GEE Group Inc.

Good morning and welcome to the GE Group fiscal fourth quarter and year-ended September 30th, 2022 earnings and 2023 update webcast conference call. I'm Derek Duan, Chairman and Chief Executive Officer of GE Group. I will be hosting today's call and 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 GE Group's results for the fiscal year and for the fourth quarter ended September 30th, 2022, and also to provide you with our outlook for fiscal year 2023 and the foreseeable future. Some comments Kim and I will make may be considered forward-looking, including predictions and estimates 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 in Tuesday's earnings press release and our most recent 10-K and other SEC filings under the captions, Cautionary Statement Regarding Forward-Looking Statements and Forward-Looking Statements, Safe Harbor. We assume no obligations to update the statements made on today's call. During this presentation, we will also talk about some non-GAAP financial measures, and reconciliations and explanations of these metrics are included in the earnings press release. Our presentation of financial amounts and related amounts, including growth rates, margins and trends, and metrics are rounded or based upon rounded amounts for purposes of this call, and all amounts and 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. With that business behind us, I'm very happy to report that we achieved outstanding results in the fiscal year 2022 with revenue of $165.1 million for the year and revenue for our fiscal fourth quarter of $41.5 million. Gross profits and gross margins were $61.7 million and $15.1 million, and 37.4% and 36.3% for the fiscal year and fourth quarter ended September 30, 2022, respectively. Our non-GAAP adjusted EBITDA for fiscal 2022 was $12.5 million, up $200,000 or 2% compared to fiscal 2021, and that represents a 7.5% margin to revenue. Non-GAAP adjusted EBITDA for the fiscal 2022 fourth quarter was $1 million compared to $3.6 million for the fiscal 2021 fourth quarter. We achieved net income of $19.6 million, or $0.17 per diluted share, for fiscal 2022 overall. We reported a small net loss of $800,000, or $0.01 per diluted share, for fiscal 2022 fourth quarter. Before I turn it over to Kim, I want to say how very proud I am of our dedicated and talented people. They work extremely hard every day to ensure that our clients get the very best service. This was a key factor in the outstanding performance of GEE Group in fiscal 2022 and will contribute greatly to the company's future success. At this time, I'd like to turn over the call to our CFO, Kim Thorpe, who will further elaborate on our fiscal 2022 annual and fourth quarter results. Kim?

Derek, thank you very much, and good morning, everyone. As Derek mentioned, revenues for fiscal 2022 were $165.1 million, up 11% as compared with fiscal 2021 revenues of $148.9 million. Revenues for the fourth quarter of fiscal 2022, once again, were $41.5 million, up slightly as compared with revenues reported for the fiscal 2021 fourth quarter. Contract staffing services contributed $138.5 million and $35 million, or 84% of revenues for both the fiscal year and fourth quarter ended September 30, 2022, respectively. Direct higher placement revenues contributed $26.6 million and $6.5 million, or in both cases, 16% of revenues for the fiscal year and fourth quarters ended September 30, 2022, respectively. Contract staffing services revenues for fiscal 2022 increased $8.7 million, or 7%, as compared to fiscal 2021. Contract staffing services revenues were near level for each of fiscal 2022 and 2021 fourth quarters, although up slightly in the 2022 fourth quarter. Direct hire placement revenues for fiscal 2022 increased by $7.5 million, or 39%, as compared to fiscal 2021. Direct hire placement revenues, again, were near level for each of fiscal 2022 2022 and 2021 fourth quarters. Direct hire placement revenues for fiscal 2022 set a record high for the company, exceeding even pre-COVID-19 results. The increases in total contract and direct hire placement services revenues for the fiscal year ended September 30, 2022, were primarily attributable to increased demand in our professional staffing services segment as the negative effects of COVID-19 have continued to lessen. In addition, the volatility experienced in the U.S. economy and workforce in 2022 created many opportunities and increased demand, particularly in the direct higher placement services market. Total revenues from our professional staffing services segment, which includes contract staffing and direct higher placement services, were $149.2 million and $37.5 million and represented 90% of total revenue for both fiscal year and fourth quarter ended September 30, 2022, respectively. Professional staffing services revenues were up 13% and 1% respectively from the comparable fiscal 2021 periods. Our highly specialized IT services vertical which includes Agile Resources, Access Data Consulting, Paladin Consulting, and SNIT Brands, accounted for 51% of our professional services business segment revenues for fiscal 2022, and we're up 23% year