GEE Group Inc.

Hello and welcome to the GEE Group fiscal 2024 third quarter and year-to-date period ended June 30th, 2024 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 GE Group's results for the fiscal 2024 third quarter and year-to-date period, ended June 30, 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 safe harbor. We assume no obligations to update statements made on today's call. Throughout this presentation, we will refer to periods being presented as this quarter or the quarter or this year to date or the year to date, which refer to the three-month or nine-month periods ended June 30, 2024, respectively. Likewise, when we refer to the prior year quarter or prior year to date, we are referring to the comparable prior three-month period or nine-month periods ended June 30, 2023, respectively. When we refer to the prior sequential quarter, we are referring to the three months ended March 31, 2024. 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.investorcenter.com. Now on to today's prepared remarks. In fiscal 2024, we have encountered and continue to face very difficult and challenging conditions in the hiring environment for our staffing services, stemming from macroeconomic uncertainty, interest rate volatility, and inflation, leading to less robust economy and a slowdown in the labor market. These conditions have produced near universal cooling effect on U.S. employment, including businesses' use of contingent labor and the hiring of full-time personnel. As a brief reminder, the demand environment for our services, as well as our industry peers, began to soften in the latter 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. Since then, many client initiatives such as IT projects and corporate expansion activities requiring additional labor in general have been put on hold. Instead, many businesses who we serve have implemented and proceeded with layoffs and hiring freezes. These conditions have continued to negatively impact job orders for both temporary help and direct hire placements. Thus, our financial results for the 2024 fiscal third quarter and year-to-date end of June 30, 2024 have been impacted by these conditions. Consolidated revenues were $29.5 million for the quarter and $88.1 million year-to-date. Gross profit and gross margin were 9.6 million and 32.6% respectively for the quarter and 28.1 million and 31.9% respectively year-to-date. Consolidated non-GAAP adjusted EBITDA was a negative 400,000 for the quarter and a negative 1.2 million year-to-date. We reported a net loss of 19.3 million or 18 cents per diluted share for the quarter and a net loss of 21.8 million or 20 cents per diluted share year to date. Due to the current and anticipated near-term macroeconomic conditions impacting the demand for our services, we assessed our intangible assets in goodwill this quarter and have prudently taken non-cash impairment charges that account for the substantial portion of our net losses for the quarter and year-to-date. We are by no means operating under any sort of wait-and-see posture, and we are taking aggressive actions to improve our financial results, both short-term and long-term. As recently announced, we are taking this opportunity to ramp up our M&A activities and at the same time streamline our operations while taking out an estimated $3 million in annual SG&A costs in the process. Additionally, we will migrate and integrate further our remaining legacy front and back office systems into singular cloud-based platforms. We have resources to complete this process over the next 12 to 18 months and anticipate we will further achieve economies of scale and be positioned to accept and integrate future creative acquisitions more efficiently. In addition to these near-term initiatives, We are working closely with our frontline leaders in the field across all verticals to help them continue to aggressively pursue new business as well as opportunities to grow and expand client revenues. We are seeing some positive results. When an anticipated recovery does occur in the future, I am very confident we are positioned to meet the increased demand from existing customers and win new business. I am also happy to report that we are now well underway formulating and executing on our recently enhanced strategic plans, which include making prudent investments to grow both organically and through mergers and acquisitions. At the same time, rest assured that we will always manage our business prudently, maintaining a solid cash position with available attractive financing. With regard to M&A, We are in contact with several potential strategic acquisition targets and expect to complete accretive acquisitions within the remainder of this calendar year and in fiscal 2025. As you know, we paused share repurchases on December 31, 2023, having repurchased just over 5% of our outstanding shares as of the beginning of the program. Share repurchases always will be considered as an alternative component of our capital allocation strategy and a bonafide alternative use of excess capital in the future if considered prudent. Before I turn it over to Kim, I want to reassure everyone that we will successfully manage through these challenges outlined previously and restore growth and profitability as quickly as possible. GEE Group has a strong balance sheet with substantial liquidity in the form of cash and borrowing capacity. The company is well positioned to grow internally and be acquisitive. We also continue to believe that our stock is undervalued and especially so based upon recent trading at levels very near and even slightly below tangible book value. Also, only a relatively small portion of our float is actually trading at these levels, Further evidence that there is a good opportunity for upward movement in the share price once we are able to gain and operate in a more normal economic and labor conditions improve. Management and our board of directors share the primary goal of restoring and growing shareholder value. Finally, 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 service. 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 the call over to our Senior Vice President and Chief Financial Officer, Kim Thorpe, who will further elaborate on our fiscal 2024 third year and year-to-date results.

