HireQuest Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 11, 2023

There are 8 speakers on the call.

Operator

Afternoon, everybody, and welcome to the HyreQuest Incorporated First Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your Mr.

Operator

John Nesbitt, Investor Relations. John, over to you.

Speaker 1

Thank you, and good afternoon. I'd like to welcome everyone to the call. Hosting the call today are Hire Quest's Chief Executive Officer, Rick Hermann and Chief Financial Officer, David Burnett. 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 The Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.

Speaker 1

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 dependent circumstances that will occur in the future. These statements include statements regarding the intent, The beliefs or current expectations of Hire Quest 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 Hire Quest's 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, Hire Quest 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 Hire Quest, Rick Hermann, go ahead, Rick.

Speaker 2

Thank you for joining us for today's call. To begin with, I will provide an overview of the financial and strategic highlights for the quarter, and then David will share more details surrounding our Q1 results. Our Q1 results were driven by strong performance at our organic locations And the integration of strategic accretive acquisitions into our business, total revenue grew 40% to $9,900,000 With franchise royalties increasing 41.8 percent to $9,300,000 System wide sales for the quarter increased to 153,500,000 dollars compared to $101,000,000 in the Q1 of 2022 and net income from continuing operations increased 372.1 percent to $2,300,000 or $0.17 per diluted share. Last quarter, we announced that we had completed our acquisition of MRI Network, a top permanent placement and executive search firm And professional staffing network based in the United States and the 3rd largest executive recruiting network in the world. This was a transformative acquisition for us, adding over 200 franchise offices both in the United States and international to our staffing network.

Speaker 2

Excuse me. Our acquisition of MRI Network is a perfect example of our broader M and A strategy. We are intently focused on identifying, evaluating and accretive acquisitions that we believe will further enhance the organic growth of our business. MRI Network allows us to add immediate scale In a brand new vertical focused on the executive search and professional staffing market and in a way that supports our existing Hire Quest direct and Snelling offerings. As is the case with any acquisition, we also incurred certain expenses related to our purchase of MRI Network that are reflected in this quarter's results, particularly in our SG and A.

Speaker 2

These are near term one off expenses that we planned for as part of the acquisition, and we expect them to have We expect them largely phased out by the end of the Q3. We will note here that certain expenses related to MRI have been a bit more difficult to eliminate as quickly as we would have wished. That said, we are pleased with the progress we've made this quarter, Immediate positive impact on our results. This is especially true in the current economic environment where many staffing have been reporting declining revenues year over year for their U. S.

Speaker 2

And North American businesses. With the Q1 now closed and a little more visibility 2023, I'm confident that we are well positioned to continue driving our growth strategy to deliver consistent improved results as we move through the balance of the year. With that, I'll pass it along to our CFO, David Burnett, who will provide a closer look at our Q1 results. David?

Speaker 3

Thank you, Rick. Good afternoon, everyone. Thanks for joining us today. Expanding on some of the numbers Rick mentioned, let's start with total revenue, which an increase of 40%. Our total revenue is made up of 2 components: franchise royalties, which is our primary source of revenue And service revenue, which is generated from certain services and interest charged to our franchisees and other miscellaneous revenue.

Speaker 3

On occasion, we will report a 3rd component, company owned revenue, which would be related to company owned locations that are not marketed as a potential franchise and are managed by us instead of a franchisee. At March 31, 2023, we owned one location, but it did not meet this criteria and instead is classified as held for sale and reported below the line as discontinued operations. Those operations are not included in the revenue I just mentioned, but it is important to keep in mind that we are still benefiting from this location. And once it is franchised Now we will retain a royalty stream. For continuing operations, franchise royalties for the quarter were 9,300,000 compared to $6,600,000 for the same quarter last year, an increase of 41.8%.

Speaker 3

Almost all of the increase in royalties relates to acquisitions. Although organic sales grew modestly, we are proud to be able to maintain organic sales in an uncertain and Underlying the growth in royalties are system wide sales, which for the quarter were $153,500,000 compared to $101,000,000 for the same period in 2022. System wide sales reflect sales at all offices, including those classified as discontinued. Similar to the growth in royalties, growth in system wide sales is primarily related to acquisitions completed in 20 2, but unlike many of our competitors, we did not lose organic sales year over year. Service revenue, which is generated from interest Charge to our franchisees on overdue accounts receivable, service fees and other miscellaneous revenues such as license fees was $534,000 for the quarter compared to $468,000 for the same quarter a year ago.

