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

HireQuest, Inc. (NASDAQ:HQI) Q4 2023 Earnings Call Transcript March 21, 2024

HireQuest, Inc. beats earnings expectations. Reported EPS is $0.03, expectations were $-0.1. HQI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, everyone, and thank you for participating in today’s call to discuss HireQuest Financial Results for the Fourth Quarter and Year Ended December 31, 2023. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I will now turn the call over to John Nesbett of IMS Investor Relations. Please go ahead.

John Nesbett: Thank you. I’d like to welcome everybody to the call. Hosting the call today are HireQuest’s Chief Executive Officer, Rick Hermanns; and Chief Financial Officer, Steve Crane. I’d like to 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 and 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. These 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 periodic reports filed with the Securities and Exchange Commission 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. I would now like to turn the call over to CEO of HireQuest, Rick Hermanns. Please go ahead, Rick.

Rick Hermanns: Thank you, everyone, for joining today’s call. I’ll begin by providing an overview of our financial and strategic highlights from the fourth quarter and full year of 2023, and then I’ll turn the call over to Steve, who will share more details around our fourth quarter and full year financial results. Both our fourth quarter and full year 2023 results were characterized by the continued execution of our growth strategy and demonstrated strength of our business model as we achieved revenue growth and profitability despite a challenging economic environment that continues to impact the staffing and recruiting industry. Our fourth quarter revenue increased 21.3% to $9.8 million and franchise royalties increased 15.9% to $8.9 million.

System-wide sales in the fourth quarter increased to $143.5 million compared to $127.9 million in 2022. For the full year, total revenue increased 22.4% to $37.9 million and franchise royalties grew 23.9% to $35.8 million. Full year system-wide sales were $605.1 million compared to $472.2 million in 2022. While our top line grew in the fourth quarter and for the full year 2023, primarily as a result of the MRINetwork acquisition, the state of the staffing and recruitment industry hampered organic growth. We were encouraged by the resiliency of our HireQuest direct franchisees who were down for year by only 2.7% and our Snelling franchisees who finished the year down 9%. These results compare very favorably to both our public and private competitors and really demonstrates the strength not only of our franchise model, but also speaks to the customer and geographic diversification cultivated by our franchisees.

Our recently launched skilled trades offering, TradeCorp, really started to gain some traction this last year, though starting from a very small base, and we’re excited to continue to see its momentum into 2024. MRINetwork wasn’t immune to the headwinds of the professional staffing and executive recruiting markets either. But as we’ve said in the past, MRI historically has had less standardized royalty model, so decreases in system-wide sales don’t necessarily translate to decreases in royalty revenues. Our reported SG&A expenses continued to impact our bottom line. However, our core SG&A expenses were effectively flat in Q4 2023 at $4.5 million compared to $4.4 million in Q4 2022. We provide details in today’s press release on core SG&A, which excludes workers’ compensation expense, the MRI ad fund expenses, which are really just a pass-through with corresponding services revenue and one-time charges.

In fact, this core SG&A expense decreased in both absolute dollars and as a percentage of total revenue for each of the past three quarters. We believe the current level provides us with plenty of capacity to take advantage of increased system-wide sales, either driven organically or through additional acquisitions without a linear increase in fixed costs. Over the past couple of quarters, I spent a fair amount of time talking about our net workers’ compensation expense. Total net workers’ compensation expense for 2023 was $3.7 million compared to a net benefit of $1.9 million in 2022. As I’ve mentioned on previous calls, there are two primary factors that impact this number. First is the difference between our net premium amounts collected and our expected losses for the policy year.

And the second is any changes to the expected losses up or down for prior policy years. Unfortunately, for us, last year, our comp rates were below our expected loss rates, accounting for approximately two-thirds of the expense and we had a particularly bad loss experience in the prior policy year, which accounted for the remaining third of the expense. While we can’t predict future loss experiences, the ’22, ’23 policy year was historically bad for us, but we haven’t seen anything in the ’23, ’24 policy year-to-date that would lead us to expect to repeat this year. Additionally, we’ve taken steps with our carrier to address the shortfall component of the expense and expect to see some relief on that side of the equation starting in Q2 2024.

