HireQuest - Q2 2024

Transcript

Operator (participant)

The conference, please press star zero on your phone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, John Nesbett, IMS Investor Relations. John, the floor is yours.

John Nesbett (IMS Investor Relations)

Thank you. I'd like to welcome everyone to the call. Hosting the call today are HireQuest CEO, Rick Hermanns, and Chief Financial Officer, Steve Crane. I'd like to take a moment to read the safe harbor statement. This conference call contains forward-looking statements as defined within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements in terms such as anticipate, expect, intend, may, will, should, or other comparable terms, involve risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. These statements include statements regarding the intent, belief, or current expectations of HireQuest and members of its management, as well as the assumptions on which such statements are based.

Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainties, including those described in HireQuest'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, HireQuest undertakes no obligation to update or revise forward-looking statements to reflect changed conditions. I would now like to turn the call over to the Chief Executive Officer of HireQuest, Rick Hermanns. Please go ahead, Rick.

Rick Hermanns (CEO)

Good afternoon. Our second quarter of 2024 was characterized by sustained profitability as we continue to mitigate costs, leverage our unique franchising model, and execute on our business strategy. We are focused on driving enhanced results as the market for staffing solutions slowly recovers from what has been a particularly difficult environment for the industry overall. Despite these headwinds, HireQuest has performed well compared to its peers. We believe that we are beginning to see a leveling out of this downward trend on the daily pay and commercial staffing side of our business, as year-over-year declines have lessened compared to recent quarters. HireQuest Direct, in particular, generated franchise royalties that exceeded Q2 2023 levels, and system-wide sales were only, just a little bit below last year.

We're not where we'd like to be, but we're noticing some encouraging trends that suggest that the market is finally beginning to find a baseline. We continued to prioritize expense reduction in the quarter as well, reducing our SG&A by 6% to $5.3 million, compared to $5.6 million in the second quarter of 2023. Core SG&A, which excludes workers' comp, the MRINetwork ad fund, and non-recurring charges, declined 7.6% to $4.6 million. Workers' compensation expense, in particular, decreased by $143,000 in the quarter as the changes we made earlier this year began to flow through.

Our SG&A in the latter half of 2023 was impacted by negative development of our 2022, 2023 workers' comp policy year, and at this point, we do not see anything that would suggest that our workers' comp will reach those levels this year. As always, M&A is a key part of our growth strategy. Our track record of acquisitions includes numerous businesses that have allowed us to penetrate both new geographic regions and staffing verticals, significantly expanding our addressable market. Moreover, we've seen increased opportunities for M&A related to the current market environment and continue to evaluate these as they are made available to us. In December of 2022, we acquired MRINetwork with the intention of expanding our bridge business into the higher margin executive search segment. Overall, this has been a positive acquisition for us, despite the industry headwinds it's faced.

When we acquired the business, it had been declining, and we stated that we expected the trend to continue in the near to medium term. Unfortunately, we couldn't have predicted the extended downturn the executive search market has experienced, which has exacerbated the problem. We are encouraged by the sequential growth in system sales over Q1 2024, following five straight quarters of decline, and we've realized some of the revenue and operational synergies we expected. But again, the state of the market has been an impediment, and the business is down significantly from where it was at the end of 2022. It's difficult to try to time the economy as well, we all know, but we have a very strong understanding of the staffing market and believe that a strategic combination of organic growth and M&A allows us to most efficiently grow our business.

We continue to diligently evaluate opportunities that have the potential to enhance our staffing offerings and create meaningful value for our shareholders, regardless of the economic environment. We take a long-term, we take a long-term approach to our business, which allows us to deliver improved results in changing market environments. In the time since our Command Center merger back in the summer of 2019, so literally we are five years after the merger, we've driven strong growth that has consistently outpaced the broader staffing industry. Our five-year adjusted EBITDA CAGR, for example, has considerably exceeded the industry average, and our five-year system sales CAGR of 17% from 2018 to 2023 is more than double almost all the other commercial or professional staffing companies in our peer group. This progress is a validation of several key aspects of our business.