Speaker 3

Changes in service revenue are generally related to growth in system wide sales and the resulting increase in accounts receivable. Selling, general and administrative expenses for the quarter were $5,800,000 compared to $2,700,000 in the prior year period. That is an increase of 120.1%. The increase was primarily driven by 2 large items. First, we had a tough comparable for our workers' compensation expense.

Speaker 3

For the Q1 in 2023, Workers' compensation expense was approximately $185,000 compared to a $613,000 benefit in net worker compensation expense in the Q1 of 2022. That is a $798,000 swing in workers' compensation expense from Q1 'twenty two to Q1 'twenty 23. This benefit in the prior year included a $365,000 reduction related to the Snelling Workers' Compensation reserves assumed at the time of acquisition that have been winding down. There was no such adjustment in 2023. Generally, workers' compensation expense will fluctuate quarter to quarter based on the mix of worker classifications, the level of payroll and claims resolution, both recent and historical.

Speaker 3

The predominant item driving the increase in SG and A is compensation and benefits. Compensation related expenses have always been the largest component of SG and A. There was a $1,600,000 increase and compensation related expenses from Q1 'twenty two to Q1 'twenty three. When we acquired MRI Network We are handling the integration in a disciplined manner in the hopes of creating an annuity like payback from cost savings for the foreseeable future. Because high costs often creep back in over the near term, it is critical for us to be patient and secure Cost synergies that will hold for several years.

Speaker 3

In addition to increased salaries and benefits, we have also absorbed other MRI network SG and A expenses, Including marketing, IT, insurance, professional fees and the like. As we communicated in our last earnings call, We expect to carry certain transition items and associated expenses through at least the first half of this year and into the third quarter. The increase in SG and A can be felt in income from operations, which is total revenue less SG and A, depreciation and amortization. Income from operations was $3,300,000 in the 1st 3 months of 2023 versus $3,900,000 in the 1st 3 months of 2022, a decrease of 14.7%. Net income includes income from operations adjusted for Misslady Sizem's Interest, income taxes and discontinued operations.

Speaker 3

Interest and financing expense included a $318,000 loss on debt extinguishment related to the refinance of our line of credit. This was largely offset by a $340,000 gain on the conversion of our dental power business into a franchise, which is reflected net of tax and discontinued operations. Net income for the Q1 of 2022 included $3,600,000 of losses resulting from the conversion of acquired operations into All in net income for the quarter was $2,600,000 or $0.19 per diluted share compared to net income of $603,000 or $0.04 per diluted share in the Q1 last year. Adjusted EBITDA in the Q1 of 2023 was $4,600,000 compared to $5,300,000 in the Q1 of 2022. We believe adjusted EBITDA is a relevant metric for us due to the size of non cash operating expenses running through our P and L.

Speaker 3

A detailed reconciliation of adjusted EBITDA to net income is provided in our 10 Q. Moving on now to the balance sheet. Our current assets at March 31, 2023 were $59,600,000 compared to $51,900,000 at December 31, 2022. Current assets as of March 31 included $8,200,000 of cash and $48,100,000 of accounts receivable, while current assets at December 31, 2023 included $3,000,000 of cash and $45,300,000 of accounts receivable. The elevated cash balance reflects some cash management inefficiencies as we change banks from Truist to Bank of America.

Speaker 3

Current assets exceeded current liabilities by $14,700,000 at March 31 versus year end when working capital was $15,200,000 The decrease in working capital reflects a larger balance on the credit line following the acquisition of MRI Network. At At quarter end, we had $21,200,000 drawn in our credit facility and another $19,100,000 in availability assuming continued covenant compliance. As I've referenced a couple of times, in February of 'twenty three, we replaced a line of credit facility at Truist Bank, plus a term loan we had at Truist Bank with a new $50,000,000 line of credit from Bank of America. We believe that this new facility provides us with the flexibility and room for short term working capital needs as well as the capacity to capitalize on potential future acquisitions. We have paid a regular quarterly dividend since the Q3 of 2020.

Speaker 3

Continuing that pattern, we paid a $0.06 per common share dividend On March 15, 2023, 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.

