HireQuest Q3 2024 Earnings Call Transcript

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November 7, 2024

There are 6 speakers on the call.

Operator

Good afternoon, everyone, and welcome to HyreQuest Incorporated's Third Quarter 2024 Earnings Call. Please note this conference is being recorded. I will now turn the conference over to your host, John Nesbitt, IMS Investor Relations. John, the floor is yours.

Speaker 1

Thank you, operator. 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, Steve Crane. I would 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.

Speaker 1

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 that depend on circumstances that will occur in the future. These statements include statements regarding the intent, belief and current expectations of Hire Quest and members of the 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 SEC 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 Chief Executive Officer of Hire Quest, Rick Hermans.

Speaker 1

Please go ahead, Rick.

Speaker 2

Good afternoon, and thank you for joining our call today. We achieved slight growth in total revenue in the Q3 of 2024 compared to the Q3 of 2023, as well as sequential revenue growth of 8.5% when compared to the Q2 of 2024 as the market for temporary staffing solutions began to stabilize. As we've mentioned before, the staffing industry has faced a particularly difficult environment in recent quarters as employers remain cautious in their hiring decisions influenced by the presidential election in an unpredictable economic landscape. Additionally, the spike in illegal immigration, which occurred from 2022 through earlier 2024 led to the influx of the undocumented workers to the lower tier labor force. While it's hard quantify the impact on our business or the staffing industry in general, many of the jobs that we staff daily are the types of jobs undocumented workers fill.

Speaker 2

Despite these headwinds, I'm proud to say that Hire Quest has performed relatively well when compared to our peers, demonstrating the strength and versatility of our franchise model. In this quarter, system wide sales for our temporary staffing brands grew by 3.6% year over year for the first time since the Q1 of 2023. Looking ahead, we believe that we're beginning to see a leveling out of the compressed demand we've been experiencing on the temporary and commercial staffing side of our business and are positioned for improved results as we move through the balance of 2024 and into 2025. Expense management continues to be a priority. We reduced SG and A expenses by over 15% in the quarter when compared to the Q3 of 2023 as we continue to mitigate workers' compensation expense that impacted our profitability in the second half of twenty twenty three.

Speaker 2

Specifically, workers' compensation expense in the 3rd quarter decreased nearly 67% when compared to the Q3 of 2023. We believe that we can maintain and even improve on these results. And as I mentioned on the last on last quarter's call, we see no indication that workers' compensation will reach 2023 levels moving forward. We view permanent placement and executive recruiting as a significant long term opportunity that ideally complements our existing staffing offerings, and MRI network is the cornerstone of our growth strategy in this market. That said, our overall market for permanent placement and executive recruiting has faced industry wide challenges for several quarters.

Speaker 2

And while we anticipated some contraction of MRI at the time of the acquisition, we did not project the protracted industry wide downturn that we've experienced. To better reflect the current fair value of MRI network to our business, we made the decision to write down certain non cash assets related to MRI, resulting in a one time non cash impairment charge of just over $6,000,000 This charge significantly impacted our profitability in the quarter and in the year to date period, for which Steve will provide more detail in his prepared remarks. At a high level though, absent this one time non cash charge, adjusted net income in the quarter increased 29% compared to the Q3 of 2023, demonstrating not only our ability to deliver strong growth and value on a year over year basis, but also our ability to do so in the face of headwinds that have continued to impact the entire staffing industry. As we close out the year, we believe that we are well positioned to drive enhanced financial performance as we enter a period where we expect to capitalize on a stabilizing staffing market and employ prudent expense management across our business. I would like to conclude my prepared remarks by reiterating some important data points that we presented on last quarter's call.

Speaker 2

Since our Command Center merger in the summer of 2019, our operational results have consistently outpaced the broader staffing industry regardless of macroeconomic factors, highlighted by a 4 year adjusted EBITDA CAGR of 12.6% from 2019 to 2023 that is more than double almost all other commercial or professional staffing companies in our peer group. This quarter, we achieved our highest adjusted EBITDA since the Q3 of 2022. And with the visibility that we have today, we believe that we're in a strong position to continue this trend. Overall, we're pleased with our Q3 results, and we're optimistic that the market for both temporary and permanent staffing solutions is entering a more favorable economic environment. We're ready and eager to capitalize on the opportunities that become available to us as demand for staffing services strengthens.

Speaker 2

I'll now pass the call over to our Chief Financial Officer, Steve Crane, who will provide a closer look at our Q3 results. Steve?

