HireQuest Q1 2024 Earnings Call Transcript

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May 9, 2024

There are 5 speakers on the call.

Operator

Greetings. Welcome to the Hire Quest, Inc. 1st Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

Please note this conference is being recorded. I will now turn the conference over to your host, John Nesbitt of IMS Investor Relations. You may begin.

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'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.

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 and depend on circumstances that will occur in the future. These statements include statements regarding the intent, belief 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 SEC and that actual results may differ materially from those contemplated by such forward looking statements. Except as required by federal securities law, HyreQuest undertakes no obligation to update or revise forward looking statements to reflect change conditions. I would now like to turn the call over to the CEO of Hire Quest, Rick Hermann.

Speaker 1

Please go ahead, Rick.

Speaker 2

Thank you, everyone, for joining today's call. I'll begin by providing an overview of our financial and strategic highlights from the Q1 of 2024, and then I'll turn the call over to Steve, who will share more details around our Q1 financial results. Our Q1 results were in line with our expectations with franchise royalties of $7,800,000 total revenue of $8,400,000 and net income from continuing operations of $1,700,000 or $0.12 a share. Overall, we delivered a solid performance given the current economic headwinds that continue to affect the U. S.

Speaker 2

Staffing market. While the overall environment for staffing solutions in the United States is currently a difficult one, The impact on our individual franchisees varies by geography and industry focus. During the Q1, our Hire Quest direct franchisees fared the best of the 3 primary offerings due in part to geographic factors, while MRI network, specifically perm placement struggled the most, consistent with what we've seen from our peers in that segment. We expect to see general demand increase as we move into the 2nd and third quarters, which are traditionally stronger for our business as demand for temporary staffing tends to increase as a result of normal seasonal factors. Our diverse group of staffing solutions is well positioned to capitalize on increased demand with employers becoming more comfortable adding headcount to their operations.

Speaker 2

As we've done effectively for several quarters now, our focus is on controlling what we can control. Our core SG and A decreased year over year in the quarter to $4,900,000 from $5,700,000 in the Q1 of 2023. In the Q1 of 2024, workers' compensation expense was $572,000 which represented a significant sequential decrease from $1,300,000 in the Q4 of 2023. We stated we started our new policy year at the beginning of March and we're encouraged by the results from the changes we implemented this year. As I explained on last quarter's call, there are 2 primary factors that impact our workers' compensation levels.

Speaker 2

First, the difference between our net premium amounts collected and ours and our expected losses for the policy year. And second, any changes to the expected losses up or down for prior policy years. The 2023 policy year was historically bad for our business and negatively impacted our bottom line over the last several quarters. That said, at this point, with the visibility that we have today, we see no indication of the 'twenty three, 'twenty four policy year repeating the same trend. Additionally, we proactively worked with our carrier to adjust our plan for the current policy year, which began March 1 to mitigate the factors in our control that contributed to the large expenses we experienced last calendar year.

Speaker 2

We are intently focused on reducing our workers' compensation expense. And as we progress through 2024, we believe that we are well positioned to continue mitigating the impact of workers' compensation on our business as these numbers return to normalized levels. M and A remains a key part of our business as well. Our strategy around M and A is to identify accretive acquisitions that allow us to expand and strengthen our diverse group of staffing offerings, while simultaneously keeping our debt leverage low and maintaining a strong balance sheet. Over the past several years, we made numerous acquisitions that have significantly expanded our staffing offerings, geographic presence and addressable market.

Speaker 2

Our focus on organic growth combined with strategic acquisitions has driven significant revenue growth, enhanced our product offerings and expanded our addressable market, and we remain intently focused on scanning the market for other opportunities that will benefit our business. Overall, we're pleased with the results that we were able to deliver in this quarter given the circumstances. As demand for staffing solutions continue to recover, we believe that we are ideally positioned to leverage our proven and growing model of over 400 franchise owned offices across the United States and the world and to drive increased value for our shareholders. Now I'll pass on the call to our Chief Financial Officer, Steve Crane, who will provide a closer look at the Q1 results. Steve?

Speaker 3

Thank you, Rick, and good afternoon, everyone. Thank you for joining us today. Total revenue for the Q1 of 2024 was $8,400,000 compared to $9,900,000 for the same quarter last year, a decrease of 14.6%. Our total revenues 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 charge for our franchisees, other miscellaneous revenue and pass through revenue from MRI Networks Advertising Fund. Franchise royalties for the first quarter were $7,800,000 compared to $9,300,000 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 Q1 were 130 $4,000,000 compared to $153,500,000 for the same period in 2023. Service revenue was $588,000 for the 4th quarter compared to $534,000 for the same quarter a year ago. Service revenues composed of interest charged to our franchisees on overdue accounts receivable, service fees, other miscellaneous revenue and MRI Networks advertising fund revenue.