Speaker 2

Thanks, David. As I said before, I am confident in Hire Quest's ability to drive sustainable growth across our business and generate positive operational results 2020 3 and beyond. As always, I would like to extend my sincerest thanks to our team, our franchisees, their workers for their Excellent work and dedication. I'm very encouraged by the progress that we've made in expanding our franchising network and offerings to address a broad spectrum of staffing needs. And I look forward to leveraging our network to drive growth and value for our shareholders.

Speaker 2

With that, we'll now open the line for questions. Thank you.

Operator

Thank you very much. We are now opening the floor up Okay. Your first question is coming from Evan Stank of Barrington. Evan, your line is live.

Speaker 4

Hey, Kevin Steinke, Barrington Research. So yes, I wanted to start off, I guess, by asking about Organic sales growth, you noted they grew modestly, while other competitors were And maybe reporting declines. What's your feel for organic growth outlook As we continue to progress through 2023 in terms of the pipeline and overall demand, is that Softening and what's labor supply availability, just any comments on that as we move forward in the year?

Speaker 2

Sure. So we are definitely Seeing a continued slight slowing in demand. It's noticeable without being Appreciable, if that makes any sense. The We're definitely you can see it. The as far as Throughout the year, obviously, look, it depends on if the Fed keeps increasing interest rates, that may Accelerate even further.

Speaker 2

As far as workforce supply, it's Definitely based on industry. And that's even true of the declines, oddly enough, Is that there are anything that touches upon tech and that's particularly true, let's say, with the MRI network is There's it's a full on recession for Those offices that focus on IT, at least in our experience. As far as and there are certain geographic Regions as well that are definitely performing poor, whereas frankly And probably why we're outperforming, say, from an organic standpoint, why we're outperforming our competition is We're heavy in Texas, Georgia, Florida, South Carolina, states that have not been nearly as Negatively impacted is certain others and where we are experiencing the most softening are in certain again are in Certain

Speaker 4

stays. Okay. That's a Helpful commentary. Just in terms of the cost items Related to the MRI, and you mentioned that maybe some of the costs are Rolling off a little more slowly than you might have hoped. And so And you also talked about the compensation and benefits increase of $1,600,000 I believe you said related to MRI.

Speaker 4

So can you just maybe talk about a little bit more what's maybe taking a little longer there? And did you actually or have you achieved all the synergies out of the gate from MRI that you would have thought of or is there still more to come or I guess they're coming more slowly?

Speaker 2

So that's right there. Right there is your finger on maybe why they're going down a bit slower than hoped for is Some of the synergies have been slower. And what I want to caution really anybody who's Listening as far as who's an investor is this is a marathon and we in buying MRI, We took over a company that has in, let's say, system wide sales more than 50% of what we had. So this is this was a very significant acquisition. And while In my optimism, had maybe hoped that we were going to be able to digest it faster than, Let's say then what it's turned out to be, so some of the expenses are sticking around a little bit longer because we want to make sure we do Gather all of those efficiencies all the synergies that we really know that in the long run we'll have.

Speaker 2

And so like I said, is it taking a little bit longer? Yes. And that's why I'll own it. Is that earlier, we really had been hoping and thinking that by the end of the second quarter, all the expenses would be gone. They'll definitely drag a bit into the Q3.

Speaker 2

But this is where Obviously, I mean, I've only been the CEO of sort of the public company since middle of 2019. Hopefully, I've developed a track record of where I'm not going to try to overpromise anything, and I certainly did it prior to that when we were a Private company. And so it's like this I know when we're overstaffed, I know when we're over spending on something. On the other hand, we bought MRI with some very, very Specific goals in mind and yes, it's taking a little more patience. Of course, again, we're still only 5 months into this thing, 5.5 months.

Speaker 2

So it's not like we've been screwing around with this for years. But there are just certain things that we absolutely know will Generate those again, those synergies. But ultimately, I know where we need to be To have this be a good investment and we'll ultimately get to the point we need to get to, but I want to use a concrete example, let's say franchise sales. And I think even you asked the question back in maybe it was September of last year or Like Q3 last year, maybe before that. We had never, up until the end, the latter half of twenty twenty two, We, meaning Hire Quest, had never actually had a franchise sales program.

Speaker 2

We never had a franchise salesperson, never hired brokers, never did anything. It was all Purely organic. And we started with like a part time salesperson at the end of last year and even that was by part time it was probably not even the half time of a person. Well, now through the MRI acquisition, we had 2 salespeople, Now, franchise salespeople. Now, realistically, there's it's easy to demonstrate And measure whether they're successful or not.