over year. The other professional services verticals, Finance, Accounting, Office Support, Engineering, Healthcare, and others, accounted for the remaining 49% of professional services business revenues for fiscal 2022 and were up 5% year over year. Industrial staffing services revenues were $15.9 million and $4 million and represented 10% of total revenue for both fiscal year and fourth quarter ended 20, I'm sorry, September 30, 2022 respectively. Industrial staffing services revenues were down 8% and 9% respectively from the comparable fiscal 2021 periods. We continue to experience some pandemic-related conditions associated with the Delta and then Omicron variants, Omicron, excuse me, in our Ohio markets in the earlier quarters of fiscal 2022. These included school and business closings and interruptions we've commented on before. which were reminiscent in some respects of the early COVID-19 pandemic. Consolidated gross profits and margins were $61.7 million, or 37.4%, and $15.1 million, or 36.3%, for the fiscal year and fourth quarter ended September 30, 2022, respectively. Our consolidated gross margins for the last six quarters have consistently been above 36%, The overall improvement in the company's combined gross profit margin is largely due to substantial increases in direct higher placement revenues, which have grown, well, I'm sorry, which have 100% gross margins. Selling general and administrative expenses for the fiscal year and fourth quarter ended September 30, 2022, increased $10.3 million and $2.6 million, respectively. SG&A expenses were 31.4% and 34.8% of revenue for the fiscal year and fourth quarter into September 30, 2022, respectively, compared with 28% and 28.6% for the comparable fiscal 2021 periods. In addition to overall growth of the business, resulting in additional incentive compensation and bonuses, The increases in SG&A expenses and ratios were affected by $800,000 in charges associated with two former positions that were eliminated during fiscal 2022. Also a $400,000 increase in bad debt expense associated with one of the company's former industrial staffing services customers and a million dollars in charges for the settlement of an old legal matter that added to our SG&A expenses in the earlier quarters of fiscal 2022. As Derek mentioned in his remarks, we achieved net income for fiscal 2022 of $19.6 million, or 17 cents per diluted share, as compared with net income of $6,000, or near break even, zero cents per diluted share rounded for fiscal 2021. There was also a small net loss for the fiscal 2022 fourth quarter of $800,000, or approximately one cent per diluted share, as compared with net income of $2.9 million, or three cents per diluted share for the comparable fiscal 2021 quarter. Non-GAAP adjusted net income loss and diluted EPS, excluding the effects of non-operating and or non-recurring items, as outlined in the earnings press release, were $7.7 million, or 7 cents per diluted share and a loss of $400,000, excuse me, or 0 cents per diluted share for the fiscal year and fourth quarter ended September 30, 2022. Adjusted EBITDA, which is a non-GAAP financial measure, was $12.5 million for the fiscal year of $200,000 or 2% compared with fiscal 2021. Non-gap adjusted EBITDA for the fiscal 2022 fourth quarter was $1 million compared to $3.6 million for the comparable fiscal 2021 fourth quarter. Again, our fourth quarter results were impacted by the accrual of additional incentive compensation and bonuses commensurate with the significant improvements in revenues, earnings, and productions we produced in fiscal 2022. As we've commented in prior years, or I'm sorry, in prior quarters, we believe these types of positive results are sustainable. A reconciliation of G Group's gap net income to the company's non-GAAP adjusted EBITDA and reconciliations of other non-GAAP measures with their GAAP counterparts discussed today can be found in the supplemental schedules as part of our Earnings Press release. To conclude, our current Our current or working capital ratio at September 30, 2022, was 2.7 to 1. Consolidated accounts receivable net of allowances for doubtful accounts at the end of fiscal 2022 were $22.8 million, and our day sales outstanding performance metric, or DSO, was approximately 49 days. We reported positive net cash flow from operating activities of $1.4 million for the 2022 fiscal fourth quarter and $9.2 million during the fiscal 2022 year as a whole, and non-GAAP free cash flow of $1.3 million and $8.9 million, respectively. Our cash flow from operations and free cash flow for the year ended September 30, 2022 were reduced in part by payment of the first of two equal installments, of deferred FICA obligations allowed us under the CARES Act of $1.8 million, which was made in December of 2021, and the payment of $1 million in settlement of an old isolated legal matter that was made in April 2022. Our liquidity position is strong. We have no outstanding debt and our net book value per share was $0.88 at September 30, 2022, and our net tangible book value per share was 25%, both up over the prior year. Now I'll turn it back over to Derek.

