiscal year’s 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, non-recurring COVID-19-related project work. With the fiscal 2022 second quarter performance being outstanding, the current fiscal second quarter still compares favorably, taking into account the discrete opportunities present in last year’s second quarter, and 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 very best service. They are the key drivers in our outstanding performance for GEE Group and what we achieved in fiscal 2022, and so far in fiscal 2023. We will continue to be the most important driver 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.

Kim Thorpe, CFO

Thank you, Derek, and good morning. Once again, consolidated revenue for the fiscal 2023 second quarter was $38.9 million, which is $700,000, or 2% lower, compared with the 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 hire placement revenue, as well as professional contract services revenue generated from COVID-19 related projects in COVID-19 responders. Excluding the effects of certain non-recurring COVID-19 related projects alone, which generated $835,000 and $3.2 million in professional contract services revenue in the three-month and six-month periods ended March 31, 2022, respectively, professional contract services revenues remaining increased $1.6 million, or 5%, during the fiscal second quarter ended 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 revenues for fiscal 2023 second quarter were $34.0 million, which is $231,000, or 1% higher, as compared with fiscal 2022 second quarter contract staffing services revenue. 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 excluding the effects of the non-recurring COVID-19-related projects 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 2023 quarter. IT direct hire and contract services revenue represented 50% of consolidated revenue and is our highest priority growth specialty. The increases in our quarter-over-quarter professional contract staffing services revenues, and in our professional IT contract staffing services sector, in particular, are the result of increasing demand and our ability to adapt and meet the demand in the new post-COVID-19 U.S. economy and workforce environments. As I said last quarter, two recent indicators, an outstanding jobs report and, in contrast, recent significant layoffs of IT professionals by larger employers, are positive indicators for the remainder of fiscal 2023. Rising employment suggests increasing demand for our services, while IT corporate downsizing actions mean 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 hire placement services revenue. Our direct hire 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 remain cautiously optimistic about our overall direct hire placement revenue potential for the remainder of fiscal 2023. Industrial staffing services revenues were $3.2 million, representing 8% of total revenue for the 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 COVID-19 and unemployment relief program funds available to the workers in Ohio that cause them to not seek employment. Recent inflation also has led us to increase salary wages and benefits for contingent workers in our light industrial business in Ohio. We believe this motivates some of our light industrial temporary 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, increases competition among staffing firms in Ohio for laborers 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 the 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 the fiscal 2023 and 2022 second quarters, respectively. The declines in gross profit and gross margin are mainly attributable to lower direct hire placement business, which has 100% gross margin. On the contract side, increases in contractor pay associated with recent inflation have resulted in some spread compression within our professional services businesses. The Company, in response, has stepped up counter-inflationary increases in mark-ups, bill rates, and spreads to address this recent margin compression. 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 revenues 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 $4.0 million. The Company monitors operating costs, including the impacts of inflation, with a view towards identifying and taking advantage of potential cost reductions regularly. In addition, we expect the implementation of the counter-inflationary measures I mentioned earlier, which include increases in mark-ups, 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, compared to $1.1 million, or $0.01 per diluted share, for fiscal 2022 second quarter. Adjusted net income, a non-GAAP measure, for the 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, also a non-GAAP measure, for the fiscal 2023 second quarter was $1.7 million 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 six-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 of 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 part of our 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 expect to commence the repurchase of shares in the near term following our earnings release and the conclusion of the related blackout period around this release. To conclude, we remain positive in our outlook for fiscal 2023, with appropriate consideration for the 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 supplemental schedules included in our earnings release. And with that, now, I’ll turn the call back over to Derek.

Derek Dewan, Chairman and CEO

Thank you, Kim. The fiscal 2023 second quarter marked our seventh consecutive quarter of strong operating performance since de-leveraging the Company. Having consistently achieved higher margins and free cash flow for the last seven quarters, we continue to build a positive track record, as well as positive momentum for the future. As of March 31, 2023, the Company had 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 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.

Unknown Analyst, Analyst

First question. That's a common question. I was trying to aggregate similar questions. We announced a $20 million stock repurchase plan through December 31 of 2023 this year? The stock purchase plan is up for open market transactions. And we do not have any shares yet, because we want to report our numbers first, we are in a blackout period. But the share buyback program will commence just after these earnings have been digested, following the reports. So probably the latter part of this week we'll begin the program. We will 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 was related to our SG&A cuts. If you'd like to comment on that, and also the impact on the next several quarters' results?