One, that our model is not only working but outperforming the broader staffing sector. A franchising model provides HireQuest and our franchisees with the flexibility to meet the needs of a wide spectrum of customers that can differ based on size, location, staffing, vertical, therefore maximizing our addressable market and the value of our offerings. Two, we have very strong economics despite a down market, and are well positioned to take full advantage of opportunities once the industry recovers. While we are not immune to market conditions, our consistent performance across differing economic landscapes demonstrates the strength of our business and ability to capitalize on a strong market. The staffing industry is cyclical, and we have a strong track record of staying the course regardless of the economic landscape.

We have a proven growth strategy and believe that we are very well positioned to weather short-term headwinds, such as the soft employment market or down economy, and forge ahead on the path to long-term value creation. I'll now pass the call over to our Chief Financial Officer, Steve Crane, who will provide a closer look at our second quarter results. Steve?

Steve Crane (CFO)

Thank you, Rick, and good afternoon, everyone. Thank you for joining us today. Total revenue for the second quarter of 2024 was $8.7 million, compared to $9 million in the same quarter last year, which is a decrease of 3.4%. Our total revenue is made up of two components: franchise royalties, which is very much 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 second quarter were $8.2 million, compared to $8.7 million for the same quarter last year. Underlying the royalties are system-wide sales, which are not part of our revenue, but are a helpful contextual performance indicator. System-wide sales reflect sales at all offices, including those classified as discontinued.

System-wide sales for the second quarter were $146.1 million, compared to $157 million for the same period in 2023. Service revenue was $479,000 for the second quarter, compared to $245,000 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 MRINetwork's advertising fund revenue. 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&A expenses for the second quarter were $5.3 million, compared to $5.6 million in the prior year period, a decrease of 6%.

In the second quarter, workers' compensation expense was approximately $547,000, a decrease of approximately $143,000 from $690,000 in the second quarter of 2023. Generally, workers' compensation expense or benefit will fluctuate based on several different factors. Also included in our SG&A were salaries and benefits, which continues to be the largest component of our operating expenses. In the second quarter of 2024, we recognized $2.7 million in compensation-related expenses, a decrease of 15% compared to $3.1 million in the second quarter of 2023, related to headcount reductions, mostly around the MRI integration.

Net income, which includes income from operations, adjusted for miscellaneous items, interest, income taxes, and discontinued operations, was $2 million in the second quarter of 2024, in line with $2 million in the prior year period. Net income from continuing operations for the quarter was $2.1 million, or $0.15 per diluted share, which was flat, with net income from continuing operations of $2.1 million or $0.15 per diluted share in the second quarter last year. Adjusted EBITDA in the second quarter of 2024 was $4 million, compared to $3.9 million in the prior year period. The adjusted EBITDA margin for the quarter was 47%, compared to 43% in the prior year period. A detailed reconciliation of adjusted EBITDA to net income is provided in our 10-Q, which was filed this afternoon.

Moving on now to the balance sheet. Our current assets at June 30th, 2024, were $57.7 million, compared to $51.5 million at December 31st, 2023. Current assets as of June 30th, 2024, included $614,000 in cash and $49.9 million of net accounts receivable, while current assets at December 31st, 2023, included $1.3 million of cash and $44.4 million of net accounts receivable. Current assets exceeded current liabilities by $20.6 million at June 30th, 2024, versus year-end 2023, when working capital was $15.7 million. Current liabilities were 64.2% of current assets at June 30th, 2024, versus 69.4% of current assets at December 31st, 2023.

At June 30th, 2024, we had $15.7 million drawn on our credit facility and another $24.6 million in availability, assuming continued covenant compliance. We believe our credit facility provides us with flexibility and room for short-term working capital needs, as well as the capacity to capitalize on potential acquisitions. We have paid a regular quarterly dividend since the third quarter of 2020. Continuing that pattern, we paid a $0.06 per common share dividend on June 17th, 2024, to shareholders of record as of June 3rd. We expect to continue to pay a dividend each quarter, subject to the board's discretion. With that, I will turn the call back over to Rick for some closing comments.