Speaker 2

And those are things where it requires patience. We can't expect that all of a sudden On day 1, we're going to be cranking out 4 new franchises a month. It just doesn't work that way. That being said, We can certainly, again, measure what's coming in or what's being produced. And If it's insufficient, there's all sorts of opportunities to just to go back to the way we were.

Speaker 2

So I guess, again, what I'm really saying to you and I'm saying to anybody who's listening is we're well aware of where we need to be And we're well aware of what our costs realistically need to be at. But We're also interested in what happens to the company 3 years from now and 5 years from now, far more than we are interested in what happens over the next 3 months.

Speaker 4

Great. That's helpful commentary. That makes sense, obviously, with an acquisition of this size Take the time to get it right, even if maybe it takes a little bit longer. So completely understood there. So maybe just lastly here, you enumerated a number of costs in the press release and your comments here.

Speaker 4

And I think you said some of those coming off by the Q3 or maybe by the end of Q3. What costs should we think about rolling off there? You mentioned IT expenses and license fees, 3rd party services for contract staffing. Obviously, the Salary and benefits costs and advertising and marketing. So just wondering what kind of should be coming out as we get To that Q3 timeframe.

Speaker 2

Yes. So let me make sure I clarify that statement. And I'll go back to my Part of it isn't it's not necessarily just Reducing costs, it's making sure that the costs are in line with what the revenues are. So I want to I'll go back to the franchise sales people. I'd hire 50 more Franchise salespeople, if they were producing enough new franchises To justify the cost, right?

Speaker 2

So I'm not saying to you that while we're going to get rid of it because that will reduce our costs so that our SG and A goes down. That's not really the point. The point is more we're going to make sure that we're selling enough franchisees to justify what is a Fairly heavy investment. Now some instance and so that's important to note. I mean, and again, it's sort of like We took on over 220 new franchises.

Speaker 2

Well, we want to make sure that they understand that we're committed to their Success and to giving them good service, but it still ultimately has to flow through That those costs are in line with what the revenues are. Now as far as some other costs That are identified to go away. Like there are certain softwares where we're running we have Two different copies of, let's say, of our accounting software. Well, it takes a while. Their saw what theirs was and ours was, Those have to be integrated, even though there are 2 copies of the exact same software.

Speaker 2

It's just frankly things Those that's a good example. The other part is we had a holdover of their CFO, their meaning MRI Network CFO. Well, okay. He left in the middle of April. So that's an expense that rolls I'm saying that's an expense that rolled off Already that will then be partially captured in the Q2 and obviously will be completely gone in the Q3.

Speaker 2

And Yes, I do want to draw out 2 other points. I don't want to just have it be buried as well. One is, Keep in mind, our effective tax rate, just the effect of a higher effective tax rate was about $170,000 of net income. Not that that Changes a lot, but it's still kind of one of those things. Obviously, we get no benefit from paying taxes other than It keeps us alive as a company, but it's there's no relatively speaking, we paid a lot higher tax Great.

Speaker 2

The and it's described why, but the point is, is it does make the comparison not look as good as what I'd prefer. The other part is with the workers' comp. That workers' comp swing of $800 was Frankly, not expected, but it's obviously had a major impact. But Going back to your other point is that there are, like I said, certain softwares that the contract will come out, Will be coming up that both Hire Quest and MRI network Might be using some form of,

Speaker 5

let's

Speaker 2

say, where we store our data, Their software or their data storage isn't a completely separate than how we store ours. Well, obviously, that's just not cost effective. But that takes 3 months, 6 months, 9 months before that stuff goes away. And so anyway, there's just there are just certain things that we had hoped we could have gotten through faster than what we did And are. And part of it is and again, it's why I still want to go back to like why We're focusing on 3 to 5 years, not 3 to 5 months, is we spent a lot of time these last 5 months really Working on relationships within the franchise community because really ultimately what we bought, and I want to make sure this is made completely clear, As we bought a series of 220 relationships and How well we do with this deal in the long run is going to be based on how well we do with building relationships with those 220 Franchises.

Speaker 2

Because kind of a funny thing is, if you look at I don't know exactly what the data is, but if you went and looked For it, it probably franchise acquisition costs are probably at least $50,000 per franchise. And so if you looked at the value of MRI just off of that, Just to replace it to get to 220 franchises, we'd probably have to pay $11,000,000 with 0 historical revenue. I want to keep that in perspective as again, we're focused on those relationships as well because that's where the synergies will ultimately come from as they get comfortable with us. And so Like I said, we're being patient. We're being patient.