Thank you, Derek, and good morning. As Derek reported, consolidated revenues for the quarter and year to date were $29.5 million and $88.1 million, down 23% and 25% respectively from the comparable prior year periods. Revenues for the quarter were up $1.4 million, or 5% as compared with those for the prior sequential quarter. Professional and industrial contract staffing services revenues for the quarter were $26.2 million, down 21% as compared to the prior year quarter. Professional and industrial contract staffing services revenues year to date were $79.3 million, down 22% as compared with the prior year to date. Professional and industrial contract staffing services revenues for the quarter increased 600,000 or 3% as compared with the prior sequential quarter. Professional contract services revenue, which represents 91% of all contract services revenue and 81% of total revenue, decreased $6 million or 20% this quarter as compared with the prior quarter, prior year quarter. Year-to-date professional contract services revenue represented 91% of all contract services revenue and 82% of total revenues and decreased $20.4 million, or 22%, as compared with the prior year to date. Industrial contract services revenue, which represents 9% of all contract services revenue and 8% of all revenue, decreased $800,000 or 24% this quarter as compared with the prior year quarter. Year-to-date industrial contract services revenue represented 9% of all contract services revenue and 8% of total revenues and decreased $2.7 million or 27% as compared with the prior year to date. Professional contract services revenue increased $600,000 again, are 3%, and industrial contract services revenue decreased $50,000, or 2%, as compared with the prior sequential quarter. Direct hire revenues for the quarter were $3.3 million, down 37% as compared with the prior year quarter, and were $8.8 million year-to-date, down 44% as compared with the prior year-to-date. Direct hire revenues were up $800,000 or 34% as compared with the prior sequential quarter. Our top line performance was directly impacted by the difficult economic and labor market conditions facing us and the staffing industry referenced by Derek in his opening remarks. Gross profit for the quarter was $9.6 million, down 30%. as compared with the prior year quarter gross profit. Gross profit year to date was $28.1 million, down 32% as compared with the prior year to date gross profit. Our overall gross margins were 32.6% and 35.8% for the quarter and year to date respectively. The decreases in gross profit and gross margin are mainly attributable to the decline in direct higher revenue which has 100% gross margin relative to total revenue and to some spread compression also experienced in our contract services businesses. Our professional contract services gross margin was 25% for the quarter compared to 26.5% for the prior year quarter, a decline of 150 basis points. The gross margin for professional contract services was 25.2% year-to-date as compared with 25.8% for the prior year-to-date, a decline of 60 basis points. The decrease in professional contract services gross margin is due in part to increases in contractor pay and other employment costs associated with the recent rise in inflation in combination with more competition for orders and candidates resulting in spread compression. Our gross profit and gross margin for the quarter were up $800,000 and 130 basis points respectively as compared with those of the prior sequential quarter. Our industrial contract services gross margin was 15.2% for the quarter compared with 17.7% for the prior year quarter, which was a decline of 250 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 resulting in spread compression. Selling general and administrative expenses, or SG&A, for the quarter was $10.2 million, down 13% as compared with the prior year quarter. SG&A expenses year-to-date were $30.8 million, down 15%, as compared with the prior year to date. SG&A expenses were 34.6% of revenues for the quarter compared with 30.8% for the prior year quarter and were 35% of revenues year to date as compared with 30.7% for the prior year to date. The increase in SG&A relative to revenue is mainly attributable to our fixed costs, including personnel-related expenses, occupancy costs, software subscriptions for applicant sourcing and tracking, and others, which became higher proportionately relative to lower revenues, and to a lesser extent, certain non-recurring expenses not associated with the core expenses. As Derek mentioned, management began taking actions this quarter to streamline operations and in the process reduce and eliminate $3 million of our annual SG&A expenses. The initial $1.6 million of these savings comprised of personnel, occupancy, and job board-related costs and expenses is in place and will be followed shortly by an additional reduction in annual costs of approximately $1.4 million. We routinely monitor our costs and expenses and take actions and, where necessary, to avoid unnecessary costs and to preserve cash flow while facing and balancing our needs to maintain quality service to our clients and preparedness for when the business environment improves. Of