Rick Hermanns (CEO)

Thank you, Steve. I'd like to thank our employees and franchisees for their hard work and dedication in this past quarter, and we look forward to generating value for our stakeholders as we progress into the latter half of 2024. With that, we can now open the line to questions. Thank you.

Operator (participant)

Thank you very much. We will now be conducting our question and answer session. If you would like to ask a question, please press star one on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. For any participants using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please wait a moment while we poll for questions. Thank you very much. Your first question is coming from Kevin Steinke of Barrington Research. Kevin, your line is live.

Kevin Steinke (VP and Senior Research Analyst)

Thank you. Good afternoon.

Rick Hermanns (CEO)

Hey, Kevin. How are you?

Kevin Steinke (VP and Senior Research Analyst)

I'm good. How are you?

Rick Hermanns (CEO)

I can't complain.

Kevin Steinke (VP and Senior Research Analyst)

Good. Well, I wanted to talk about your comments about an improving staffing market. You mentioned a slow recovery, but yeah, I'm assuming that you saw some recovery in the second quarter and just trying to get a feel for what you've seen in the market thus far, you know, through the first five, six weeks of the third quarter.

Rick Hermanns (CEO)

Yeah, I would, I would definitely. You know, throughout the second quarter, you know, there was an improvement. You know, there was definitely an improvement, particularly in year-over-year comparisons. That trend towards, you know, sort of an improvement has continued into the third quarter. So we're, you know, we've actually had a couple of weeks where, you know, we've actually exceeded the prior year, which is we hadn't seen that in, you know, more than a year. So, you know, that's why we're cautiously optimistic now. You know, obviously, sort of the market, you know, stumbled here the last couple of weeks. If that ends up translating into the real economy, well, then we're knocked off track again. But again, we've definitely, you know, we've definitely seen an improving trend.

Kevin Steinke (VP and Senior Research Analyst)

Okay, great. And you mentioned HireQuest Direct actually being up year-over-year in the second quarter. Are there any particular occupational categories that you know, maybe have drilled down into that are driving that improvement? Like, is it kind of across the board? Just wondering what you're seeing in that piece of the business.

Rick Hermanns (CEO)

So, you know, and that's a good question. So we've. It's more geographic than it is, you know, than it is, let's say, job category, but it is construction. Our strongest offices are those that are construction-related. We've had recovery in a couple of markets where we had had a few down quarters that are definitely regaining, you know, their stride. And, you know, we were battling a couple of comparisons where we had some good-sized Snelling clients that had fallen off, and that, you know, they've started to be replaced by new business. So it's not necessarily the old clients having come back, but there are new ones stepping, you know, sort of up and filling in. So, you know, again, we're cautiously optimistic about Q3. But it... and then, going back to your original question, I would definitely. It's construction that's the best for us.

Kevin Steinke (VP and Senior Research Analyst)

Okay. Yeah, that's helpful. So, the part of the business that you called out, still facing some meaningful headwinds, MRI, executive search. Have you seen any stabilization in that part of the business or green shoots? Just wondering if, you know, what you're feeling about that business you're seeing, as we move into the second half year?

Rick Hermanns (CEO)

So I would say there are two different factors that are involved. One, as, you know, stated in our prepared remarks, and really going back to what we had put out in December of 2022, when we acquired MRI. MRI was, you know, losing offices and franchisees for a number of years. And so part of the downward trend, you know, is related simply to the, you know, to the organization, the number of units itself. The, the remaining offices were then obviously subjected to what is, you know, clearly a, a bad environment for executive search. As far as green shoots, it, it, it definitely was better in Q2 than it was in Q3.

You know, let's say, if you exclude the effect of offices that had left the system. That said, it's still significantly more challenging than the staffing. You know, literally staffing has come back to being, at least for our offices, you know, have come back to a point where we're effectively flat. Whereas, you know, the executive search is still has a somewhat, you know, a less downward trend, but a downward trend nonetheless.