Speaker 2

We're trying to invest in the system in a way that benefits All of our franchises. And, but again, we're also well aware that Ultimately, everything needs to be cost effective. And I've been in business for 33 years, and that's never been a problem for me

Speaker 4

Okay. Thanks for all the insight. That was helpful. I will turn it over.

Speaker 2

Thank you, Kevin.

Operator

Thank you. Thank you very much. Your next question is coming from Matthew Hayes from with D. A. Davidson.

Operator

Matthew, your line is live.

Speaker 5

Hi. Thank you for taking my question. Weekly jobless claims just came in at 264,000 hitting a 1.5 year high last week. Could you comment on how this development impacts your business?

Speaker 2

I think that where it affects us most is it's an indicator that Demand is softening. It's just another indicator. It hasn't really impacted us from A job fill standpoint, other than what I would say is, is clients are being a bit more selective. A year ago, year and a half ago, many clients would were desperate enough that they would That they were less choosy than what they are now. Now they're back to a more normal way of being choosy.

Speaker 2

So that's one aspect of it. And as I said before in response to one of Kevin's questions, there are certain Industries and areas that are that 260,000 I would love to be able to see the detail of that 200 264,000 new jobless claims. My guess is that they fall in probably Very much in certain industries and not necessarily Overall. So I don't know if that answers your question, but I would just say that, like I said, it but anytime you start seeing that and If the jobless rate starts going up, clearly, that's what's driving that softness. That's why some of our competition were showing revenue declines of 14%, 15%, 16%.

Speaker 2

And that would Tend to accelerate that, higher jobless claims obviously.

Speaker 5

That makes sense. And a follow-up for you, Rick. You've built this business from scratch and it seems like a real differentiator to the story is your deep understanding of both the franchise staffing model and Incentivizing entrepreneurs from having been in this business for over 30 years. I guess my question is how much longer do you plan on running the business?

Speaker 2

You know what, I

Speaker 5

have no

Speaker 2

I pretty much I work out 5 days a week even though I'm fat. I still work out 5 days a week. I feel great. So I have Yes, I have no intention of going anywhere.

Speaker 5

Great. I'll jump back in the queue.

Operator

Thank you very much. Your next question is coming from Mike Albanese of EF Hutton. Mike, your line is live.

Speaker 6

Rick, David, how are you guys?

Speaker 2

David, how are you? Good, Mike.

Speaker 6

Yes. Hey, first off, glad to hear that you have no intentions of, I guess, leaving, Continuing to build upon your previous successes here at Hire Quest. You pretty much answered my question in your responses to Kevin, Budd, I'd like to just go back to his original question and maybe I can we can dig into it just a little bit deeper. And the question is, as it relates To the divergence in organic growth rate between you and your competitors. And I'm wondering if you get the sense at all that you're stealing market share from them And what that could be attributable to, is it the difference in business model?

Speaker 6

Or is it just simply kind of What you alluded to, which is just your exposure to different end markets and different geographies, I'm really just wondering if there's more under the hood there.

Speaker 2

I would love to sit there and say, we're just so much freaking better than everybody else that we're just crushing them, right? And that's why. Honestly, though, if I said that, I'd be lying. I mean, I do think generically we are better, right? I mean, I'd say that to any client because of our model, right?

Speaker 2

I would always take a franchisee on average over a corporate run store every time, Right. So I believe in that. That being said, though, that has been baked into our numbers for literally decades. So I can't really claim that is why we did so much, let's say, better from a revenue standpoint this quarter. I think it's 100% just based on where we are.

Speaker 2

And because even within our own numbers, there are a couple of places where We are off. And fortunately, those are in places where we have those tend to be in places where we have Less exposure. And look, I live in Florida. You would never confuse this place with Someplace that's in a recession. It's booming.

Speaker 2

House prices are up, everything's up. Fortunately, like I said, we are heavy in Texas Texas, Florida, Georgia, South Carolina, Tennessee. So I just think that is really what it is. And so call that strategy, Call it dumb luck. It is just a fact.

Speaker 6

Yes. No, I mean, well said. That's Fair. I think I'd like to give you a little more credit than it's just Dunbloc, right?

