HireQuest Q4 2024 Earnings Call Transcript

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Provided by Quartr
March 27, 2025

There are 6 speakers on the call.

Operator

Greetings. Welcome to the Hire Quest Inc. Fourth Quarter and Year End twenty twenty four 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 Hermans 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 in terms such as anticipate, expect, intend, may, will, should or other comparable terms involve risks and uncertainties because they relate to events, independent circumstances that will occur in the future. Those statements include statements regarding the intent, belief or current expectations of Hire Quest and members of its management team, 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 involves risks and uncertainties, including those described in the Hire Quest 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 the changed conditions. I would now like to turn the call over to CEO of Hire Quest, Rick Hermans.

Speaker 1

Go ahead, Rick.

Speaker 2

Good afternoon, and thank you for joining our call today. Our fourth quarter and full year results are reflective of the challenging environment that impacted the entire staffing industry in 2024. While Hire Quest was not immune to these market conditions, our flexible franchise model has allowed us to drive profitable results in both the fourth quarter and the full fiscal year. We achieved profitability in the fourth quarter of twenty twenty four, supported by total revenues of $8,100,000 The timing of the holiday season impacted the quarter as we saw less temporary staffing and day labor demand during the roughly two week period that encompassed the holidays, which fell on a Wednesday. For the full year, we recognized total revenue of $34,600,000 and net income of $3,700,000 The market for permanent placement and executive search solutions has been weak and continued to impact the performance of MRI network, which has fallen short of our internal expectations.

Speaker 2

A combination of staffing headwinds and an unpredictable economy have caused employers to slow down or even halt their hiring decisions entirely, which has had a particularly negative impact on permanent placement and executive search. During this market slowdown, we've taken the opportunity to evaluate, reorganize and refine certain operations and processes within MRI. We're controlling what we can control and believe that we've positioned MRI to benefit when demand levels for permanent placement and executive search return. Our temporary staffing and day labor offerings have performed better relative to the MRI network, though this segment has not been immune to recent market conditions. Relaxed immigration policies and lessened enforcement throughout the previous administration has reduced the demand for temporary and day labor services as some employers chose to exploit undocumented workers for cheaper labor.

Speaker 2

As an E Verify employer, we believe that Hire Quest could experience an increase in demand due to enhanced enforcement of immigration laws by ICE requiring employers to hire documented workers. Operationally, cost reduction remains a key priority for us and we made solid progress on this initiative in both the fourth quarter and the full fiscal year. Notably, we saw a 22.7% decline in SG and A compared to the fourth quarter of twenty twenty three, a decline of 12.4% for the full year. This improvement was driven largely by a reduction in our workers' compensation expense, which as many of you already know had a significant impact on our business in 2023. Steve will provide a more detailed update in his prepared remarks, but we're pleased to report that this expense has meaningfully come down in 2024, and we're confident that it will go down further in 2025.

Speaker 2

We continue to stay active on the M and A front. Acquisitions are a key part of our broader strategy, and our franchise model allows us to identify and efficiently acquire businesses that expand our staffing footprint and enhance our scope of offerings. We're monitoring the market for accretive opportunities and we execute each transaction with capital preservation and value enhancement at the forefront of our decision making process. While this was a difficult quarter and year for both Hire Quest and the industry overall, I'm proud of the resilience and flexibility of our that our business has demonstrated to drive positive results and profitability in the fourth quarter and fiscal year. As we all know, staffing markets won't recover overnight, but we are well equipped with a demonstrated ability to drive profitable results in diverse markets, and we believe that we are ideally positioned to benefit when demand returns.

Speaker 2

With that, I'll now turn over the call to Steve Crane, our Chief Financial Officer, to provide a closer look at our fourth quarter and full year results.

Speaker 3

Thank you, Rick, and good afternoon, everyone. Thanks for joining us today. Total revenue for the fourth quarter of twenty twenty four was $8,100,000 compared with revenue of $9,800,000 in the same quarter last year, a decrease of 17.2%. For the full year, total revenue was $34,600,000 compared with $37,900,000 in 2023. 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 service and interest charge to our franchisee as well as other miscellaneous revenue.

Speaker 3

Franchise royalties for the fourth quarter were $7,600,000 compared to $8,900,000 for the same quarter last year. For the full year, franchise royalties were $32,700,000 compared with $35,800,000 in 2023. Underlying franchise 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 fourth quarter were $134,800,000 compared to $143,500,000 in the fourth quarter of twenty twenty three.

