HireQuest, Inc. (NASDAQ:HQI) Q4 2022 Earnings Call Transcript

HireQuest, Inc. (NASDAQ:HQI) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Greetings, and welcome to the HireQuest Inc. Fourth Quarter and Year-End 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I would now like to turn the conference over to your host, Jennifer Belodeau. You may begin.

Jennifer Belodeau: Thank you, Kelly. I would like to welcome everybody to the call. Hosting the call today are HireQuest’s CEO, Rick Hermanns; and CFO, David Burnett. Let me take a moment to read the safe harbor statement. This conference call contains forward-looking statements as defined within Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements in terms, such as anticipate, expect, intend, may, will, should, or other comparable terms involve risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. Those statements include statements regarding the intent, belief or current expectations of HireQuest and members of its management, as well as the assumptions on which such statements are based.

Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties including those described in HireQuest’s periodic reports filed with the SEC and that actual results may differ materially from those contemplated by such forward-looking statements. Except as required by federal securities law, HireQuest undertakes no obligation to update or revise forward-looking statements to reflect changed conditions. Let me now turn the call over to the CEO of HireQuest, Rick Hermanns. Go ahead Rick.

Rick Hermanns: Thank you for joining us for today’s call. To begin, I will provide an overview of the financial and strategic highlights for the quarter and then David will share more details surrounding our fourth quarter results. We delivered strong top line growth in the fourth quarter, driven primarily by our franchise royalties, which increased by 26.4% to $7.7 million. Total revenue also increased 23.1% to $8 million. Income from operations increased 68.4% to $2.8 million and net income from continuing operations increased 21% to $2.6 million or $0.19 per basic and diluted share. Adjusted EBITDA for the fourth quarter was $4.4 million, compared to $3.4 million in the fourth quarter of 2021, showcasing our ability to drive sustained profitability across our business.

For the full year, we saw an increase in franchise royalties of 35.6% to $28.9 million, compared to $21.3 million in 2021. Income from operations increased 109.6% to $16 million compared to $7.7 million in 2021. Our net income from continuing operations increased modestly to $12 million or $0.87 per basic and diluted share compared to $11.8 million or $0.88 a share per basic and $0.87 per diluted share in 2021, primarily related to acquisition costs that we incurred throughout 2022. However, adjusting for these acquisition-related charges and other non-cash expenses that we expect to recoup as we integrate and scale our acquisitions, we actually saw an increase in adjusted EBITDA of 78.9% to $22 million compared to $12.3 million in 2021. So as you can see, we believe we are well positioned to drive continued profitability in tandem with our strategy of making accretive acquisitions that complement the organic growth of our business.

Speaking more on our acquisition strategy. In the fourth quarter, we announced and closed our acquisition of certain assets of MRI Network, the third largest recruiting network in the world, adding over 200 offices to our franchise network across the United States and internationally. MRI provides us with immediate scale in the executive recruiting and professional staffing segments of the market and is highly complementary to our existing HireQuest direct and selling offerings. We’ve made great progress in integrating MRI into our operations. However, there are certain transition items and associated expenses that we will be carrying through the first half of this year. In addition to MRI, we successfully grew our franchise base through three other acquisitions over the course of 2021.

These transactions fall under our more common category, where we acquired businesses with one or more offices and then resell them as franchises. As I’ve mentioned on previous calls, we’ve become quite efficient at executing and integrating acquisitions like these into our business and expect that they will continue to make up a majority of the transactions we complete going forward. Overall, we’re very pleased with our fourth quarter and annual results, and are encouraged by the progress we’ve made both organically and through our acquisition strategy throughout fiscal 2022. We remain intently focused on identifying accretive opportunities in the market that allow us to continue expanding our franchise network and brand offerings and complement the organic growth of our business.

As we move through 2023, we believe we are well-positioned for continued growth in the current uncertain economic environment as many businesses and organizations may opt to fill their staffing needs with temporary rather than permanent employees. Additionally, an uncertain economy could result in consolidation in our industry providing acquisition opportunities. That said, nobody likes a recession and we will remain watchful as the year unfolds. With that, I’ll pass along to our CFO, David Burnett who will take — who will provide a closer look at our fourth quarter and full year results. David?