Speaker 2

I mean, where you're looking at

Speaker 6

by design, But my general thought is I wonder if the softening labor market and the weakening demand is really Opposing a better business model. And if that's starting to show in the numbers and yes, I know it's hard to kind of dissect that. So I was just curious as to what your thoughts on that were. So yes, thank you very much

Speaker 3

for taking my questions. Even in

Speaker 2

the places where we're way down, Right. Like there's one particular market I'm thinking, we'll weigh it down. It's related to one single client. And it was just and they have had a big slowdown And they consolidated their operations. Well, there's nothing we could do.

Speaker 2

There's literally nothing we could do about that. Now if we were in Certain other states, we're in certain other states Where it's just it's softer, you can tell. I mean, you can see it Probably even where you look at real estate prices, and it's almost a harbinger for us as well. I will say for a thought going forward is, obviously, if Interest rate increases ultimately choke off commercial real estate demand. That's a that's sort of the longer term where it starts to create Broad based problems.

Speaker 6

Yes, that makes sense.

Operator

Your next question is coming from Aaron Edelhite of Mindset Capital. Aaron, your line is live.

Speaker 7

Thank you. Just for the record, Rick, you're not allowed to leave Hire Quest. That's a new shareholder rule we're implementing. I don't know if you know about it.

Speaker 2

Thank you.

Speaker 7

I just want to say in all seriousness, I really appreciate the candor. I really appreciate you just Sharing open and not glossing over any of the tougher things that you go through, I really appreciate it. My question, just to clarify, and I really appreciate all the detail That you've shared in your commentary and answering the questions. It sounds like you believe the synergies are still there. It just may be an extra quarter.

Speaker 7

And that when we're looking in Q4, obviously, no one can control or no one Well, if I could predict where the economy was going, I'd be sitting on a beach somewhere. But absent that, By Q4, things should be normalized to where you want them to be. Is that an accurate Assessment?

Speaker 2

No, I so no, I would say that's actually somewhat inaccurate, but maybe not in the way that you think. I would have never I never went in we never went in thinking that We were going to get all these synergies in the Q1 or the Q2. A lot of these are literally these are 3 to 5 year propositions in a lot of cases. For example, utilizing MRI has a great training program. We're co opting that into also working with our Snelling branches, for example.

Speaker 2

Now what's the payoff on that, right? In the current quarters, It's nothing really, right? It's something that happens over time. And so I don't expect to get a benefit from that for 2, 3 years, frankly. Now there are other things, there are other synergies in particular, where I think that Both the MRI network and Hire Quest direct, Glen Snelling, all three Frequently sell to the exact same companies, but maybe different areas within those companies.

Speaker 2

Those synergies Have been slower to develop than what I had really thought. And that those are the ones that definitely Should be blooming by the 3rd Q4, but that's taken a little bit longer Than what it is. That would be a faster one. And again, some of the synergies on just how we deliver our services, so whether that's Handling accounting and things like that, there are still synergies that just we just have to plow through it. And already they started, but they need to but they have more to go.

Speaker 7

Yes. When you those costs That you specifically highlighted, it's like $700,000 $800,000 outside of the workers' comp, which I understand fluctuates up and down. I just want to clarify so that I fully understand. Are those Some of the costs, are those all of the costs? Are there even more synergies that you Fully expect?

Speaker 7

Like how should I think about those specific extra costs you highlighted in the press release Versus kind of the in terms of a more normalized where things should be Q4.

Speaker 2

So I'm a builder, not a burner, right? We didn't buy MRI network. You know what I'm saying? To strip out whatever we could and then just you know what I'm saying? Just feed off of Feed off of a corpse.

Speaker 2

That makes no sense. There would be no purposes in us doing that. Rather, we looked at MRI network as being something that would be accretive to what we do. And it does expand our product offerings to a far broader segment of the overall staffing industry. It also brought in 220 franchisees, many of which have the Certainly have the talent to do more than what they're doing.

Speaker 2

And so by bringing those resources, It is absolutely our intention and goal and expectation that there are Again, within that group of 220 MRI franchises, there are a fairly good sized number that I'm saying that we can help them double or triple their business. That's how we're going into it. Now that requires and so I'm not saying because I wouldn't carry I want to make sure I'm clear. Unless it was something along the lines of, Hey, we only have one person who knows how to run this software and we better not get rid of them even though they're a terrible expensive employee. There's nobody I want to there's nobody and I tried to and I may have done a bad job with it when I was answering Kevin's question.