Speaker 3

Full year system wide sales were $563,600,000 compared with $605,100,000 in 2023. The decrease in our revenue on an annual basis is roughly consistent with the decrease in underlying system wide sales and as Rick pointed out was driven by a softening of the overall staffing market throughout 2024. The impact of this was most acutely felt in our permanent placement and executive search business, primarily MRI network, which declined 18.6% when compared with 2023 results for this segment. Service revenue was $439,000 for the fourth quarter compared to $871,000 in the year ago period. Service revenue for the fourth quarter of twenty twenty three included pass through revenue of $515,000 related to the MRI Network advertising fund, which was for the full year of 2023, while fourth quarter twenty twenty four service revenue only included advertising fund revenue for the quarter.

Speaker 3

Full year 2024 service revenue was $1,900,000 compared to $2,100,000 in the prior year. Service revenue is composed of interest charged for our franchisee and overdue accounts receivable, service fees, other miscellaneous revenue and MRI Network's advertising fund revenue and can fluctuate from quarter to quarter based on several factors including growth in system wide sales, changes in accounts receivable, insurance renewals and similar dynamics. Selling, general and administrative expenses SG and A for the fourth quarter were $5,100,000 compared to $6,600,000 in the prior year period, a decrease of 22.7%. Additionally, SG and A expenses for the fourth quarter of twenty twenty three included $515,000 of expense related to the MRI Network Advertising Fund, which is for the full year of 2023, while fourth quarter twenty twenty four SG and A only included expenses related to the Advertising Fund for quarter. SG and A expenses for the full year decreased 12.4% to $21,400,000 compared with $24,400,000 in 2023.

Speaker 3

As Rick stated, the reduction in our SG and A expenses was primarily driven by reduced workers' compensation expense, which decreased approximately 46% to $2,000,000 in 2024 compared with $3,700,000 in 2023. Workers' compensation expense will generally fluctuate based on a mix of classifications, the level of payroll, recent claim resolutions and cumulative experience. While we cannot accurately predict the effects of workers' compensation in future periods, we believe we'll continue to see it go down further in 2025. Net income after tax was $2,200,000 in the fourth quarter of twenty twenty four or $0.16 per diluted share compared to a net income of $15,000 or zero earnings per share in the fourth quarter of twenty twenty three. Net income for the full year was $3,700,000 or $0.26 per diluted share compared with net income of $6,100,000 or $0.45 per diluted share in 2023.

Speaker 3

As we stated last year, full year net income included a non excuse me, last quarter, full year net income included a non cash impairment charge of $6,000,000 in the third quarter related to the MRI network assets that we acquired in December 2022. This charge had a considerable impact on our profitability both in the quarter and year to date period. And as such, we determined that providing an adjusted net income figure would be a helpful metric to better showcase growth and progress that we've achieved. With that said, adjusted net income for the fourth quarter of twenty twenty four, which excludes the non cash impairment charge of $6,000,000 amortization of acquired intangibles and other non recurring one time expenses was $2,600,000 or $0.19 per diluted share compared to adjusted net income of $2,500,000 or $0.18 per diluted share in the fourth quarter of twenty twenty three. Adjusted net income for the full year was $9,900,000 or $0.71 per diluted share compared to adjusted net income of $9,900,000 or $0.72 per diluted share in the prior year period.

Speaker 3

We have provided a table in the press release issued earlier this afternoon with a detailed reconciliation of adjusted net income to net income. Adjusted EBITDA in the fourth quarter of twenty twenty four was $3,800,000 compared to $4,300,000 in the prior year period. Adjusted EBITDA margin for the quarter was 47% compared to 44% in the fourth quarter of twenty twenty three. For the full year, adjusted EBITDA was $16,100,000 compared to $16,500,000 in the prior year. Adjusted EBITDA margin in 2024 was 47% compared to 44% in 2023.

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 K, which we filed this afternoon as well as our press release. Moving now to the balance sheet. Our current assets at 12/31/2024 were $49,200,000 compared to $51,500,000 at 12/31/2023. Current assets as of 12/31/2024 included $2,200,000 in cash and $42,300,000 of net accounts receivable, while current assets at 12/31/2023 included $1,300,000 of cash and $44,400,000 of net accounts receivable.

Speaker 3

Current assets exceeded current liabilities by $25,100,000 at 12/31/2024 versus year end 2023 when working capital was $15,700,000 Current liabilities were 49% of current assets at 12/31/2024 versus 69% of current assets at 12/31/2023. At 12/31/2024, we had $6,800,000 drawn on our credit facility and another $33,400,000 in availability assuming continued covenant compliance. Importantly, our credit facility was not impacted by the 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 third quarter of twenty twenty.

Speaker 3

Most recently, we paid a $0.06 per common share dividend on 03/17/2025 to shareholders of record as of March 3. 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

Thank you, Steve. I'd like to thank our employees and franchisees for their hard work and commitment throughout this past year. We're encouraged by what's ahead for our business and look forward to driving an enhanced value to our shareholders in fiscal twenty twenty five. With that, we can now open the line to questions. Thank you.