David Burnett: Thank you, Rick and good afternoon, everyone. Thanks for joining us today. At the risk of repeating some of the numbers Rick mentioned, let’s start with total revenue which for the fourth quarter of 2022 was $8 million compared to $6.5 million for the same quarter in 2021, an increase of 23.1%. Total revenue for all of 2022 was $31 million, an increase of 37.4% over 2021 when total revenue was $22.5 million. Our total revenue is made up of two components: franchise royalties our primary source of revenue which makes up roughly 95% of our total revenue and service revenue which is generated from service fees, interest charged on overdue accounts and other miscellaneous franchise-related revenue. On occasion, we will report a third component, company-owned revenue, which would be related to operations that are not marketed as a potential franchise and are managed by us instead of a franchisee.

At December 31, 2022 we operated two such locations, but they did not meet this criteria and instead were classified as held for sale and reported below the line as discontinued operations. Even though we previously have reported one of these as company-owned revenue, we reclassified it in the fourth quarter and retroactively as we began the process of franchising it out. I won’t refer to those operations specifically and they are not included in the revenue I just mentioned. But it is important to keep in mind that we are still benefiting from them. And once they are franchised out, we will retain the royalty stream. For continuing operations, franchise royalties for the quarter were $7.7 million compared to $6.1 million for the fourth quarter of 2021, an increase of 26.4%.

For the full year 2022, royalties were $28.9 million compared to $21.3 million in the full year 2021, an increase of 35.6%. Underlying the growth in royalties are system-wide sales, which for the quarter were $127.9 million compared to $106.8 million for the same period in 2021. System-wide sales for the full year 2022 were $472.2 million compared to $354.5 million in the full year 2021, an increase of 33.2% primarily related to acquisitions completed in 2022 and organic growth related to the rebound from the economic downturn lingering in 2021 due to COVID-19. System-wide sales include sales at all offices including those classified as discontinued. Selling, general and administrative expenses for the quarter were $4.7 million compared to $4.4 million in the fourth quarter of 2021.

For the year, SG&A decreased from $13.3 million in 2021 to $12.9 million in 2022. The decrease was primarily driven by a $2 million benefit in net workers’ compensation, $1.2 million of which is attributable to the Snelling workers’ compensation reserves that were assumed at the time of the acquisition and are currently in runoff mode. This decrease was offset by a net increase in compensation expense of approximately $800,000, which includes additional headcount to keep pace with our growth. Compensation-related expenses remain by far the largest component of SG&A and most of the costs we took on from the MRI acquisition are related to human capital. Income from operations which is total revenue less SG&A, depreciation and amortization was $16 million in 2022 versus $7.7 million in 2021, an increase of 109.6%.

Most of the $8.5 million increase in total revenue fell straight to income from operations, reflecting our ability to leverage incremental revenue without rapid increases in core operating expenses. Income tax expense for the quarter was approximately $1.9 million, an effective tax rate of 13.7%. This was over double the effective tax rate for 2021, which was 5.1%. The lower rate for 2021 was the result of a large non-taxable bargain purchase gain recognized as part of the Snelling acquisition. Our normal effective tax rate is expected to be in the teens and will fluctuate based on significant permanent items like the Work Opportunity Tax Credit. All in net income for the quarter was $2.7 million or $0.20 per diluted share compared to net income of $2.2 million, or $0.16 per diluted share in the fourth quarter last year.

For the year, net income was $12.5 million or $0.91 per diluted share compared to net income of $11.9 million in 2021 or $0.87 per diluted share. Adjusted EBITDA in the fourth quarter of 2022 was $4.4 million compared to $3.4 million in the fourth quarter of 2021. And as Rick highlighted earlier, our adjusted EBITDA for the year was $22 million compared to $12.3 million last year. We believe adjusted EBITDA is a relevant metric for us going forward due to the size of non-cash operating expenses running through our P&L. A detailed reconciliation of adjusted EBITDA to net income will be provided in our 10-K. Moving on now to the balance sheet. Our current assets at December 31, 2022 were $51.9 million compared to $42 million at December 31, 2021.

Current assets as of December 31, included $3 million of cash, and $45.3 million of accounts receivable while current assets at December 31, 2021 included $1.3 million of cash and $38.2 million of accounts receivable. Current assets exceeded current liabilities by $15.2 million at December 31 versus a year earlier when working capital was $20.5 million. The decrease in working capital reflects a larger balance on the credit line, following the acquisition of the MRI network assets late in the fourth quarter. At year-end, we had $12.5 million drawn on our credit facility and another $12.2 million in availability after accounting for certain reserves and letters of credit. In February 2023, we replaced this Truist Bank facility, plus a term loan we had at Truist Bank with a new $50 million credit line from Bank of America.

