This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: and first half ended March 31, 2024, earnings and update webcast conference call. I'm Derek DeJuan, 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 second quarter and first half ended March 31, 2024, 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 Wednesday's earnings press release and our most recent form 10Q10K and other SEC filings under the captions cautionary statement regarding forward-looking statements and forward-looking statements. 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 explanation 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.investorcenter.com. We have faced very difficult and challenging conditions so far in the fiscal 2024 first half, mainly stemming from ongoing macroeconomic and labor market instability, volatility, and uncertainty, particularly as they have affected businesses' use of contingent labor and their hiring of full-time personnel. As we reported in the past, the demand environment for us and our industry peers began to soften in the middle part of calendar 2023, following a robust hiring of both contract labor and permanent employees in calendar 2021 and 2022, much of which was attributable to a post-COVID-19 bounce in employment. Many IT projects and corporate expansion activities requiring additional labor have been put on hold with some layoffs implemented in conjunction with a hiring freeze. These conditions have continued to negatively impact job orders so far in the first half of calendar 2024. Consolidated revenues were $28 million for the fiscal 2024 second quarter, and 58.7 million for the first half of fiscal 2024. Gross profit and gross margin were 8.7 million and 31.3% respectively for the fiscal 2024 second quarter and 18.5 million and 31.5% for the first half of fiscal 2024. Consolidated non-GAAP adjusted EBITDA was negative at $600,000 for the fiscal 2024 second quarter and negative $800,000 for the first half of fiscal 2024. We reported a net loss of $1 million or $0.01 per diluted share for the fiscal 2024 second quarter and a net loss of $2.6 million or $0.02 per diluted share for the first half
spk01: of fiscal 2024.
spk04: The prior fiscal 2023 second quarter and first half results were solid, although lower when compared to 2022's best ever results, which included record high demand for direct hire placement services and many special projects on the contract side driven by a post-COVID recovery, resulting in an upward bounce in hiring at that time. The pullback in demand for direct hire placement services in particular, which began in the middle part of calendar 2023, has continued into the first half of 2024 so far and contributed to the lower fiscal 2024 second quarter and first half results. Performance is also down and nearly universally among our industry peers as we all are facing similar challenges and the industry observers have labeled our current situation the big stay. Employers are holding tight onto their good, reliable employees, so turnover and replacement hiring of full-time personnel are down accordingly. On the contract side, our clients continue to postpone projects in many areas, including IT software implementation and systems upgrades, accounting and finance special work, and manufacturing production and facilities expansion, resulting in fewer contractor assignments. The good news in this is that our client retention itself remains outstanding, even though orders are down from normal levels across nearly all verticals. Additionally, we are beginning to see signs of improvement in some of the leading indicators we have been tracking. These positive trends have been mentioned in recent reports covering the staffing industry and by other peer group companies in their press releases and public filings. It remains unclear at this juncture, however, whether it's sustainable and as to when exactly the challenges faced by us in the U.S. staffing industry overall may be expected to meaningfully subside. So as indicated in our earnings press release, we do remain cautiously optimistic in our outlook. Before I turn it over to Kim, I would like to touch on some other recent important developments. Less than a month ago, we announced the completion of the company's review of strategic alternatives undertaken by our board of directors in conjunction with its M&A committee with the assistance of the investment banking firm DC Advisory. We are now well underway formulating our plans and budgets with which to execute on the M&A committees and DC Advisory's recommendations, which include making prudent investments to grow both organically and through mergers and acquisitions. Without going into details for now, armed with considerable excess cash and potential available financing, we already have begun both adding and training new revenue producers and revving up sales initiatives in key markets, and also revisiting our M&A targets and socializing with several targets at this stage. We paused share repurchases on December 31, 2023, having purchased 6.1 million shares of GE Group stock, or just over 5% of our outstanding shares at the beginning of the program. For now, our board and management agree that it is judicious to discontinue share repurchases for the time being, at least until we gain more clarity on when market conditions may improve, and until then, how much of our excess cash should be held in reserve. Share repurchases always will be a part of our capital allocation strategy and a bona fide alternative use of our excess capital and implemented if and when prudent. However, in the context of our overall growth strategy, it is not by itself a bona fide long-term course of action to maximize enterprise value and increase shareholder value. Also, there's some other bright spots in our outlook. It is still too early to predict when a definitive upward turn in our existing down cycle will occur. However, we are seeing some positive results from our recent investments to accelerate growth. Price and spread improvements in our professional verticals are beginning to take hold, and job orders were up in April. Our revenues for April and revenues per billing day are coming in higher than both the month of March 2024 and the average monthly revenues for the entire quarter. We also have continued to achieve excellent client retention, most notably among our largest clients throughout the current cycle. We view continued good client retention to be a positive sign for things to come as the cycle begins to improve. I want to assure everyone once again that our sole focus is to manage through the downturn and to restore growth as quickly as possible. We have a strong balance sheet with substantial liquidity in the form of cash and borrowing capacity and are well prepared to do both. We also continue to assert that our stock is undervalued and especially so based upon recent trading at levels very near and even slightly below tangible book value. Also, while our stock price has been down since the last earnings release, only a small portion of our float is actually trading at this low a level. Further evidence that it is undervalued and has substantial room to grow, especially from here. And finally, before I turn it over to Kim, I once again wish to thank our wonderful, dedicated employees and associates. They work extremely hard every day to ensure that our clients get the very best services. They are a key factor in our prior achievements and the most important driver of our company's future success. At this time, I'll turn over the call to our Senior Vice President and Chief Financial Officer, Kim Thorpe, who will further elaborate on our fiscal 2024 second quarter and year-to-date results. Kim?
