HireQuest - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $8.1M (-17.2% YoY) and diluted EPS was $0.16 vs $0.00 in Q4 2023; adjusted EPS rose to $0.19 vs $0.18 YoY, reflecting cost controls despite softer demand.
• SG&A fell 22.7% YoY to $5.1M, aided by a sharp reduction in net workers’ compensation expense ($0.335M vs $1.3M YoY), supporting profitability in the quarter.
• Adjusted EBITDA was $3.8M; adjusted EBITDA margin expanded to 47% vs 44% YoY, driven by lower workers’ comp costs and disciplined expense management.
• Management reiterated quarterly dividend continuity at $0.06 and highlighted M&A as a key growth lever; no quantitative revenue or margin guidance was issued, but workers’ comp is expected to decline further in 2025, providing a margin tailwind.
• Potential stock reaction catalysts: continued dividend, visible cost relief in workers’ comp, and accretive small/mid-size acquisitions in depressed industry valuation conditions.

What Went Well and What Went Wrong

What Went Well

• Margin resilience and cost discipline: SG&A fell 22.7% YoY and net workers’ comp expense dropped meaningfully, enabling profitability and margin expansion in Q4; CFO: “Adjusted EBITDA margin for the quarter was 47% compared to 44% in the fourth quarter of twenty twenty three”.
• Operational execution in a tough market: CEO emphasized profitability despite sector-wide headwinds—“our flexible franchise model has allowed us to drive profitable results in both the fourth quarter and the full fiscal year”.
• Capital deployment and M&A pipeline: Management remains active and sees more reasonable deal pricing after nine depressed quarters; “pricing of deals is starting to definitely get more reasonable… we completed an acquisition right at the end of the year”.

What Went Wrong

• Top-line pressure: Franchise royalties fell 14.0% YoY to $7.6M and total revenue declined 17.2% YoY to $8.1M, reflecting softer demand and holiday timing effects.
• System-wide sales contraction: System-wide sales decreased 6.0% YoY to $134.8M in Q4, consistent with broader market softness and caution on hiring.
• MRI Network underperformance and impairment: Permanent placement/executive search remains weak; management recorded a $6.0M non-cash impairment in Q3 and highlighted ongoing reorganization to improve efficiency.

Transcript

Operator (participant)

Greetings. Welcome to the HireQuest Fourth Quarter and Year-End 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, John Nesbett of IMS Investor Relations. You may begin.

John Nesbett (Head of Investor Relations)

Thank you, Operator. I'd like to welcome everyone to the call. Hosting the call today are HireQuest Chief Executive Officer, 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. Those statements include statements regarding the intent, belief, or current expectations of HireQuest 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 involve risks and uncertainties, including those described in HireQuest'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, 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 CEO of HireQuest, Rick Hermanns. Go ahead, Rick.

Rick Hermanns (CEO)

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 HireQuest 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 2024, supported by total revenues of $8.1 million. 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 $34.6 million and net income of $3.7 million.

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. 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 have reduced the demand for temporary and day labor services as some employers chose to exploit undocumented workers for cheaper labor. As an E-Verify employer, we believe that HireQuest 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&A compared to the fourth quarter of 2023 and 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. We continue to stay active on the M&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 HireQuest and the industry overall, I'm proud of the resilience and flexibility 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. 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.

Steve Crane (CFO)

Thank you, Rick, and good afternoon, everyone. Thanks for joining us today. Total revenue for the fourth quarter of 2024 was $8.1 million compared with revenue of $9.8 million in the same quarter last year, a decrease of 17.2%. For the full year, total revenue was $34.6 million compared with $37.9 million 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 charged to our franchisee, as well as other miscellaneous revenue. Franchise royalties for the fourth quarter were $7.6 million compared to $8.9 million for the same quarter last year. For the full year, franchise royalties were $32.7 million compared with $35.8 million in 2023. Underlying franchise 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 fourth quarter were $134.8 million compared to $143.5 million in the fourth quarter of 2023. Full-year system-wide sales were $563.6 million compared with $605.1 million 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 the 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 2023 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 2024 service revenue only included advertising fund revenue for the quarter. Full-year 2024 service revenue was $1.9 million compared to $2.1 million in the prior year. Service revenue is composed of interest charged to our franchisee on overdue accounts receivable, service fees, other miscellaneous revenue, and MRI Network 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&A, for the fourth quarter were $5.1 million compared to $6.6 million in the prior year period, a decrease of 22.7%.