We believe these actions will help normalize our margins as we progress through the year and the changes take effect. We continue to believe that we are a leader in the staffing industry with regards to our ability to manage workers’ compensation expense and it continues to be a core competency and competitive advantage. M&A continues to be a key component of our growth strategy, and we continued executing on it in 2023, while keeping our leverage low and maintaining a strong balance sheet. Most recently, we announced the acquisition of TEC Staffing Services in the fourth quarter of 2023. This acquisition is an excellent example of the accretive opportunities that we look for in the market as it expanded our Snelling operations in Northwest in Central Arkansas, while restoring some of the operating leverage that we’ve lost due to the challenging economic environment.

MRINetwork has proven to be a solid acquisition for us as well. While revenues have been down as a result of industry headwinds, MRI has demonstrated healthy profitability this past year. Additionally, as it relates to M&A, I’d like to point out that we’ve been able to maintain a healthy balance sheet and low leverage throughout all these transactions. Since the beginning of 2021, we’ve increased system-wide sales by just shy of $400 million. We’ve invested over $75 million in acquisitions and finished 2023 with net debt of $13.4 million. I’ll also highlight that fully diluted shares over that time have increased from about 13.7 million to only 13.8 million at the end of 2023. That is, we financed our growth almost exclusively with cash flow from operations.

We believe that as demand for staffing solutions recovers, HireQuest will be well positioned with premier staffing and executive search capabilities that we can leverage to enhance our offerings and operations, improve our bottom line, and drive increased value for our shareholders. I’ll now pass the call over to our Chief Financial Officer, Steve Crane, who will provide a closer look to our fourth quarter and full year results. Steve?

Steve Crane: Thank you, Rick, and good afternoon, everyone. As Rick mentioned earlier, total revenue for the fourth quarter of 2023 was $9.8 million compared to $8 million for the same quarter last year, an increase of 21.3%. Total revenue for the full year of 2023 increased 22.4% to $37.9 million compared to $31 million in 2022. Our total revenue is made up of two components franchise royalties, which is our primary source of revenue, and service revenue, which is generated from certain services and interest charge to our franchisees, other miscellaneous revenue and starting this past quarter, it also includes the pass-through revenue from MRINetworks advertising fund. Franchise royalties for the fourth quarter were $8.9 million compared to $7.7 million for the same quarter last year, an increase of 15.9%.

For the full year of 2023, franchise royalties increased 23.9% to $35.8 million compared to $28.9 million in 2022. Underlying the growth in royalties are system-wide sales, which are not part of our revenue, but our helpful contextual performance indicator. System-wide sales reflect sales at all offices, including those classified as discontinued. System-wide sales for the fourth quarter were $143.5 million compared to $127.9 million for the same period in 2022, which is an increase of 12.1%. Service revenue was $871,000 for the fourth quarter compared to $378,000 for the same quarter a year ago. Service revenue is composed of interest charge to our franchisees on overdue accounts receivable, service fees, other miscellaneous revenue and MRINetworks advertising fund revenue.

The ad fund revenue contributed $515,000 in Q4 of 2023 and is offset by a corresponding expense in SG&A. Service revenue can fluctuate from quarter-to-quarter based on a number of factors, including growth in system-wide sales, changes in accounts receivable, insurance renewals and similar dynamics. Selling, general and administrative expenses for the fourth quarter were $6.6 million compared to $4.7 million in the prior year period. For the full year, SG&A expenses were $24.4 million compared to $12.9 million in 2022. The increase in SG&A for the year is attributable to three primary drivers: increased workers’ compensation expense, increased expenses to support the growth in system-wide sales and acquisition integration expense, which we incurred during the first and second quarters and the MRINetwork advertising fund expense of $515,000 are included in our fourth quarter and full year SG&A.