Speaker 3

Thank you, Rick, and good afternoon, everyone. Thank you for joining us today. Total revenue for the Q3 of 2024 was $9,400,000 compared with revenue of $9,300,000 in the same quarter last year, an increase of 1.6%. 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 as well as other miscellaneous revenue. Franchise royalties for the Q3 were $9,000,000 compared to $8,900,000 for the same quarter last year.

Speaker 3

Underlying the royalties are system wide sales, which are not part of our revenue, but are helpful contextual performance indicator. System wide sales reflect sales at all offices, including those classified as discontinued. System wide sales for the Q3 were $148,600,000

Speaker 2

compared to $151,200,000

Speaker 3

for the same period in 2023. The decrease in system wide sales was primarily driven by a decline in our professional recruiting and staffing brands of $6,500,000 and partially offset by a 3.9 $1,000,000 increase in sales generated by our temporary staffing brands when compared to the prior year period. Service revenue was $428,000 for the 3rd quarter compared to $366,000 for the same quarter a year ago. Service revenue is composed of interest charged to our franchisees on overdue accounts receivable, service fees, other miscellaneous revenue and MRI Networks advertising fund revenue. Service revenue can fluctuate from quarter to quarter based on a number of factors, including changes in system wide sales, accounts receivable, insurance renewals and similar dynamics.

Speaker 3

Selling, general and administrative expenses for the 3rd quarter were $5,400,000 compared to $6,400,000 in the prior year period, a decrease of 15.3% as the changes we made to our workers' compensation insurance policy in Q1 of this year have lessened the increase in related experience excuse me, expense we experienced in 2023. Additionally, we continue to prioritize expense management across our business. Net workers' compensation expense in the Q3 of 2024 was approximately $499,000 compared to a net expense of approximately $1,500,000 in the Q3 of 2023. Also included in our SG and A were salaries and benefits, which continues to be the largest component of our operating expenses. In the Q3 of 2024, we recognized $2,800,000 in compensation related expenses compared to $2,900,000 in the Q3 of 2023.

Speaker 3

Our year to date compensation related expenses decreased 11.1% to $8,500,000 primarily driven by headcount reductions we made during 2023 related to the integration of the MRI Network acquisition. Net loss after tax was $2,200,000 in the Q3 of 2024 or loss of $0.16 per diluted share compared to a net income of $1,500,000 or earnings per diluted share of $0.11 in the Q3 of 2023. As Rick mentioned in his prepared remarks, we recognized a one time non cash impairment charge of $6,000,000 in the quarter related to the MRI network assets we acquired in December 2022. This non cash impairment charge had a considerable impact on our profitability both in the quarter year to date in 2024. As such, we decided that providing an adjusted net income figure for the quarter year to date period as of September 30, 2024 would be a helpful metric to better showcase the growth and progress that we've achieved.

Speaker 3

With that said, adjusted net income for the Q3 of 2024, which excludes the one time non cash impairment charge, amortization of acquired intangibles and other non recurring one time expenses net of the tax effect from these adjustments was $2,800,000 or $0.20 per diluted share compared to adjusted net income of $2,200,000 or $0.16 per diluted share in the Q3 of 2023. Adjusted net income for the 9 months ended September 30, 2024 was $7,300,000 or $0.52 per diluted share compared to adjusted net income of $7,300,000 or $0.53 per diluted share in the prior year period. We did provide a table in the press release we put out earlier this afternoon with a detailed reconciliation of net income to adjusted net income. Adjusted EBITDA in the Q3 of 2024 was $4,900,000 compared to $3,700,000 in the prior year period. Adjusted EBITDA margin for the quarter was 52% compared to 40% in the prior year period.

Speaker 3

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. A detailed reconciliation of net income to adjusted EBITDA is provided in our press release and our 10 Q. Moving now to the balance sheet. Our current assets at September 30, 2024 were $58,000,000 compared to $51,500,000 at December 31, 2023. Current assets as of September 30, 2024 included $1,600,000 in cash and $50,500,000 of net accounts receivable while current assets at December 31, 2023 included $1,300,000 of cash $44,400,000 of net accounts receivable.

Speaker 3

Current assets exceeded current liabilities by $23,400,000 at September 30, 2024 versus year end 2023 when working capital was $15,700,000 Current liabilities were 59.7 percent of current assets at September 30, 2024 versus 69.4% of current assets at December 31, 2023. At September 30, 2024, we had $13,400,000 drawn on our credit facility and another $26,900,000 in availability assuming continued covenant compliance. Importantly, our credit facility was not impacted by the one time non cash impairment charge that we recognized in the quarter. We believe our credit facility provides us with flexibility and room for short term working capital needs, as well as the capacity to capitalize on potential acquisitions. We have paid a regular quarterly dividend since the Q3 of 2020.