spk02: Thank you, Derek, and good morning.
spk00: As Derek mentioned, consolidated revenues for the three- and six-month periods ended March 31, 2024, were $28 million and $58.7 million, down 28% and 27%, respectively, compared with the same fiscal 2023 periods. Professional and industrial contract staffing services revenues for the fiscal 2024 second quarter were $25.6 million, down 25% as compared to the fiscal 2023 second quarter. Professional and industrial contract staffing services revenues for the first half of fiscal 2024 were $53.2 million, down 23% as compared to the first half of fiscal 2023. Professional contract services revenue, which represents 90% of all contract services revenue, 2% of total revenue decreased 7.6 million or 25% quarter over quarter. And the first half of fiscal 2024, again, professional contract services revenue represented 91% of all contract services revenue. And again, 82% of total revenues and decreased $14.3 million or 23% as compared with the first half of fiscal 2023. Industrial contract services revenue, which represents 10 percent of all contract services revenue and 9 percent of total revenue, decreased $800,000, or 24 percent, quarter over quarter. In the first half of fiscal 2024, industrial contract services revenue represented 9 percent of all contract services revenue and 8 percent of total revenues, and decreased 1.9 million or 28% as compared with fiscal 2023's first half. Direct revenues for fiscal 2024 for the fiscal 2024 second quarter were $2.4 million down 50% as compared with fiscal 2023 second quarter revenues and were $5.5 million for the first half of fiscal 2024 down 48% from the first half of 2023. The effects of the economic and labor conditions referred to by Derek have resulted in declines in job orders for temporary and direct hire personnel from clients and the decline in revenues and the decline in revenues virtually all are professional verticals. Recruiting qualified temporary labor to fill job orders for our industrial division in particular led to decreases in contract revenues for that business. The big stay, as it's called, has been widely chronicled throughout the staffing industry by our observers and has led to the overall declines in demand for permanent hires. Gross profit for fiscal 2024's second quarter was $8.7 million, down 34% as compared with fiscal 2023's second quarter gross profit. Gross profit for the first half of 2024 was $18.5 million, down 33% as compared with the first half of fiscal 2023. Our overall gross margins were 31.3% and 34% for the fiscal 2024 and 2023 second quarters, respectively. The differences in gross profit and gross margin are mainly attributable to the decline in the percentages of direct higher revenue, which has 100% gross margin to total revenue. Our professional contract services gross margin was 25.7% for the fiscal 2024 second quarter, compared with 25.4% for the fiscal 2023 second quarter, an improvement of 30 basis points. The gross margin for professional contract services was 25.3% for the first half of fiscal 2024 as compared with 25.4% for the first half of fiscal 2023, a slight decline of 10 basis points. Our industrial contract services gross margin was 15.2% for the fiscal 2024 second quarter compared with 16.5% for the fiscal 2023 quarter, which was a decline of 130 basis points. In addition to fewer job orders, we continue to face challenges with our industrial business, including sourcing and recruiting qualified candidates, as well as increased competition in those markets. Despite lowered overall gross profit and gross margins so far in 2024, however, our current margins remain relatively high, as compared with those of our competitors. Selling, general, and administrative expenses SG&A for the fiscal 2024 second quarter were $10 million, down 15%, compared with the fiscal 2023 second quarter. SG&A expenses for the first half were $20.6 million, down 16%, as compared with the first half of fiscal 2023. SG&A expenses were 35.7% of revenues for fiscal 2024's second quarter, compared with 30.1% for fiscal 2023's second quarter. The increase in SG&A relative to revenue is mainly attributable to our fixed costs, including personnel-related expenses, occupancy costs, software subscriptions, for the applicant tracking and sourcing systems our producers use and others, which became proportionately higher relative to lower revenues in the quarter and the half, or in the quarter