Thank you, Kim. The 2022 fiscal fourth quarter and fiscal year marked our fifth consecutive quarter and first full year of strong performance since D-Level Company. Having consistently achieved higher margins and free cash flow for the last five quarters, we are establishing a positive sustainable track record as well as positive momentum for the future. On September 30, 2022, the company had over $18.8 million in cash and another $15.4 million in availability under its ABL facility. GE Group's prospects for today and for future profitable growth have never been better. Despite macroeconomic challenges or unforeseen events, we believe we can continue to produce solid results in fiscal year 2023 and beyond. Before we pause to take your questions, I want again to say 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 shared with you today. If you have questions, please submit those by email and we'll start the queue at that point. Please just ask one question and rejoin the queue with a follow-up as needed. At this time, we'll come back to you as well. Thank you, and we'll start the Q&A session. One of the first questions is related to the fourth quarter, and the revenue in our fourth quarter was very similar to the fourth quarter of fiscal 2021. However, the SG&A was higher and thus net income and adjusted EBITDA were lower. Kim, will you address that for me, please? Sure. The question was, why is your EBITDA lower and what caused your SG&A to increase?

Part of the reason why SG&A was higher in the fourth quarter was because we accrued additional incentive compensation and bonuses commensurate with the outstanding performance that we had put in throughout the remainder of the year. We held off on doing that until the fourth quarter for various practical reasons, but we thought it was prudent to take the full charge for all of that incentive comp. And then also, there is a progression of increased compensation and bonuses over a calendar year of which the last three quarters of this fiscal year were the first three quarters of the calendar year. So there is an upward progression over the year, but those things specifically account for the increase in SG&A. And one other thing I might point out that I think is worthy, if you go back to our 2018 year and you compare our revenues, they're literally within $200,000 a Our revenues in 2018 were $165.3 million. They were $165.1 million. However, our gross profit this year was $3 million higher. And if you take that same ratio concept and instead of applying the ratio of SG&A against revenue, you apply it against gross profit, our SG&A expenses were actually lower as a percentage of gross profit. And the reason they came in that well is because of all the extensive restructuring and expenses we took out of the business between 2018 and after the pandemic. So I just want to point that out.