Operator

Thank you. Our first question is from Kevin Steinke with Barrington Research. Please proceed.

Speaker 4

Thanks and good afternoon. Just wanted to start out by talking a little bit more about the demand environment. Going back to your third quarter twenty twenty four conference call, of course, that's going back to the November, just a couple of days after the election. At that time, it seemed like there was a little more optimism around an improving demand environment for you and the industry. So if you could talk about maybe what if anything has changed since that time on the demand front that maybe making the demand outlook a little more muted or cautious here?

Speaker 2

Yes. Thanks, Kevin. I mean, at that time, sort of the beginning of the fourth quarter, our comparative numbers were really were running pretty good and then they really started to soften in December. And the other part is, and it was alluded to in my remarks as well as this seems like a silly thing and it's but having Christmas and New Year's on Wednesdays probably cost us the equivalent of at least two days' worth of sales. And so that drove our comparisons down a bit.

Speaker 2

So I think that the between the tariff talk isn't really helping demand much. And so like I said, demand kind of softened up. I will say that the first quarter hasn't there hasn't really been much of an improvement from December. Although, even just looking at the last few weeks, it's started to improve again. But it's still a tricky environment for us.

Speaker 2

It's kind of like three steps forward, three steps back. And we hit some good spots and then we hit some bad. So it's very much of a market and that's really backed up by and I know you cover couple of other companies in the staffing industry. It's really pretty common throughout the staffing industry. It's pretty common.

Speaker 2

But again, I'm optimistic by nature and I would just say that at least March is again, I go back to it, but of course it's easy to say, it's easy to say, but I do, I am hopeful, but I think that our industry would benefit from a bit more and really our clients would benefit from a bit more certainty with respect to where supply chains and tariffs are going to be.

Speaker 4

Okay. Yes, that's helpful. Appreciate that. And you mentioned making some changes at MRI. Maybe could you talk through that a little bit more?

Speaker 4

And you mentioned that positioning you for to benefit from an upturn when that occurs. So maybe just a little more color on that.

Speaker 2

Sure. So when we bought MRI back in the end of twenty twenty two, we tried to keep as many departments separate that we could from, let's say, staffing versus recruiting. And so, again, we were running parallel departments and we had hoped that the market would recover a bit and that we would be rewarded for it. And so to give you an idea, like what we did is rather than having a training department for MRI and then a training department for Snelling and Hire Quest Direct, we basically recombined those. And so we've taken a couple we've taken a few steps like that to basically drive more efficiencies because it just given the slowness in demand.

Speaker 4

Okay, thanks. And talking about you've talked about in the past, obviously, one of the potential benefits of this uncertain demand environment is perhaps more acquisition opportunities becoming available. You mentioned you're still active on that front. So maybe what are you seeing in the pipeline and in terms of valuations and are more opportunities cropping up in this type of environment?

Speaker 2

So there are I say the same thing every quarter, which is there's always plenty of opportunities and that's still so that's still the same. That said, I think that pricing of deals is starting to definitely get more reasonable because in reality, the staffing industry has been in a depressed state for literally nine quarters. So the ability to start buying at reasonable prices is returning. As you'll note, we completed an acquisition right at the end of the year as an example. And it's really turned out to be a very nice small, but a nice small acquisition.

Speaker 2

And so, we expect to continue to be able to find those. We're working on a couple that are larger. It's just but we're always again, I don't want you to read more into that other than what there really is, but other than to say that if typical staffing company being down 20%, thirty % over the last two to three years, that is going to necessarily drive down their pricing expectations. And where that really can help us, and I'll use the example of the small acquisition we did at the end of the year, it happened to be in a market where our sales were really lagging. And by combining those two entities, it wasn't sort of just like X plus Y equals Z, but it was really more like X plus Y equals Z plus Z because especially at the branch level economics, the volume matters a lot.

Speaker 2

And so a branch it's not the same as saying particularly for the franchisee, two different markets billing 1,500,000 doesn't equal the same profit as one market billing $3,000,000 And so, like I said, these types of acquisitions tend to be very, very helpful even if they're small. But I realize you didn't quite ask that, but long and short of it is, is that we are out there, we're engaged as we typically are at any given time with three or four companies.

Speaker 4

Okay. That's helpful. Appreciate it. Just lastly, wanted to ask about workers' compensation. Obviously, a very significant reduction year over year in the fourth quarter.

Speaker 4

You mentioned you think it can go down further in 2025, obviously not to the same magnitude, but just any sense directionally how that might trend? Do you still think that can kind of get back to neutral at some point in 2025 or if not, maybe beyond that?

Speaker 2

So if you go back pre 2021, it's really 2021 and before, workers' comp was always a positive had a positive effect on our income. And then it started turning it started turning decidedly negative in 'twenty three in particular. So as we've described before, there are a couple of factors in it. One was and again, we had a really, really bad workers' comp experience in 2022 or 2022, '20 '20 '3 policy year was bad. And so part of that had to work its way through and so that was where '23, of course, the numbers were really high.