in particular. And to a lesser extent, certain non-recurring expenses not associated with ongoing core business operations. Management has made a concerted effort to reduce SG&A and will continue to do so in a manner that will not hinder revenue growth as the business environment improves. In addition, we have begun to selectively add and train new revenue-producing personnel and launch sales initiatives in key markets in order to enhance our resources to obtain new clients, new job orders, and increase market share. Our management team is experienced in managing through cyclical conditions such as the ones we're now experiencing, and these investments are being made in anticipation of the eventual recovery. We reported a net loss for fiscal 2024 second quarter of $1 million or one penny a share, down $1.7 million as compared to net income of $700,000 or a penny a share positive that is for diluted share for fiscal 2023 second quarter. Our net loss for the first half of fiscal 2024 was $2.6 million or negative two cents for diluted share, down $3.9 million as compared with net income of $1.3 million or a penny per diluted share positive for the first half of fiscal 2023. Adjusted net loss which is a non-GAAP financial measure for fiscal 2024 second quarter, was approximately $400,000 down $1.2 million as compared with adjusted net income of $800,000 positive for fiscal 2023 second quarter. Our adjusted net loss for the first half of 2024 was $1.3 million down $3.2 million as compared with positive adjusted net income of $1.9 million for the first half of fiscal 2023. EBITDA, which is a non-GAAP measure for the fiscal 2024 second quarter, was negative $1.2 million, down $2.7 million as compared with $1.5 million for fiscal 2023 second quarter, $1.5 million which was positive. EBITDA for the first half of fiscal 2024 was a negative $2.1 million, down $5.2 million as compared with positive $3.1 million for the first half of fiscal 2023. Adjusted EBITDA, which also is a non-GAAP financial measure for the fiscal 2024 second quarter, was negative $600,000, down $2.3 million as compared with $1.7 million positive EBITDA for the fiscal 2023 second quarter. And our adjusted EBITDA for the first half of 2024 was a negative $800,000, down $4.5 million as compared to $3.7 million for the first half of fiscal 2023. Our current working capital ratios of March 31, 2024 was 3.9 to 1, up from 3.6 to 1 as of September 30, 2023. We reported positive cash flow from operating activities and free cash flow, which is a non-GAAP, the latter of which is a non-GAAP financial measure of about $400,000 for fiscal 2024's second half ended March 31, 2024. Our liquidity position remains very strong. And we have an undrawn ABL credit facility and no outstanding debt. Our net book value per share and net tangible book value per share were $0.92 and $0.32, respectively, as of March 31, 2024. In conclusion, while we're obviously disappointed in our fiscal 2024 second quarter results and first half, we do remain cautiously optimistic in our long-term outlook and have demonstrated that we can generate substantial earnings consistently under more favorable economic conditions and a more conducive environment for the staffing industry and have done so in the past. Before I turn it back over to Derek, Please note that reconciliations of G Group's non-GAAP financial measures discussed today with their GAAP counterparts can be found in the supplemental schedules included in our earnings press release.
spk02: Now, I'll turn it back over to Gary.
spk04: Thank you, Kim. At March 31, 2024, the company had $21.2 million in cash and another 8.2 million in availability under its bank ABL credit facility. Despite economic headwinds and staffing industry specific challenges impacting demand for our services, we are aggressively managing and preparing our business for an inevitable recovery. As I mentioned in our earnings press release and again in my opening remark, we are moving aggressively not only to prepare for an eventual recovery, but also to restore growth sooner to be driven by both organic and M&A growth plans and other initiatives. 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 people for their professionalism, hard work, and dedication. 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. And at this point, that concludes our formal remarks and we'll move to Q&A.
spk01: Thank you. So, Kim, will you take the first question, please?