course, taking care of our employees is paramount to the success of GEE Group. Another key aspect of our plans to streamline operations that Derek spoke of, it is opening remarks. is to mitigate and integrate our remaining legacy front and back office systems onto singular cloud-based platforms. The company has the financial means to do this and expects to complete this task in the next 12 to 18 months. We anticipate financial and operational returns in terms of providing the means to accelerate and integrate future accretive acquisitions more efficiently and achieve economies of scale more rapidly. We reported the net loss for the quarter of $19.3 million or 18 cents for diluted share down $27.2 million as compared with net income of $7.9 million or 7 cents for diluted share for the prior year quarter. Our net loss year to date was $21.8 million or 20 cents for diluted share down $31 million as compared with net income of $9.2 million or $0.08 per diluted share for the prior year to date. Adjusted net income, which is a non-GAAP financial measure for the quarter, was negative $3.4 million, down $11.9 million as compared with adjusted net income of $8.1 million for the prior year quarter. Our year to date adjusted net income was $5.5 our net loss was $5.4 million, down $15.4 million as compared with adjusted net income of $10 million for the prior year to date. The main drivers of the declines in our net income resulting in our large net loss for the quarter and the year to date were the $20.5 million in non-cash impairment charges, as well as the declines in orders and revenues we've discussed and in addition, the reversal of the valuation allowance or the former valuation allowance on our deferred tax asset in the prior year quarter and prior year to date. EBITDA, which is a non-GAAP financial measure for the quarter, was a negative $600,000, down $2.5 million as compared with $1.9 million positive for the prior year quarter. Year to date, EBITDA was negative $2.7 million down $7.7 million as compared with the $5 million for the prior year to date. Adjusted EBITDA, which also is a non-GAAP financial measure, for the quarter was negative $400,000, down $2.5 million as compared with $2.1 million for the prior quarter. Sorry. Our year to date adjusted EBITDA was negative $1.2 million down $7 million as compared to $5.8 million for the prior year to date. Again, the main drivers of the decline in EBITDA and adjusted EBITDA for the quarter and year to date are the declines in orders and revenues as we've discussed. Our current or working capital ratio as of June 30, 2024 was 4.1 to 1, up from 3.9 to 1 at March 31, 2024, and up from 3.6 to 1 as of September 30, 2023. We reported $1.1 million in negative cash flow from operating activities for the year to date and negative free cash flow, which is a non-GAAP financial measure of the negative $1.2 million year to date. Our liquidity position as of June 30, 2024 remains very strong, with $19.6 million in cash, an undrawn ABL credit facility with availability of $8.7 million, net working capital, including our cash, of $26.9 million, and no outstanding debt. Our net book value per share and net tangible book value per share were 79 cents and 36 cents, respectively, as of June 30, 2024. Our net book value per share and net tangible book value per share were 98 cents and 36 cents, respectively, as of September 30, 2023. Again, the decrease in net book value per share was primarily the result of the non-cash impairment charges taken in the quarter. And as a reminder, these had no effect on our cash position, tangible assets, net working capital, or net tangible book value. In conclusion, while we were obviously disappointed with our results and remained somewhat cautious in our near-term outlook, we do remain optimistic for the long term and are preparing for the long term. Our management team and field leadership is experienced in managing through difficult times, such as the business disruption attributable to COVID and previous cynical downturns affecting the labor markets. Collectively, we have demonstrated that our company can generate substantial earnings consistently under more favorable economic conditions in a more conducive demand environment for our staffing industry. Before I turn it back over to Derek, please note that reconciliation, plural, 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. Now I'll turn the call back over to Derek.

Thank you, Kim. Despite economic headwinds and staffing industry challenges impacting the demand for our services, we are aggressively managing and preparing our business to mitigate losses, restore profitability, and be prepared for an anticipated recovery. What we hope you take away from our earnings press release and our remarks today and from our strategic announcements last week is that we are moving aggressively not only to prepare for a more conducive and growth market, but also to restore growth sooner by executing on both organic and M&A growth plans and 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 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.

Kim, will you take the first question, please? We're moving to the question and answer period now.