Speaker 2

'24, we were still absorbing certain losses from that. And it's part of the reason why that we're pretty confident about '25 is those claims have mostly closed now and we're moving on from that. Whereas our 2324 policy year was sort of a normal year. And so again, that's so it's pretty predictable, it should be pretty predictable where we're at. And our twenty twenty four, twenty twenty five results were better, were actually good.

Speaker 2

And so I say all of that is that part of the reason for our optimism is just simply just based on the data, the claims data. And that's consistent throughout the insurance industry by the way. But if you look at you speak to any insurance executive of a multiline carrier, they're going to tell you that workers' comp is one of the best product lines they have right now because accident trends are better for a variety of reasons. Accident trends, workers' comp are good. We're seeing that.

Speaker 2

The other part is though is our rates are somewhat higher now as well. Our rates were inadequate in 'twenty two and 'twenty three. And so that's part of what and really in 'twenty four, they still weren't really adequate. But those rates have firmed up a bit. And so we are also again in a spot where we feel much better about 2025.

Speaker 2

So are we going to get all the way to where we breakeven on our workers' comp? Maybe. But we do think it will still be significantly better than '24.

Speaker 4

Okay. Great. Thanks for all the helpful commentary. I will turn it back over.

Speaker 2

Great. Thanks, Gavin.

Operator

The next question comes from Egan Cox with D. A. Davidson. Please proceed.

Speaker 5

Hello. I was just wondering, going to pick up on the demand topic again. I know the executive placement business was a little bit weak or you've been seeing softness there. I was just wondering more on the temporary staffing and day labor side. Is there any industries or sectors that you're seeing weakness in particularly?

Speaker 2

That's a good question. So our we're sort of getting construction is definitely if you just sorry, I'm not really want to line this up perfectly. Back about two years ago, construction was masking a relatively steep decline, let's say, in logistics, warehouse and manufacturing. And I would say that the construction part has more leveled off. And so while manufacturing and warehousing still remains weak and is continuing, I'm saying is continuing to weaken somewhat.

Speaker 2

Nothing is bad as what it was, but it's still down some. And again, our actual declines in the staffing side aren't really that pronounced. So our real declines are more in the executive search, are definitely is definitely more pronounced. But anyway, I would just say, unfortunately, construction is not increasing the way it was to offset some of the decline on the industrial sectors.

Speaker 5

That makes sense. And then just a follow-up on your own SG and A. You guys have been pretty prudent with expense management lowering or selling expenses more than your revenues are falling, been able to hold in that margin. I was just wondering how much room is left, like how much more could sales fall and how much SG and A could you cut to offset that, I guess?

Speaker 2

Well, that's cutting it, we are careful when we cut expenses. We've tried to develop a great team that we try to keep, let's say during a soft period like this. But realistically, let's say when you have a pandemic, let's say like a pandemic level event, we cut almost 40% of our staff within two weeks. And so if demand dropped off like that, we absolutely could do that. Now that might not have been your question, but the point is that we always have abilities to drop our costs significantly, which is why we retained profitability both in the second quarter of twenty twenty or even going back to like 02/2008, '2 thousand and '9.

Speaker 2

We'll cut our costs to the extent that we need to. What you're probably asking more is, hey, can we keep cutting even where we're at now? And the answer is yes. We haven't really made any cuts that I would say help you in the current period, but then do damage in the future. And really quite frankly, the single biggest area for that is IT.

Speaker 2

We haven't made any significant we really haven't made any cuts in IT because we're really developing for the future. Now, if we went up in revenue by 40% next year, and I'm not predicting that, but let's just say we went up 40% next year, that doesn't mean our IT spend is going to go up 40%. It probably wouldn't even go up at all. So my point is that IT is one area where we could still cut a lot if we wanted to. It would just impair sort of strategically what we're trying to do a year and a half, two and a half years down the road.

Speaker 2

And the same thing, we've been spending more money on marketing, not sales, but actually marketing. Again, those are easy cuts if we really feel that we need to do them. And at this point, we're not as much as the market is challenging, it's not again, it's not great recession or pandemic type levels where we feel that we should be basically defunding things that really will have a lot of value in the future. But as you pointed out, more current things, we're certainly cutting and have cut.

Speaker 5

Thank you.

Operator

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

Speaker 2

I want to thank everybody for joining us on this call. And again, appreciate your following the company or investing in the company. I want to thank our employees, our franchisees. And I would, looking forward to 2025, I do believe that there are a lot of good things that are going on out there and within the company and I'm looking forward to reporting back in another couple of months. Thank you very much for joining us.

Operator

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

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HireQuest Q4 2024
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