spk00: Sure, Derek. The first question is, why do you appear to be losing market share? Your results are considerably weaker than peers and are symbolic of a deep recession. My answer to that is, based on our data, we do know that our results are down at, let's say, the lower end of a group of larger companies. But the core reason that I believe our results show a little bit worse than other larger public company peers is because we have a larger contingent of small and medium-sized enterprises as clients. As Derek mentioned, we have had good retention, especially among our larger clients and also in our smaller clients, but orders are down. Some of it in terms of the margins and our profits is because of our size. But overall, we are not necessarily, in fact, our orders are good and our trends are moving in the same direction and everything else being the same. I would not say that we're considerably weaker than our peers.
spk04: Okay, thank you. Sure. Another question. Are you concerned that discontinuing share repurchases when your book value is 92 cents is sending a bad message to prospective shareholders? Kim, you want to take that one as well?
spk00: Sure. We're not concerned about the share repurchases for a few reasons. One is we and we haven't completely discounted forever. share repurchases. But share repurchases are not, in and of themselves, the way forward with our long-term growth goals. Because we're buying stock back, and I understand why some of our individual investors feel as strongly as they do about share repurchases, but our duty is to provide stewardship at a fiduciary basis for all of our capital and all of our shareholders. And we believe that the steps we're taking now in concert with the recent strategic alternative study we perform are the way forward for the company. So yeah, I hope it's not sending a bad message. The message it's supposed to send is that we believe very strongly that we have alternative uses for capital that will improve shareholder return even more than share repurchases. So those are my thoughts on that.
spk04: Thank you, Kim. So the next question is in regard to acquisitions. But I do want to mention on the call that yesterday an IT staffing company called with the ticker symbol TSRI, which happens to be the name of the company, TSR Inc., traded on the NASDAQ under TSRI, agreed to be acquired at a 71% premium over its trading price. TSRI's gross margins, and we know our peer group really well, are around 17.5% to 18%. our gross margins are 31.5% this quarter, and that's down from our, um, usual highs of 34%, uh, to 37%. Also our contract gross margin by itself without the influence of perm is in the mid and upper twenties. So from a performance metric standpoint, it's very appealing, uh, to look at our company from an undervalued standpoint. But that's just one indication of how undervalued the trading prices are of the entire group. I just wanted to point that out. And that announcement was made yesterday, an all cash deal. I think what's important to look at, the question that I have before me, are suitable acquisitions and niche staffing appealing to you? The answer is absolutely yes. We do have a healthcare component dealing with medical scribes. We're in the IT and accounting and finance verticals. And if we find a niche business that fits in nicely or is in one of our existing verticals, for sure, that would be appealing. And what multiples might we pay for acquisitions? And would we use stock for an M&A transaction? The multiples... range from five to eight times, depending upon the type of business it is and whether or not there's synergies to bring the multiple down, among other things, the type of consideration used in various other factors, growth rates, margins, and so forth. Clearly, would we use stock of GE Group? We would only contemplate using GE Group stock that were highly valued. For example, if our peer just got acquired at a 71% premium, if you apply to 71% premium to our stock price, that may be attractive to use some equity on a deal, particularly if it's someone that would like to grow their equity value with our company. We clearly wouldn't use it at the depressed levels that we've seen of recent times. Another question is, um, In the December call, we saw some signs of improvement in January, better than December, but March was a low report in terms of revenue. The March quarter is typically our lowest quarter in the fiscal year. There's a lot of peaks and valleys in the contract staffing side. and also on the direct hire side. However, we do look at trend lines. And, Kim, you can comment on our trends. We also have on the call, after you comment, Kim, I'd like Alex Duckey, our chief operating officer, to comment too, because he has been on top of the trending, and I'd like to hear his commentary and share it with you in the street. Kim?
spk00: Yeah. First of all, let me on the question. April revenues are up. The detailed question in part is, we thought we saw improvement in January, but now the quarter's lower than December. And now we're saying April is better than March. April is better than March. April is better than the average of January through March. And May so far is looking very promising. So that's the answer to that. Alex, do you want to comment?
spk03: Sure. To go a little further and a little deeper on that, we see green shoots across all of our verticals and across all of our brands in order flow and in placements. And we feel like the summer, is going to produce a substantially different result than we've seen in the past. We believe that we have hit the bottom. You asked when we hit the bottom, we feel like the bottom has been hit. And like I said, we see green shoots across all verticals and all brands in order flow. So we feel very positive about the coming summer.