Kim Thorpe, CFO

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. That was probably 80% of the total number. As far as the margins go, we expected 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. We're all cautiously optimistic about the economy and the environment. However, assuming everything goes as planned, it should provide us with about a 2% increase in the EBITDA margin this year, which would bring our EBITDA margin somewhere between 6% and 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.

Derek Dewan, Chairman and CEO

Okay, Kim, thank you. 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. The multiples have to be in line with where we're trading, which can be accomplished with synergies and so forth. However, we are fortunate that we're able to execute a buyback program and also be opportunistic about strategic acquisitions at the appropriate time, particularly some tuck-ins that are less risky and easier to integrate. Now, the question was, what's our outlook for the rest of the year, hires perm placement? I'd like you to comment, and then I'll fill in after that.

Kim Thorpe, CFO

Okay. Right now, perm placement. Again, we are cautiously optimistic that trends we are seeing now continue during this quarter and our last quarter. We expect to report permanent placements that are on par with what we experienced in our higher years before the pandemic, which I believe was between $20 million and $22 million. So you can analyze the $10.6 million we've done here to date to get to there. That's conservative; if the economy does heat up, it could be a little better than that.

Derek Dewan, Chairman and CEO

Okay. And let me add this. Fiscal 2022 was an aberration in terms of the demand throughout the industry for direct hire placement or permanent placement, and that was a post-COVID bounce. Fortunately, we capitalized on it. This year, we expect a more normalized version of it. However, we are continuing to do the placements successfully, and our contract businesses have fortunately picked up, which will help make up for the differential in perm.

Kim Thorpe, CFO

Next question, Kim, deals again with the buyback question. I covered that pretty well. But I should say that fortunately, our cash flow is significant, and we are able to continue that program. The question was, are you going to spend all your money at once? Or how quickly? I think, we'll be judicious in our execution. We believe the stock is of good value, so we are definitely pursuing a program. Next question. Again, your SG&A cuts quickly, will they affect earnings immediately? They are already starting to be reflected.

Derek Dewan, Chairman and CEO

Okay. Again, the questions are pretty much repetitive.

Kim Thorpe, CFO

Yes, the cuts were done in March; they were fully executed.

Derek Dewan, Chairman and CEO

Then I’ll add that we are still looking for other ways to cut costs, be it job board costs, technology costs, and otherwise. We are seeing other opportunities and we're pushing those costs out to the extent that we can. Same with lease renewals and so forth because of virtual working and remote working. So we foresee a bumpy road ahead economically, but our crystal ball is no better than anyone else's. Rest assured, we will be able to deliver good results, and we will also execute our capital allocation strategy.

Kim Thorpe, CFO

No, I think you covered everything well. I would just remind everybody that I'm looking through some of the questions and there are a number of questions about acquisitions and what our plans are. It seems like there's some concern, but let me just say. The company you are on the phone with right now got here through acquisitions. When the founders, Derek and Alex, put this company together in 2015, it was a $40 million public company that was about to be delisted. We're here in fact, our eighth birthday has just passed, where our revenues are 4x, our profit is up 175% on a compound annual growth rate. We will execute a multifaceted strategy. As Derek said, there will be stock buybacks, but we are also going to continue to look for acquisitions that make sense.

Derek Dewan, Chairman and CEO

Let me add to that. We set blackout periods through our team and with counsel, which will be related to earnings or trading blackouts. Aside from the usual blackout times, we don't anticipate any unusual periods, but we will inform everyone if that changes. We plan to execute the program fairly soon. Earnings will be processed, so I would say definitely by the latter part of this week, and we will be careful in our approach. Another point raised was whether we considered auctioning during a tender offer. We did, but we believed it was wiser to pursue an open market strategy, considering the state of the economy. Spending all our cash at once might not be the best decision right now. Rest assured, this is always taken into account in our discussions on capital allocation. I think that pretty much covers everything today. If you have follow-up questions, just let us know. Thanks for joining us, and that will conclude our call.