Speaker 3

The ad fund revenue contributed $101,000 in the Q1 of 2024. 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. SG and A expenses for the Q1 were $5,600,000 compared to $5,800,000 in the prior year period. MRI network advertising fund expenses of $101,000 are included in our Q1 2024 results. In the Q1, workers' compensation expense was approximately $572,000 compared to approximately $185,000 in the Q1 of 2023 and decreased sequentially from an expense of $1,300,000 in the Q4 of 2023.

Speaker 3

This is an encouraging trend that reflects our more proactive approach to the impact that workers' compensation has had on our results in recent quarters. Also included in our Q1 SG and A were salaries and benefits of $3,000,000 a decrease of 15.7% compared to $3,600,000 in the Q1 of 2023 related to headcount reductions and lower bonus accrued expense. Net income, which includes income from operations adjusted for miscellaneous items, interest, income taxes and discontinued operations was $1,600,000 in the Q1 of 2024 compared to $2,600,000 in the prior year period. Net income from continuing operations for the quarter was $1,700,000 or $0.12 per diluted share, compared to net income from continuing operations of $2,300,000 or $0.17 per diluted share in the Q1 of last year. Adjusted EBITDA in the Q1 of 2024 was $3,400,000 compared to $4,600,000 in the first quarter of last year.

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 adjusted EBITDA to net income is provided in our 10 Q, which is filed this afternoon. Moving on now to the balance sheet. Our current assets at March 31, 2024 were $55,100,000 compared to $51,500,000 at December 31, 2023. Current assets as of March 30 1, 2024 included $1,600,000 of cash $47,700,000 of net accounts receivable of current assets at December 31, 2023 included $1,300,000 of cash and $44,400,000 of net accounts receivable.

Speaker 3

Current assets exceeded current liabilities by $18,000,000 at March 31, 2024 versus year end 2023 when working capital was $15,700,000 Current liabilities were 67.3 percent of current assets at March 31, 2024 versus 69.4 percent of current assets at December 31, 2023. At March 31, 2024, we had $16,100,000 drawn on our credit facility and another $24,200,000 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 Q3 of 2020 and continuing that pattern we paid a 0.06 dollars per share dividend on March 15, 2024 to shareholders of record as of March 1. We expect to continue to pay a dividend each quarter subject to the Board's discretion.

Speaker 3

With that, I'll turn the call back over to Rick for some closing comments.

Speaker 2

Thank you, Steve. We're pleased with our Q1 results given the current economic environment and are encouraged by the trend we're seeing in the market. I'd like to thank our employees and franchisees for their hard work and dedication in this quarter, and we remain optimistic about what's ahead for our business in the staffing industry in the second half of 2024. With that, we can now open the line to questions. Thank you.

Operator

Thank you. At this time, we will be conducting a question and answer First question comes from Kevin Steinke with Barrington Research. Please proceed.

Speaker 4

Thanks. So just wanted to start out by talking about the difficult environment for staffing solutions you referenced kind of a continuation of that. But just in terms of what you're seeing, does it feel like it's gotten any worse? Is it stable? Or how would you characterize it at this point?

Speaker 2

So thanks, Kevin. I would say that it's probably stable. It isn't getting worse. That said, it really isn't getting much better, but it's been an odd situation throughout in that it's been very much concentrated in certain areas. Our branches in the Southeast have tended to do better.

Speaker 2

Our anything related to IT has been tougher, although there has been probably more improvement have been more improvement there. But I would say at least as we move into the second quarter, again, there certainly hasn't been deterioration, but the improvements whatever improvements there have been, have been fairly minimal.

Speaker 4

Okay. And you referenced continued headwinds in technology. I've heard some commentary about potentially some green shoots in terms of maybe some improved hiring in that sector. But I don't know if you're picking any of that up in your business or if it's kind of status quo.

Speaker 2

Yes, I would say I would definitely say so that there are more opportunities, but the employers are definitely very choosy. So where maybe 6 months ago, 9 months ago, there weren't even many, if any job openings, now there are some job openings. But again, the employers are being extremely choosy. So I would call it a green shoot that that's I'd rather have a harder to fill requisition than none at all. And so there's definitely, like I said, that way in the IT side in particular, that's improved.

Speaker 2

I think that the other side is logistics has been tough over the last year. And I would say that that's starting to again sort of improve a little bit. But by this but again, nothing so appreciable that I'd say, gosh, it's not that it's great. It's not.

Speaker 4

Right, right. Understood. You did talk about that you expect demand for temporary staffing to increase in the second and third quarters due to normal seasonal factors. A little over a month into the second quarter, does it feel like you'll get your kind of typical seasonal ramp or could that be more muted? I just I don't know if you have any sense for that, or it's still kind of too early or difficult to tell.