Additionally, SG&A expenses for the fourth quarter of 2023 included $515,000 of expense related to the MRI Network advertising fund, which is for the full year of 2023, while fourth quarter 2024 SG&A only included expenses related to the advertising fund for the quarter. SG&A expenses for the full year decreased 12.4% to $21.4 million compared with $24.4 million in 2023. As Rick stated, the reduction in our SG&A expenses was primarily driven by reduced workers' compensation expense, which decreased approximately 46% to $2 million in 2024 compared with $3.7 million 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 $2.2 million in the fourth quarter of 2024, or $0.16 per diluted share, compared to a net income of $15,000 or $0.00 earnings per share in the fourth quarter of 2023. Net income for the full year was $3.7 million or $0.26 per diluted share compared with net income of $6.1 million or $0.45 per diluted share in 2023. 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 million 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 2024, which excludes the non-cash impairment charge of $6 million, amortization of acquired intangibles and other non-recurring one-time expenses, was $2.6 million or $0.19 per diluted share compared to adjusted net income of $2.5 million or $0.18 per diluted share in the fourth quarter of 2023. Adjusted net income for the full year was $9.9 million or $0.71 per diluted share compared to Adjusted net income of $9.9 million or $0.72 per diluted share in the prior year period. 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 2024 was $3.8 million compared to $4.3 million in the prior year period.

Adjusted EBITDA margin for the quarter was 47% compared to 44% in the fourth quarter of 2023. For the full year, Adjusted EBITDA was $16.1 million compared to $16.5 million in the prior year. Adjusted EBITDA margin in 2024 was 47% compared to 44% in 2023. We believe Adjusted EBITDA is a relevant metric for us due to the size of non-cash operating expenses running through our P&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 December 31, 2024, were $49.2 million compared to $51.5 million at December 31st, 2023.

Current assets as of December 31, 2024, included $2.2 million in cash and $42.3 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 $25.1 million at December 31, 2024, versus year-end 2023 when working capital was $15.7 million. Current liabilities were 49% of current assets at December 31st, 2024, versus 69% of current assets at December 31st, 2023. At December 31st, 2024, we had $6.8 million drawn on our credit facility and another $33.4 million 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 2020. Most recently, we paid a $0.06 per common share dividend on March 17, 2025, to shareholders of record as of March 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 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 2025. With that, we can now open the line to questions. Thank you.

Operator (participant)

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Once again, please press star 1 if you have a question or a comment. Our first question is from Kevin Steinke with Barrington Research. Please proceed.

Kevin Steinke (Analyst)

Thanks, and good afternoon. I just wanted to start out by talking a little bit more about the demand environment. Going back to your third quarter 2024 conference call, of course, that's going back to the first half of 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. If you could talk about maybe what, if anything, has changed since that time on the demand front that is maybe making the demand outlook a little more muted or cautious here.

Rick Hermanns (CEO)

Yeah, thanks, Kevin. I mean, at that time, sort of the beginning of the fourth quarter, our comparative numbers really were running pretty good, and then they really started to soften in December. The other part is, and it was alluded to in my remarks as well, this seems like a silly thing, but having Christmas and New Year's on Wednesdays probably costs us the equivalent of at least two days' worth of sales. That drove our comparisons down a bit. I think that between the tariff talk isn't really helping, isn't helping demand much. Like I said, demand kind of softened up. I will say that the first quarter, 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. It's still a tricky environment for us.

It's kind of like a—it's like three steps forward, three steps back, and we hit some good spots, and then we hit some bad. It is very much of a meh market. That is really backed up by—I know you cover a couple of other companies in the staffing industry. It is really pretty common throughout the staffing industry. It is pretty common. Again, I am optimistic by nature, and I would just say that at least March is—again, I go back to it, but of course, it is easy to say. It is 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.

Kevin Steinke (Analyst)

Okay. Yeah, that's helpful. Appreciate that. You mentioned making some changes at MRI. Maybe could you talk through that a little bit more? You mentioned that positioning you to benefit from an upturn when that occurs. Maybe just a little more color on that.