Okay, thank you, Kim. Another question is, it seems like in the middle of the month, there were large trades of the stock. upward around $250,000 at the close. I also observed that occur for several days, maybe four or five days. Is that stock manipulation? And if so, who's doing it? And I'm paraphrasing the question. The answer to that is that we just don't know. A lot of the trades are made around the New York on some of the other electronic mediums. and those trades influence the stock price at closing or slightly after hours. You know, that happens from time to time, and we're not too concerned about it. We don't have a large short position in our company either. So if someone was trying to manipulate the stock price, as has been suggested in the question, we're not aware of who that might be, and I think that it's temporary at best. The other question that came up, is what are you going to do with your large cash position? A couple comments related to stock buybacks. We were restricted until about now, mid-December, because of the CARES Act PPP loans that you had one year after the date of the last loan being forgiven. That would preclude you up until that time that we were precluded from doing a stock buyback. So now that we're in a position that stock buybacks could be done, those discussions are happening with our directors at our board meetings. And we will address that soon after these earnings releases get digested by the street. There are some rules on stock buybacks that the SEC put out. There's some rules on 10b51 plans. which we would be likely to adopt so that if and when we do a buyback, that we can take advantage of the safe harbors in 10b-5-1. So those are all things that are out there. There's also a 1% excise tax that was encouraged by the president and adopted by Congress. That 1% excise tax is on buybacks over a million. Just to give you a background, because I had several questions on buybacks. So the answer to buybacks, historically I've done buybacks with my predecessor company. I'm well familiar in how to do them, and we will address that soon after the earnings are digested. I'm the largest shareholder. What would you do with your cash? Do you need it for working capital? The answer is no. Our working capital is sustained by our collection of accounts receivable and billings. Those accounts receivable, I think Kim gave you the DSO number of about 49 days. So we're not really having to tap our cash reserves, and we're definitely not tapping our ABLE facility for working capital. So we're doing very well on cash management, and how we deploy that cash is a subject of additional conversations with our directors. Prospects for future profitable growth. Let me address what's happened in our industry and in the general economy for labor in the U.S. So, way through our fourth quarter, and this was during our third quarter announcement, I said we were very optimistic, but for some issues with the potential macroeconomic turbulence with recessions or layoffs or some combination of both. We have seen layoffs at customers. We have seen employment tighten up for full-time hires in a big way. 2022 fiscal year was a robust year for full-time hires, but midway during the fourth quarter, we saw some of those full-time hire opportunities reduced. And the contract headcount was consistent. And what typically happens during a downturn of some type or noise in the economy, full-time hires tend to drop some, and all hiring drops for a period of time. And then contract hiring starts to kick in in a higher way. And then full-time comes back toward the end of an economic cycle or when, I quote, the noise goes away. So we're in that period now. And you could see if you see the business news, Goldman Sachs laid off substantially a lot of their full-time people. Interestingly enough, and that's indicative of what large corporate employers are doing, not just in investment banking but across the board, Goldman is a client of ours, and we were not at this point hurt by that. We have contract labor there. However, if there were full-time hires going in, they would put those on hold. but the contract people that we have so far have stayed out. But the point here is that the general level of hiring is somewhat muted during this period of what I call uncertainty. People don't know if we're going into a downturn. You've got a high interest rate environment. Some people have additional interest expense and so forth. I believe we'll end up in the spring kicking really hard on a comeback, assuming And when I say that, we're doing quite well, except perm placements will not be at the same level as they were in fiscal 2022. All of our competition has said the same thing, and that's because full-time hiring has been dampened because of potential economic turbulence on the outlook front. Additionally, in the tech sector, as you know or have read, the Amazons, the Googles, the Facebooks, and so forth have laid off people. Interestingly, a lot of those people were in our business before as recruiters and they're coming back to us for their career so we can pick and choose the best and the brightest. Our outlook is good. We have plenty of cash. We will not waste it. We will use it judiciously and also on the SG&A front, we will make adaptations to our SG&A based on the volume of business and it will also go down some if the placements drop at all because commissions are included in that SG&A so it's a variable cost