Kevin Steinke (VP and Senior Research Analyst)

Okay. And you know within MRI, they have a. I think they have a, you know, a meaningful portion in terms of, you know, IT placement and technology. You know, I've heard some comments that there might be some signs of stabilization or recovery in that market. I don't know if that's something, you know, you might have seen, you know?

Rick Hermanns (CEO)

That's a great question, and so, yeah, there's been a little bit, but not, not as, let's say, as good as in other, you know, as in, as, as in other segments. It's really been a mixed bag as well. I think that there's, you know, it, you know, you can't just point to, let's say, the financial sector and say, "Those MRI offices are doing well, and the others aren't." Because, again, a lot of those go to, many of our MRI offices are very focused on sort of specific, not even just specific industries, but even, let's say, categories within that industry.

And so they don't, it, they don't move in predictable, you know, in a very predictable fashion. So, you know, I can't just sit there and say, healthcare has done well and tech has done poorly, or vice versa. It truly is all over the board. I wish I could give you a better answer, but that's the truth.

Kevin Steinke (VP and Senior Research Analyst)

Okay. Yeah, fair enough. Yeah, looking at the core SG&A expenses, $4.6 million in the second quarter, that's down from $4.9 million in the first quarter, I believe. I think you might have talked last quarter about some actions you had taken. I'm just, you know, trying to get a sense of if you've taken some costs out in terms of the core SG&A, and if, you know, $4.6 million is more of a run rate for the second half.

Rick Hermanns (CEO)

Yeah, I mean, we've definitely taken some steps. There were, even when we were, you know, doing the last earnings call, there were already several cuts that had already been made, you know, that clearly hadn't worked through, you know, worked their way through the income statement. And so the $4.6 million, as far as for the core SG&A, there's, you know, really nothing, you know, there's nothing to drive that up at that, at this point that would be predictable. I mean, sometimes bills for large expenses come in at weird times, but if, if anything, there's probably even a bit more downward pressure on it versus upward pressure. We're, we're really being careful with our costs.

Kevin Steinke (VP and Senior Research Analyst)

Okay. That's helpful. Lastly, I just wanted to ask about the M&A environment. I think you mentioned you're seeing increased opportunities, given some of the recent pressures on the staffing industry. Maybe if you could just speak to the pipeline and, valuation expectations by sellers, et cetera.

Rick Hermanns (CEO)

So the deals are out there. There are opportunities like they always exist, but there are more, at least in our experience, there are more. They're still not necessarily at valuations that we think are appropriate for this environment, and so we're still working on sort of matching what we're willing to offer with what's being expected. But, you know, the deals are out there. And, you know, we've, you know, we've gotten, you know, close, and we've ended up whiffing on a few of them, but we're, you know, we're still actively engaged. And obviously, though, prices are still certainly better now than what they were a year and a half ago.

So, you know, I think we're getting closer to that point where, you know, we'll be able to, you know, to execute on some of them. And, you know, but again, we're always looking at that. You know, now I say that, it might be, it might be a year, it might be two years before we hit something, and there's no promise in that whatsoever. But, again, the deals are out there.

Kevin Steinke (VP and Senior Research Analyst)

Right. Okay. Yeah, understood. That makes sense. So, yeah, well, that's all I had. I will turn it back over. Thanks for taking the questions.

Rick Hermanns (CEO)

Thanks, Kevin.

Operator (participant)

Thank you very much. Our next question we had, I'm not sure if the, if the client has dropped the line, but, just in case, if there are any more questions in the queue, you can press star one on your phone keypad now to join the queue. Okay, I'm not seeing any further questions come into the queue, so I will now hand back over to the management team for any closing remarks.

Rick Hermanns (CEO)

Well, again, I want to thank everybody for joining us on this call. We look forward to the second half of the year, which I probably really wouldn't have been able to say at this point last year. And so, you know, we are cautiously optimistic. Again, we thank you for your continued interest in the company and confidence in the company, and we just look forward again to speaking with you again in a quarter. Thank you very much.

Operator (participant)

Thank you very much. This now concludes today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.