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Presentation

Derek Dewan: 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 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, provide you with our outlook for the remainder of the 2023 fiscal year in 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 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 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 was outstanding, the current fiscal second quarter still compares favorably, taking into account the discreet 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 insure that our clients get the very best service.

They are the key 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: 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 the 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, professional contract services revenues 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 before the effects or 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 represented 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, recent outstanding jobs report and, in contrast to that, recent significant lay-offs of IT professionals by larger employers, also each are positive indicators for the remainder of fiscal 2023. Rising employment suggests increasing demand for our services, while IT corporate downsizing actions means 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 all are aware of, 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 and represented 8% of total revenue for 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 which tends to causes 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 it found that 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, tends to increase competition among staffing firms in Ohio in particular 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 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 again 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 also 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 in order to address this recent margin compression. Despite lower quarter over quarter gross profit and gross margins, our current margins remain high and are 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 on a routine basis. In addition, that we expect the implementation of the counter-inflationary measures, I mentioned a minute ago, 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, as compared to of $1.1 million, or $0.01 per diluted share, for fiscal 2022 second quarter.

Adjusted net income, which is 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, which is a non-GAAP measure, for the fiscal 2023 second quarter was $1.7 million as compared with $3.4 million for the fiscal 2022 second quarter. Our current or 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 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 a 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 would expect to commence the repurchase of shares in the near term following our earnings release and 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 so with that, now, I’ll turn the call back over to Derek.

Derek Dewan: 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.

Derek Dewan: Yes. First question. That’s a common question. I was trying to aggregate similar questions. We announced a $20 million stock repurchase plan through 12, 31 of ’23 this year? The stock purchase plan is up for open market transactions. And we do not — have not bought any shares yet, because we want to report our numbers first, because we are in a blackout period. But the share buyback program will commence after these earnings have been digested, which we reported. So probably the latter part of this week is we’ll begin the program. And we’ll 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 Kim, was our SG&A cuts? If you’d like to comment on that, and also the impact on the next several quarters results?

Kim Thorpe: 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. And that was probably 80% of the number 85% of the number. And as far as the margins go, the number is calculated based on their actual current pay, including in some cases some commission. The impact on the margin is, 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. And of course we’re all looking at — we’re all cautiously optimistic about the economy and the environment. However, assuming everything goes as planned, it should provide us about a 2% increase in the EBITDA margin this year, which would bring our EBITDA margin somewhere between 6% and 7%, 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: 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? So the multiples have to be in line with where we’re trading. And that can be accomplished with synergies and so forth. However, fortunately, we’re able to execute a buyback program and also be opportunistic, on strategic acquisitions at the appropriate time, particularly some tuck-ins that are less risky, easier to integrate so forth. Now, the question was, what do we — 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: Okay. Right now, perm placement. Again, they’re cautiously optimistic that trends that we’re seeing now continue during the net through this quarter, and our last quarter. We expect to report permanent placements that are on par with what we, with our higher years before the pandemic, which I believe was between $20 million and $22 million. So and you can simply analyze the 10.6 that we’ve done here to-date to get to there. That’s conservative, assume if the economy does heat up, it could be a little better than that. Derek?

Derek Dewan: Okay. And let me add this. The 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. And fortunately, we capitalized on it. And this year, we expect a more normalized version of it. However, we are continuing to do the placements successfully and our contract businesses picked up fortunately, which will help make up for the differential in perm. Next question, Kim, deals with again, the buyback question. I cover that pretty good. But I should say that, fortunately, our cash flow is significant. And we’re able to continue that program. And the question was, are you going to spend all your money at one time? Or how quickly?

I think, you know, we’ll be judicious in our execution. But we think the stocks had good value. So we are definitely pursuing a program. Next question. Again, your SG&A cuts up quickly, will they be affecting earnings immediately? They already are starting to be reflected there. Let’s see what else we got. Okay. Again, the questions are pretty much repetitive.

Kim Thorpe: Yes, that the cuts were done in March, they were fully executed. Okay. So…

Derek Dewan: Then I’ll play that, we’re still looking for other ways to cut costs, be it job boards cost, be it technology costs, and otherwise. So we’re seeing other opportunities and we’re pushing those costs out to the extent that we can. Same thing with lease renewals and so forth because of virtual working and remote working. So we’ll see a bumpy road ahead economically it appears, but our crystal ball is no better than anybody else’s, but for sure, we will be able to deliver good results. And we’ll be very judicious in how we spend our money. And we will also execute our capital allocation strategy. Kim, do you have anything to add at this point?

Kim Thorpe: No. I think you covered everything well. I would just remind everybody that, we’re — I’m looking through some of the questions and there’s a number of questions about acquisitions. And what are your plans? And it seems like there’s some concern, but let me just say. The company that you’re 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 the — in fact, our eighth birthday, just past us, where our revenues are 4x, our profit is up 175% compound annual — on a compound annual growth rate. And we have every — we’re going to execute a multifaceted strategy. As Derek said, there’ll be some stock buybacks. But we’re also going to continue to look for acquisitions that makes sense.

Derek Dewan: Let me add to that. Blackout periods are set by us through our — also through counsel. However, those will be related to earnings, blackout periods, or trading blackouts. But other than the normalized blackouts, we don’t expect any unusual periods. And if we do, we’ll let people know, if that pops up. But we plan on executing the program fairly soon here. Earnings gets digested. So I say the latter part of this week for sure. And we will be judicious in the approach. The other thing that came up, did you touch auction at a tender offer? We sure did. But it was we felt our Board felt and we felt and our advisors felt that it was prudent to execute an open market strategy, because the status of the economy and so forth, in terms of spending all our cash immediately might not be the optimal thing to do at this point. So rest assured that those are always considered and our deliberations are regarding capital allocation.

Derek Dewan: I think that pretty much covers everything today. If you have follow up, just let us know. Thanks for joining us, and that’ll conclude our call.