Speaker 3

Most recently, we paid a $0.06 per common share dividend on September 16, 2024 to shareholders of record as of September 2. We expect to continue to pay a dividend each quarter subject to the Board's discretion. With that, I'll turn the call back over to Rick for some closing comments.

Speaker 2

Thank you, Steve. And I'd like to thank our employees and franchisees for their hard work and dedication this quarter. And we look forward to closing out the year strong and speaking with you again on our year end call. With that, we can now open the line to questions. Thank you.

Operator

Thank you very much. We will be conducting our question and answer Thank you very much. Your first question is coming from Mike Baker of D. A. Davidson.

Operator

Mike, your line is live.

Speaker 4

Great. Thanks. So a lot of CEOs have been saying there's a lot of uncertainty out there because of the election. That's been a common refrain for, I don't know, 3, 6 months. Election is over.

Speaker 4

No disruption. So that's now behind us. You've been saying you said in your call that things are getting better prior to that. Now, first of all, why do you think things are getting better? What's getting better in the environment?

Speaker 4

And how does the resolution, this relatively calm resolution of the election lead to even more improvement in the environment?

Speaker 2

So thanks for the question, Mike. I would say three things. One is, of course, the reduction of interest rates today, further reduces the chance of a meltdown in the commercial real estate market and commercial construction, which is a big driver of our business. So that's one thing. And of course, that already started during this quarter.

Speaker 2

So that's a very helpful factor. I also and the reality is that on top of it is with in June, obviously the federal government started changing a bit of the way it was handling the illegal immigration. And I think we're starting to see some of that as well because we particularly our Hire Quest direct line basically competes directly with undocumented workers. And so that, I think is a favorable thing that's happened throughout the summer. And then with that being resolved, it just it takes that issue off the table.

Speaker 2

And then the other part is, we can just see it in our numbers that things have that we're getting orders where we weren't getting them before. I think that our franchisees have the market post pandemic was very strange. There was it was hard to find employees. It was hard to find permanent employees and good business development people. And some of those things have started to normalize.

Speaker 2

And so part of what where I feel good about it is that our franchisees themselves are sort of returning to habits that they had pre pandemic and normal incentives are starting to take effect. So those would be the reasons for our optimism.

Speaker 4

Yes, yes, that's very helpful. And so then if I could ask one follow-up within all those things getting better, are there specific lines of business or types of businesses that are getting better? You're actually starting to see commercial real estate and construction get better? And then same question geographically.

Speaker 2

Commercial construction has been strong really for the last since for that matter, really since 2020, it's been consistently strong and even really during 2020. So that's been a bright spot throughout. Geographically, it's the same areas that are good for us, which is Texas, Tennessee, Tennessee is purging a little bit, but Florida, Georgia, they've all been the Southeast has been very strong for us. But now we're also having some better success even in the Mid Atlantic is getting stronger. And I would say also our skilled trades division is really picking up as well.

Speaker 2

So we're getting some help from that as

Speaker 4

well. Awesome. Thank you. I'll turn it over to someone else.

Operator

Thank you very much. Thank you. Your next question is coming from Kevin Steinke of Barrington Research. Kevin, your line is live.

Speaker 5

Thank you. So you talked about temporary staffing returning to system wide sales growth, but at the same time, the executive recruiting and permanent staffing market being a little tougher. Although I think in your actual press release, you said you're optimistic that the market for both temporary staffing and permanent staffing is entering a more favorable economic environment. So I'm just wondering if you're seeing signs of stabilization or improvement on the permanent staffing side and your outlook or your level of optimism for that part of the business?

Speaker 2

Thanks for that question. So the perm staffing or I'm sorry, perm placement business has been incredibly tough the last 7 quarters. I'm not going to sugarcoat that. It's been really bad. And so if nothing else, the optimism and I guess the optimism is almost based on it almost can't stay that it's at abnormally low levels.

Speaker 2

And so it almost has no place to go but up. And again, sort of what I alluded to in responding to Mike's question regarding why we're optimistic is part of it is, it was sort of in some respects, it was almost too easy in 2022 for our offices. And people started getting away from just normal blocking and tackling. And now they're kind of waking up and saying, you know what, I don't really like where I'm at. And sort of readjusting to their own office habits basically to be a bit more aggressive.

Speaker 2

But it's also there was that overhang in 2022 where people were hiring pretty much as anything they could do to hire a person, they would. And so 2023 came as a bit of a shock almost where it's, gosh, now I have 58 computer programmers, but I really only needed 30, but I was just grabbing them because I couldn't find them. And I think we're getting back again to just more at least to the normal market. And I think again, 2023 2024 were abnormally depressed because of the strength of 2022. I don't know if that answers your question, but that's a lot of how I see it.