For the fourth quarter in 2023, workers’ compensation expense was approximately $1.3 million compared to $166,000 in the fourth quarter of 2022. For the full year, workers’ compensation expense was approximately $3.7 million compared to a net benefit of $1.9 million in the full year 2022. Beyond workers’ compensation, the largest component of SG&A is employee salaries and benefits. Salaries and benefits for the fourth quarter of 2023 were $3 million versus $3.2 million in the prior year period. For the full year of 2023, salaries and benefits were $13 million versus $10.4 million in 2022. Also included in our full year SG&A were increased salaries and benefits related to personnel costs as we integrated MRINetwork as well as SG&A expenses from MRI, including marketing, IT, insurance, professional fees and similar costs.

We had largely completed MRI’s integration by third quarter, and this most recent quarter reflects an expected level based upon current revenue volumes for executive recruiting services. We don’t anticipate the need for additional increased expenses looking ahead to 2024. Net income includes income from operations adjusted for miscellaneous items, interest, income taxes and discontinued operations. Net income for the quarter was $16,000 compared to $2.7 million in the prior year period. Net income from continuing operations for the quarter was $467,000 or $0.03 per diluted share compared to net income from continuing operations of $2.6 million or $0.19 per diluted share in the fourth quarter last year. Besides increased SG&A, net income in the fourth quarter was negatively impacted by $2.6 million charge related to the resale of the tech offices to franchisees.

For the full year of 2023, net income was $6.1 million compared to $12.5 million in the prior year period. Net income from continuing operations for the full year 2023 was $6.4 million or $0.47 per diluted share combined with $12 million or $0.87 per diluted share in 2022. Adjusted EBITDA in the fourth quarter of 2023 was $4.3 million compared to $4.4 million in the fourth quarter of last year. For the full year, adjusted EBITDA was $16.5 million compared to $22 million in 2022. We believe adjusted EBITDA is a relevant metric for us due to the size of noncash operating expenses running through our P&L. A detailed reconciliation of adjusted EBITDA to net income is provided in our 10-K, which will be filed shortly. Moving on now to the balance sheet.

Our current assets at December 31, 2023, were $51.5 million compared to $51.9 million at December 31, 2022. Current assets as of December 31, 2023, included $1.3 million of cash and $44.4 million of net accounts receivable while current assets at December 31, 2022, included 3 million of cash and $45.7 million of net accounts receivable. Current assets exceeded current liabilities by $15.7 million at December 31, 2023, versus year-end 2022 when working capital was $15.2 million. Current liabilities were 69.4% of current assets at December 31, 2023, versus 70.8% of current assets at December 31, 2022. At December 31, 2023, we had $14.1 million drawn on our credit facility and another $26.2 million in availability, assuming continued covenant compliance.

We believe our credit facility provides us with flexibility and room for short-term working capital needs as well as the capacity capitalized on potential acquisitions. We have paid a regular quarterly dividend since the third quarter of 2020. Continuing that pattern, we paid a $0.06 per common share dividend on March 15, 2024, to shareholders of record as of March 1. For the full year 2023, we paid dividends in the amount of $0.24 per common share, and 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: Thank you, Steve. Our performance in both the fourth quarter and full year of 2023 demonstrates our ability to drive growth and profitability despite the challenging economic environment that is currently impacting the overall staffing and recruiting industry. Our focus right now is on controlling what we can control and reducing expenses to improve our bottom line. Looking long term, insiders and Board members own a substantial percentage of the company, and we will manage the company with a view on allocating capital to its best and highest use and maximizing growth of earnings per share. As always, I would like to thank our employees and franchisees for their hard work and dedication this past quarter and throughout all of 2023. We’re excited for 2024 and believe that we are well positioned to continue driving long-term value for our franchises, and to our shareholders. With that, we can now open the line to questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] First question comes from Kevin Steinke with Barrington Research. Please proceed.

Kevin Steinke: Hi, good afternoon. I want to start off by asking about the March 1 insurance policy renewal in terms of workers’ compensation. I mean how much do you think you accomplished with that relative to — would you may be like to accomplish going forward?