Speaker 2

Well, I would say that we certainly expect to get a seasonal impact. Will we get it to the extent that we should or that we normally would? The answer is it is too early to tell. I mean, we will definitely it definitely seems like we'll see again a positive impact. But if you really even look at our numbers from last year, our Q2 grew somewhat in line with historical numbers, but it was really in the Q3 that like even though the Q3 was literally down from the Q2, which is really which really is not good for us at all.

Speaker 2

But the 2nd quarter showed an increase, but again, probably less than what it should have been. So what I would say is that I do believe that we will, again improve sequentially in Q2 and Q3. Will it be to the extent of what it normally would be? I would say we're tracking right now, we're tracking well with last year. By saying well, I don't mean that we're doing better as much as we're not deteriorating.

Speaker 2

And so our Q2 and Q3 were higher last year than Q1. So I don't know if that answers your question. So I would just say that I expect revenues to be higher, but perhaps not the same impact. Again, the bottom line is, and I've been saying this from my very first earnings call, it's difficult to predict how we'll do because we are tied to the economy. And so if all of a sudden the economy, at least for staffing, gets better in the Q3, well then we expect a stronger snapback.

Speaker 2

But it's hard for us to overcome those headwinds. I would focus more on or focus is the wrong word, but I would just say that these types of circumstances, these types of industry times to me highlight the value of the Hire Quest system insofar as we're retaining at least a reasonable level of profitability at a time when a fair number of our peers are losing money or are obviously way down. And so this is a great time to sort of test the validity of our model. And I think that from that perspective, we're withstanding the sort of the test. That said, to get back to a meaningful growth to where we hit historical trends, obviously, we need the economy, at least for staffing, to improve.

Speaker 4

Right. Now, that all makes sense. Just I also wanted to ask about the nice improvement sequentially in workers' compensation expense. Do you think that the number that we saw in the Q1 is kind of representative of how it will trend for the remaining quarters of 2024?

Speaker 2

So and that's a great question. I would just say, I hope it will actually go down a bit more. Obviously, again, the policy renewed on March 1. And so those that $572,000 of net expense really only reflected 1 month of the new policy. The other part is that 20 22, 2023 policy year, I think, I hope we have it in the really have it in the rearview mirror.

Speaker 2

And so to answer your question, I'm we are hopeful that actually the Q1 would be the worst one. That said, workers' comp is notoriously jumpy. And so we could start getting some adverse development that we're not expecting right now. But I definitely would like to think that we're going to be in a much better position even in Q2, Q3 and Q4 than we were in Q1. When I say much better, I'm talking maybe a couple $100,000 better, not massively beyond that.

Speaker 2

But we do certainly hope for a little bit more improvement quarterly.

Speaker 4

Sure. Yes. Sure. Okay. Yes, understood.

Speaker 4

Thanks. And just lastly, you mentioned still being focused on gaining the market for M and A opportunities. What's the pipeline in this environment? Are you seeing more opportunities given the difficult staffing market right now and your relatively stronger position financially in the space?

Speaker 2

Yes. So I would say we're seeing more bad deals. We're definitely, I think, seeing more deals, but probably more geared towards people who are living in 2022 and have those sorts of mindsets. The reality is though we are but we're seeing some that are more realistically priced as well. So, I think that as we if we continue on with this relatively lousy market for the staffing industry, the cumulative effects will be to create better opportunities for us.

Speaker 2

And I think we're already seeing that on a couple of potential smaller things that are out there and available. Now me saying that doesn't mean we've got anything teed up. That's not the case. But it's just what we're seeing also, especially on the smaller side, there's just more people who are struggling, which creates more realistic prices for us. But anyway, the short answer is that the numbers are big.

Speaker 2

The prices are still too high, kind of like that candidate who is running for mayor in New York City. The rents are too damn high. So like the prices are too damn high as far as I'm concerned still.

Speaker 4

Okay, great. Well, thanks. Thanks for all the insight. Appreciate you taking the questions. I'll turn it over.

Operator

Okay. It appears we have no further questions in queue. I'd like to turn the floor back to management for closing remarks.

Speaker 2

Well, again, thank you everybody for dialing in and listening. We appreciate your continued interest in the company. We are looking forward to better times as we get deeper into 2024 and hopefully see an improvement in the environment for staffing. But I also again, encouraged that we have been able to sort of go through this patch as well as we have. And hopefully, you will agree with me that the validity of our system is being and resiliency of our system is being shown during these times.

Speaker 2

And again, thank you for your attention and look forward to speaking to you in another quarter. Thank you.

Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

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