Speaker 5

Yes, absolutely. Yes, that makes sense. So great. So on the expense side, I apologize if you called it out, but just you've talked about the core SG and A in the past and then also the workers' compensation expense. I can't recall if you gave the exact number.

Speaker 5

I'm backing into it being about $500,000 or so, but just I was wondering if you could review those numbers for me.

Speaker 2

Yes. I mean, and I'm kind of back into these. We didn't give the core or do you have it, Steve?

Speaker 3

Well, I've got the networkers comp. You were spot on. It's about 500,000 in the Q3 of this year and then $1,500,000 in the Q3 last year.

Speaker 2

So $1,000,000 was the improvement, which really so in core SG and A stayed flat at $5,400,000 but obviously overall SG and A dropped by $1,000,000 due to the improvement in workers' comp. So we were able to hold our costs flat from the Q3 of last year, which is pretty much consistent with our sales being flat as well year over year.

Speaker 5

Yes. Okay, understood. Yes, that's helpful. And so going forward with the demand picture appearing to pick up here, do you think you can hold those core SG and A expenses relatively flat? I know you've talked about maybe having some excess capacity to add system wide sales or just again want to get back to how much capacity you think you might have in terms of Yes, that's

Speaker 2

a great question. Yes, Kevin, that's a great question. So here's how I would answer it is that, yes, we still have the ability to take on, I would argue, probably a 5% to 10% sales increase with no appreciable increase in costs and need for SG and A. So yes, we still have some slack capacity. The only thing that would dampen that in my mind would be to the extent that the environment, the economy improves a bit is I do believe that there's going to be a very real potential for wages to go up.

Speaker 2

And so while we may not have a major headcount increase, it's easy for me to see our perm payroll expenses go up. So I don't think we can stay flat, but I do think our headcount will stay almost exactly flat.

Speaker 5

Okay. Yes, got it. That's fair. And so you've talked in previous calls with this softer demand environment that it typically has created more acquisition opportunities for you. Just wondering if that's been the case still or what the pipeline looks like and you're just kind of overall appetite for continuing

Speaker 2

Kevin, I'm glad you asked that question. I'm glad you asked that question. So obviously, our threshold for reporting acquisitions as we've grown has become significantly higher. So even in this quarter, we've made 2 acquisitions, small, but 2 acquisitions. And so we have a fair number of deals in the pipeline right now.

Speaker 2

Nothing so significant as to, I'm saying trigger any disclosures or anything, but we have but like I said, we have a number of small deals that are in various points of completion. So like I said, we did 2 deals already in the last 3 months and would anticipate there's no reason for me to believe that that will slow down.

Speaker 5

Okay. Yes, obviously, like you mentioned, that too small to even register from a materiality perspective, but were those just kind of typical commercial staffing or what areas have you been looking at? Yes.

Speaker 2

They're well, I shouldn't say that. Actually, they were on demand. 2 of them were on demand. The 2 were on demand this quarter. But really, there tends to be more opportunities in the commercial because the commercial the traditional commercial staffing is a larger portion of the staffing industry.

Speaker 2

So we tend to have more of those opportunities, whereas the on demand is more of a niche market and there are fewer out there. That said, we found 2 of them this past quarter. And so I would say they would tend to trend more towards commercial staffing though in the future.

Speaker 5

Okay.

Speaker 2

Sounds good. By the way, to answer your original question, they're also they tend to be whether it's the ones we're looking at, whether it's the ones that we completed, it might be someone who has only one market or 2 markets. And so it really fits in nicely either fortifying our position in a particular market or maybe it puts us in a new city, so which we had one of each like this last quarter. So they're nice deals. They're a very limited risk.

Speaker 2

And like I said, just strengthen our overall presence.

Speaker 5

Great. Yes, helpful update. I'll turn it back over. Thanks for taking the questions. Sure.

Operator

Thank you very much. Well, we appear to have reached the end of our question and answer session. I will now hand back over to the management team for any closing remarks.

Speaker 2

Thank you, Jenny, and thank you for joining us on this call. I certainly hope you will agree that despite the breakdown of the MRI assets that there's a lot of information in there that have sort of validated our strategy as far as being a franchisor of staffing companies and it demonstrates our resilience despite the headwinds that you can clearly see in our peers. And again, I encourage you to reach out if you have any further questions and we just thank you for joining us and have a good day.

Operator

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

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