Rick Hermanns: Thanks, Kevin. So I would say two things. One is if you — as far as what we accomplished, I do believe that we’ve — I think that in the remaining 10 months of the year, our policy, as you’ve stated, renewed on March 1, is that the — that will be — it’s structured in such a way that the rates will be somewhat more adequate. Frankly, we’ve had rate inadequacy for really probably 2 years, and it won’t be as bad. So I’m not saying that we’re going to — as we pointed out, there’s about a $3.6 million net expense. And obviously, that’s not something we can obviously sustain or want to sustain. And so I think that the new structure will allow us to recover somewhere around half of that. Now part of what was in my remarks as well is 2023 also had some just had some bad development from the policy that ended on March 1, of 2023.

That’s the type of expense you really — it’s difficult to control for. For 30 years, we’ve done what I think is an excellent job in controlling our expenses. We closed claims quickly. We work them very hard. We have incentives for our franchisees to make sure that we’re working together to get in to close claims quickly and at a reasonable amount. But at the end of the day, it’s you can never completely control what happens. And as I stated, I — there is nothing that — there’s nothing that I’ve seen thus far in the ’23, ’24 policy that just expired, that comes anything close to what the ’22-’23 policy was. So I don’t know if that answers your question, but I would like to think that we will certainly narrow that gap in ’24, will we achieve breakeven or profitability in the workers’ comp program?

Probably not. But again, that’s probably not, but much closer.

Kevin Steinke: Got it. No, thank you. That did answer my question. So I also wanted to ask about the core G&A expenses, 4.5 million in the quarter. I believe you mentioned no need for additional expenses in 2024. So is that 4.5 million of core SG&A a good run rate? Or would you potentially look to reduce expenses if the demand environment continues to be soft.

A – Rick Hermanns: So I think that the 4.5 million per quarter is a good number. Now can it be reduced still? Frankly, we literally already have taken steps that by the end of this month, we’ll have reduced perm payroll by about another 550,000, which of course, would hit SG&A. So can we cut more? Well, yes, we already — I’m saying we already have. That being said, the — I think the more important way of looking at it is to the extent that we can grow, it’s harder to cut at this point without cutting things that will impair our future. And so the answer to your question is if we had something that really started if our sales really dropped off a cliff, yes, there are things that we could cut. We could probably cut an additional $500,000 to $800,000 a quarter if we needed to.

The thing is, its stuff like, let’s say, software development, we could stop. We can absolutely slow down or shut some of those programs off. The problem is — and still run the business exactly the way we are. The impact will be a year from now, 3 years from now. And so to the extent that we’re able to maintain profitability and that while the environment is absolutely weak, it is absolutely weak for demand. We’re still profitable. And we’re still taking the viewpoint that the economy will recover at some point, whether it’s in the second half of 2024 or even if it’s in 2025, we want to be positioned to take advantage of that uptick. And as alluded to in my remarks, well, not even alluded to really stated is we’re in a position to grow sort of like with the tech acquisition without adding any additional staff.

So do we have — we’re at a weird point. Do we have, let’s say, slack capacity where we have five people doing what three people should be doing. No, we don’t do. We would never ever do that. On the other hand, if you have something like franchise sales, like, okay, we’re not selling franchise sale — our franchise sales level isn’t what we would expect in a really good environment. But we only we have one1 person selling franchises. So it’s — you literally go from a franchise sales effort to no effort, right? So it’s like do you do that when it’s a little bit weak? And the answer is, in my opinion, not at this point. But if you were truly getting to a point where your viability was being threatened, absolutely. Then you get rid of it. I don’t know if that answers your question, but that’s how we see things.

Kevin Steinke: Yes, it does answer the question. Thanks. I also wanted to just ask about — I know you gave the declines — organic declines for HireQuest direct and Snelling for the full year. I don’t know if you had an organic number, percentage number for either system-wide sales or franchise royalties in the fourth quarter. And the reason I ask, I’m just trying to gauge things kind of stabilized or worsened or where the demand environment stands?