in many respects but to the extent that we can reduce SG&A which we will absolutely do somewhat and adjust it and according to the revenue stream that will occur as well so some of the one-time items in SG&A will go away after the fourth quarter. So remember that as well going forward. In the last two quarters, management has indicated they would address share buybacks. I talked about that in the last two quarters. Okay, management, please again give a little bit more color on why SG&A ballooned NQ4 this year versus last year. Kim, I think you covered that pretty good, so I'm going to move on. Let's see. Okay. This comment says we're moving into a more challenging economic environment. I addressed that and what we're doing about it. What's your free cash flow priorities in 2023? Again, share buyback question. Address that. Let's see. Will you activate the buyback? Okay. Another question. Obviously, there's a high degree of interest in stock buybacks. We'll take that definitely into account. Can you add views on current client activity? Things are pretty good, but there's a lot of uncertainty, so some people are putting hires on hold. Typically, toward the end of the year, in the first couple weeks of January, we do see a bit of what I call a hold pattern. And then the hiring cranks up again going into the later part of the spring, and we should see some good activity then. That's our expectation. How would a recession affect us? I can tell you I've managed through several recessions, including 2008, and staffing companies collect more cash in a downturn because they're not putting out as much money for payroll, but they're collecting receivables that were on the books. books at a faster pace than they were expending money for payroll. So cash flow actually goes up for approximately nine months to 10 months, about the time, the average time and duration for a recession. But for the 08 recession, which had a financial calamity issue attached to it. So if you think through that and with our cash position and no debt and the ability to draw on our credit if we need it, We're not concerned about cash flow at all, and we will not waste cash. I could tell you that. So we've accumulated cash exactly for the very reason that that question came up. Can you sail through any downturn if you have one? The answer is absolutely yes. And will you use your cash judiciously? Yes. Acquisitions, do you see them? Yes. Will you execute? Only the good ones. We're not going to jump into one if it's not a slam dunk. Do you expect the underlying earnings in fiscal 22 to continue in this year, fiscal 2023? The answer to that is the macro factors may keep us from hitting that same target number, but we will do quite well in any event. What is your plan to unlock shareholder value against stock buyback question? Availability, talent. Are you able to get talent? The answer is we do a really good job recruiting internally. We pretty much have the pick of the litter, particularly with a lot of the layoffs going on in corporate America in the recruiting side. So we've been able to attract some recruiters back to our industry and back to our company or to our company if they weren't with us before. Analyst coverage, we're working on that to get more. What's your long-term strategy? Our strategy is to continue doing what we're doing, managing costs, particularly adjusting it to the revenue cycle, revenue streams that we see, debt-free. Let's see. Is the outlook for direct hire? I mentioned that. Is it flat or declining a bit in fiscal 2023? And will it be at fiscal 18 or fiscal 19 levels? The fiscal 18, fiscal 19 levels are probably a better indicator of where permanent hires will be or direct hire business would be for 2023. 2022 was a bit of an abnormality. It was off the charts. And that was probably because hiring was muted during the COVID era. Let me just see. SEC. Okay, another question on SG&A, we got that. Do you see TEP hiring increasing as PERM decreases? The answer is yes, TEP will increase. but there's a little bit of a transition period, summer between December to February, and then we should start seeing the temp hires kicking back up. And PERM will stay somewhat muted in that period of time, although we're hitting PERM still, but not at the 2022 level, which was a pretty hard benchmark to beat. Can management comment on how the pricing is looking for acquisitions? They're holding pretty good. If anything, they've come down a bit because of the economic uncertainty and potentially turbulence in the economy. So the questions are finished. I thank everyone for being on. I can tell you that we're very optimistic, absent some macroeconomic potential noise going into this fiscal year, although we're going to manage our income statement appropriately in our expense line to match revenues so that we can stay in the profitability areas that we want to be at and also generating substantial cash flow, which we will continue to do and which we are doing now. And we will use our cash wisely and look for some good things coming. That concludes our call today. We sincerely appreciate all of your time and effort and your investment, and I can assure you we'll be good fiduciaries for you all, shareholders, and we will take care of our employees and look forward to some really good things. This is a journey. It's not a sprint. So we will absolutely make sure the journey is successful. Thank you very much, and that concludes our call.