Speaker 2

It's not my goal to I'm saying it's not my goal to cut anything. Our goal would be that Those synergies would develop, those incremental amounts of business would develop That those costs are just in line with what they I'm saying with what they need to be. And I go back to the I don't want to beat a dead horse, but The franchise sales, again, becomes it's very easily to demonstrate whether it's been successful or not. And we've got a pretty heavy investment in it. Now I believe it will make a lot of sense and we've started to we've got some green shoots that are starting.

Speaker 2

I think we've opened, I don't know, in the first Through May. I don't know. There's been, I think, we got to anyway, like 4, 5, something like don't quote me on that. I'm not But it's they're starting to come, right? So it's kind of like, okay, and that's Then that justifies it as it does for those results even as you sell a new franchise.

Speaker 2

You don't really get jack when you sell one of those. It's over time That, that starts becoming worthwhile. So that was a really long way of answering your question, but it's just simply I would not look at the synergies as just, hey, let's just gut what we can. It's not that at all. It's making sure That we use what we have to absolutely optimize what we're doing.

Speaker 7

So if I were to summarize what I heard, This is really about this acquisition is really about growth. When I just take some of the examples, you have people who will sell Franchises for the first time, you have training programs, you bought in new franchises who have the opportunity to expand what they're doing With Hire Quest offerings and that by next year, it should be really clear that organically from the combined Hire Quest MRI, that Hire Quest is growing organically. And if you're not, then you'll pull back on Is that a right way to think about it? Yes.

Speaker 2

No, that's 100% that is exactly. You're spot on.

Speaker 7

And okay. So speaking of growth, I would be remiss to, you have an expanded credit line. You've been a track record

Speaker 2

It's not it's actually it's reduced, by the way. It's reduced.

Speaker 7

Oh, okay. Well, I guess I'm more flexible. But What does your pipeline look like? And I'm keenly interested because if my understanding is correct, The economy does weaken from here. You don't have as great account as an account book receivable demand, Your cash balance goes up, you pay down your credit line, along with just your normal free cash flow, puts you in even a better Positioned to acquire more companies like MRI, what does your pipeline look like?

Speaker 7

And How do you think about where you are balance sheet wise towards taking advantage if you see another Great opportunity like MRI. So

Speaker 2

as far as on the pipeline, my answer is the same as what it is almost every quarter, Which is we have more than enough targets. I will fully admit we're being choosy because You're buying off of 2022 multiples or earnings rather Versus maybe what's really going on now. So we're being careful because we need to see some people experience a little bit of pain. That's when we'll probably be more aggressive. You are right in saying that, Obviously, to the extent that our revenues go down, it also drives down our AR, which Then of course drives down our borrowings.

Speaker 2

Based on ordinary earnings and cash Obviously, I would like to think of it as though we will have a relatively, Notwithstanding any future acquisitions in the near term, That our line of credit will move down relatively quickly. And so The resources we have generally are adequate even as it is. And again, I would expect our line To drop fairly consistently and yet significantly over the next 3 to 4 quarters. Realizing as well, and it was in the press release, I think, but it's we're really inefficient right now as As far as on our cash position is, I think even at the end of the quarter, we were sitting at like $8,000,000 in cash versus, Let's say 3 at the end of the year. So our borrowings were really inflated by, at least on that day, $5,000,000 versus what they probably normally should have been.

Speaker 2

Point being that Because that was kind of just now we've anyway, we had clients paying into old lockbox instead of new lockbox. And So anyway, like I said, it's just harder to keep the cash balances as low as we would normally like to. All that being said is that I don't see any actual lack of resources unless we were able to You know, bag of whale.

Speaker 7

Thank you very much and keep up the great work.

Speaker 5

Thank you.

Operator

Thank you very much. There appear to be no further questions in the queue. I'm going to hand back over to management for any closing remarks.

Speaker 2

I want to thank everybody for listening in. I hope that you will agree that the The quarter was momentous in that, again, we took on an entity that represented almost 50% of what Hire Quest was Previously and that there are a lot of opportunities out there that we are working towards admittedly a little The opportunities are in some ways bigger and therefore the investments are bigger. But anyway, I do want to thank you for joining us and Look forward to continuing the success as we go through 2023. Thank you very much.

Operator

Thank you, everybody. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful rest of the day. Thank you for

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Earnings Conference Call
HireQuest Q1 2023
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