spk04: Thank you, Alex. Another question is business is getting more competitive competitive. Is there overcapacity in the industry at this time? How do you see this being rationalized? I've been in the industry since the 90s, and the industry, if you look at its growth rate, has been solidly upward with a few dips for recessionary periods along the way. What we're finding is because of the robust nature of technology and the verticals we're in, of the demand environment, when people are confident in the economic aspects of the economy growing, for example, or at lower rates, things that right now aren't happening, when those turn, the demand usually exceeds the supply and staffing companies have more job orders than they can fill. We anticipate we'll get there again soon. But we're tracking it very tightly to make sure that our cost structure is appropriate for the revenue that we have. And we believe we'll get there. We don't believe there's an overcapacity. There's been a lot of consolidation in the industry. And if you look at the larger companies and what market share they have relative to all the other companies, it's still minuscule and compared to the totality of the entire staffing industry. What are industry indicators for the recovery? You heard some of those today, job orders coming in across each of the verticals or up. Those are the things we look at. Here's another question. Is there a plan to look offshore to save recruiting costs in the US with demand being low? Adding an offshore component to recruiting has been done successfully by several companies. And we are looking into that and would likely move forward with that as our IT leader and his group agree that that's a viable option. to enhance our recruiting capability at a lower cost? So the answer is yes. Total cash in hand was $21.2 million. That's what it was as of March 31. Yes, correct. And it's in that range now. What do you attribute your higher than industry average gross margin to professional contract services? Alex, why don't you cover that since... you're on top of the professional division as well.
spk03: As Kim noted earlier, we have a very distinct group of customers that are in the mid-market range, which are able and willing to pay a slightly higher spread than the much, much larger VMS and MSP type agreements and companies. So I believe that because of the type of customer we have, and our marketing strategy that that's attributable to our higher gross margin and higher spread.
spk04: Thank you. Another question relates to turnover and retention of top producers. We have been very successful in retaining top producers. Our average tenure is very high, particularly with top producers. We just had our top producers on our annual sales award trip with excellent feedback from them. And we really try to take care of our people across the board. And we have hired aggressively additional top producers potentially or with experience. So we're doing pretty well on retention and we will continue to do the right things to keep our valuable staff someone said they're concerned about using stock at a cheap valuation. The answer is no, that will not happen. Next question. Do you see investments in M&A that provide more returns in buying back your stock? That analysis was done by DC Advisory and made available to our board of directors and management team. We studied it and concurred that at this time, that's the most optimal way to enhance shareholder value. As Kim said, in our capital allocation strategy, stock buybacks are still there at the appropriate time. We would initiate that if it was felt that the M&A side of the equation and organic growth weren't getting to the answer, but we do believe we will get there And we could, in fact, add both at the same time. And that's a possibility. Have you seen signs of distress in your customers' ability to pay? Alex, on the receivable side, our DSOs run about 43, 44 days, correct?
spk03: That's correct. Receivables are holding at the same consistent level they have in the mid-40 range. We've had very good success with our receivables, and we don't have any signs of our particular customers having an inability to pay nor asking for extended terms.
spk04: Thank you. Another question is, have you been receiving offers to be acquired? If so, what's the premium they're offering? Are these from peers or private equity? Well, I have to say that good companies typically are called to explore opportunities to merge, to get bought or otherwise. And I think that it's safe to say that the premiums, one, as I said yesterday, was a 71% premium to the trading price of a public IT staffing company. which is significant. But yes, all the time, we always get opportunities. And if it makes sense from a shareholder value standpoint, we must consider that. However, we're building this company for long-term growth and enhancing shareholder value. All three of us are significant stockholders in the company, and we'd like to see our equity value really accelerate, as do you. our shareholder base. So yes, good companies will always get offers. The best companies continue to operate for maximum shareholder value. And of course, we will do whatever is appropriate at the right time if opportunities come in. However, at depressed prices at this level, even a 70% premium only brings you back to a reasonable trading range. So Nonetheless, we are very, very confident that we will get to where we need to be from a shareholder value standpoint. And we really appreciate all of you that have been with us for some period of time and those new shareholders as well. We are working very, very hard to get the growth engine going, to get the earnings back to where we want it to be. And we believe that will help influence shareholder value coupled with acquisition growth and other capital allocation strategies as we move forward. So that concludes our call today. And one other question, someone asked about a 13G filing. We had a 13G filing, but it was an existing shareholder and a very long-term shareholder who we communicate with regularly. So there was no surprises there. So the answer to that is no, there's no surprises. And we have some very solid shareholders, including one of our directors who has the majority percentage of the company right now, about 9%. But we're very solid with our shareholders, and we appreciate your investment, and we are working hard to deliver. And that concludes our call today. Thanks again for coming on.
Disclaimer