Rick Hermanns (CEO)

Sure. When we bought MRI back in the end of 2022, we tried to keep as many departments separate that we could from, let's say, staffing versus recruiting. 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. To give you an idea, what we did is, rather than having a training department for MRI and then a training department for Snelling and HireQuest Direct, we basically combined those. We have taken a couple—we have taken a few steps like that to basically drive more efficiencies because it just given the slowness in demand.

Kevin Steinke (Analyst)

Okay. Thanks. 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. Maybe what are you seeing in the pipeline in terms of valuations and are more opportunities cropping up in this type of environment?

Rick Hermanns (CEO)

I say the same thing every quarter, which is there's always plenty of opportunities, and 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. 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. It's really turned out to be a very nice, small, but a nice small acquisition. We expect to continue to be able to find those. We're working on a couple that are larger. We're always—again, I don't want you to read more into that than what there really is.

Other than to say that if a typical staffing company being down 20%-30% over the last two to three years, that is going to necessarily drive down their pricing expectations. 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. By combining those two entities, it wasn't sort of just like X+Y=Z, but it was really more like X+Y=Z=Z because, especially at the branch-level economics, the volume matters a lot. A branch—it's not the same as saying, particularly for the franchisee, two different markets billing $1.5 million doesn't equal the same profit as one market billing $3 million.

Like I said, these types of acquisitions tend to be very, very helpful, even if they're small. I realize you didn't quite ask that. Long and short of it is that we are out there. We're engaged, as we typically are at any given time, with three or four companies.

Kevin Steinke (Analyst)

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

Rick Hermanns (CEO)

So if you go back pre-2021, early 2021 and before, workers' comp was always a positive, had a positive effect on our income. It started turning, it started turning decidedly negative in 2023 in particular. 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. Our 2022-2023 policy year was bad. Part of that had to work its way through. That was where 2023, of course, the numbers were really high. In 2024, we were still absorbing certain losses from that. It's part of the reason why we're pretty confident about 2025, as those claims have mostly closed now, and we're moving on from that. Whereas our 2023-2024 policy year was sort of a normal year. Again, it's pretty predictable.

It should be pretty predictable where we're at. Our 2024, 2025 results were better. We're actually good. I say all of that is that part of the reason for our optimism is just simply based on the data, the claims data. That's consistent throughout the insurance industry, by the way. If you look at—you speak to any insurance executive of a multi-line 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. The other part is, though, our rates are somewhat higher now as well. Our rates were inadequate in 2022 and 2023. That's part of what—and really in 2024, they still weren't really adequate. Those rates have firmed up a bit.

We are also, again, in a spot where we feel much better about 2025. Are we going to get all the way to where we break even on our workers' comp? Maybe. We do think it'll still be significantly better than 2024.

Kevin Steinke (Analyst)

Okay. Yeah, great. Thanks for all the helpful commentary. I will turn it back over.

Rick Hermanns (CEO)

Great. Thanks, Kevin.

Operator (participant)

Once again, if you have a question or a comment, please indicate so by pressing star one on your touchtone phone. The next question comes from Keegan Cox with D.A. Davidson. Please proceed.

Keegan Cox (Analyst)

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?

Rick Hermanns (CEO)

That's a good question. We're sort of getting—construction is definitely—sorry, I 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. I would say that the construction part has more leveled off. While manufacturing and warehousing still remains weak and is continuing—you know what I'm saying?—is continuing to weaken somewhat. Nothing as bad as what it was, but it's still down some. Again, our actual declines in the staffing side aren't really that pronounced. Our real declines are more in the executive search, are definitely—is definitely more pronounced. Anyway, I would just say, unfortunately, construction's not increasing the way it was to offset some of the decline on the industrial sectors.

Keegan Cox (Analyst)

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

Rick Hermanns (CEO)

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. Realistically, let's say when you have a pandemic, let's say a pandemic-level event, we cut almost 40% of our staff within two weeks. If demand dropped off like that, we absolutely could do that. 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 2020 or even going back to 2008, 2009. 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?" 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. Quite frankly, the single biggest area for that is IT. 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. 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.

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. 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. As you pointed out, more current things, we're certainly cutting and have cut.

Keegan Cox (Analyst)

Thank you.

Operator (participant)

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

Rick Hermanns (CEO)

I want to thank everybody for joining us on this call. I appreciate your following the company or investing in the company. I want to thank our employees, our franchisees. 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. I am looking forward to reporting back in another couple of months. Thank you very much for joining us.

Operator (participant)

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