We believe this new facility provides us with the flexibility and room for both organic growth, as well as the capacity to capitalize on potential future acquisitions. We have paid a regular quarterly dividend since the third quarter of 2020. Continuing that pattern yesterday, we paid a $0.06 per common share dividend to shareholders of record as of March 1. We expect to continue to pay a dividend each quarter subject to the Board’s discretion. With that, I will turn the call back over to Rick for some closing comments.

Rick Hermanns: Thanks, David. Our fourth quarter and full year results demonstrate our ability to drive sustainable growth, across our business both organically and through acquisitions that broaden the scope of our franchised operations and expand our geographic presence. As always, I would like to take the time to acknowledge our team, our franchisees, and their workers for their continued excellence and dedication to the success of our business. This is an exciting time for our business, and we believe that we €“ that with our significantly expanded franchise network and dynamic offerings, for a variety of staffing and other talent-related needs, we are well positioned to continue driving improved results, and value for our shareholders as we move through 2023. With that, we can now open the line to questions. Thank you.

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Q&A Session

Operator: Certainly. The floor is now open for questions. Your first question is coming from Mike Baker with D.A. Davidson. Please pose your question. Your line is live.

Mike Baker: Okay. Thanks. Lot I could ask, but I guess I’ll ask this. You guys are in a pretty interesting and unique position to have an opinion on the job market, which is obviously a huge topic right now and wages and all those kinds of things. So I guess, I’ll just ask you a bigger picture, what’s your view of the job market right here of where wages are going? Is it easier or harder to find temporary staffing? And how does your business typically react in the recession? And would that be different this time, around just because of the diversification that you guys now have through your acquisitions? Thanks.

Rick Hermanns: Yes. Thanks, Mike. So number one is, I would say, that there is no question that there has been a noticeable slackening of demand. So there’s no question that the — at the margins, the amount of openings have declined. And therefore, it is easier to find people. That said, wages are still continuing to go up. And so for us, the increasing wages tends to soften the blow of let’s say, reduced demand. So — but it’s noticeable. Now as far as, how our business generally reacts to a recession, because it’s not good. It’s — recessions are never good, typically for any company and certainly not for a staffing company. That said, there is still such a while everybody is rightfully concerned about the economy, we’re still sitting with incredibly low unemployment rates.

And therefore, I’m €“ maybe, I’m whistling past the graveyard, but it seems to me that this is very much different than usual, in that there is just a shortage of talent. And so, again while I completely acknowledge that there is a slowing down of overall demand, the demand in most instances still exceeds our capacity to actually even fill it. And so, it will take quite a bit more slippage, before it will really start to — before it would really start to impact our numbers. But thanks, for the question.

Mike Baker: Sure. And so, I guess as a follow-up to that, sort of understanding that, you don’t really give forward guidance and I appreciate that. But, how should we think about — in the past, we’ve sort of thought of your system-wide sales, growing at GDP or something along those lines. Is that still a fair way to think about the system-wide sales?

Rick Hermanns: So, let’s set aside MRI for a second, because that creates a new — that’s created a new dynamic for us. In our core Snelling and HireQuest Direct, yes, I mean GDP really does represent a good gauge as to which way our sale — our system-wide sales are going to go. And so, if you assume a recession, I think that it’s fair to say that, for us to lose 2 to 3 times whatever the percent decline in GDP is, is a reasonable assumption. And whereas growing tends to be not that much of a factor, unless we’re coming directly out of a trough. In other words, obviously, if you go back to 2017, 2018 we’ve been in a growth period already for five, six years. So I’m not suggesting that a 3% growth of GDP would necessarily yield, a 9% increase in our system-wide sales.

But coming off of a trough, then that same way that saying going into, a recession would drop at 2 to 3 times the GDP decline, in the immediate couple of quarters coming out of a recession, would also be that factor 2 to 3 times a 2 to 3 times sort of that increase, which is really just typically recovering what was lost during the recession. Does that make any sense on, what I’m saying?

Mike Baker: Yes. No, I got it. I’m with you, I’m following you.

Rick Hermanns: Okay. So, that’s

Mike Baker: But that is MRI