Q3 2024 HireQuest Inc Earnings Call
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Speaker Change: Good afternoon everyone and welcome to HigherQuest Incorporated's third quarter 2024 earnings call.
Speaker Change: At this time all participants have been placed on a listen-only mode and we will open for questions following the presentation.
Speaker Change: If anyone should require operator assistance during 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: 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.
John Nesbett: I would like to take a moment to read the Safe Harbor Statement.
John Nesbett: This conference call contains forward-looking statements as defined within Section 27A.
John Nesbett: of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
John Nesbett: 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 high-request periodic reports filed with the SEC, and that actual results may differ materially from those contemplated by such forward-looking statements.
Speaker Change: Accept 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 Chief Executive Officer of HireQuest, Rick Hermanns. Please go ahead, Rick.
Good afternoon and thank you for joining our call today.
Rick Hermanns: We achieved slight growth in total revenue in the third quarter of 2024 compared to the third quarter of 2023 as well as sequential revenue growth of 8.5% when compared to the second quarter of 2024 as the market for temporary staffing solutions began to stabilize.
Rick Hermanns: As we've mentioned before, the staffing industry has faced a particularly difficult environment in recent quarters as employers remain cautious in their hiring decisions influenced by the presidential election in an unpredictable economic landscape.
Rick Hermanns: Additionally, the spike in illegal immigration which occurred from 2022 through earlier 2024 led to the influx of undocumented workers to the lower tier labor force.
Rick Hermanns: While it's hard to quantify the impact on our business or the staffing industry in general, many of the jobs that we staff daily are the types of jobs undocumented workers fill.
Rick Hermanns: Despite these headwinds, I'm proud to say that HireQuest has performed relatively well when compared to our peers.
Rick Hermanns: demonstrating the strength and versatility of our franchise model. In this quarter, system-wide sales for our temporary staffing brands grew by 3.6 percent year-over-year for the first time since the first quarter of 2023.
Rick Hermanns: Looking ahead, we believe that we're beginning to see a leveling out of the compressed demand we've been experiencing on the temporary and commercial staffing side of our business and our position for improved results as we move through the balance of 2024 and into 2025.
Rick Hermanns: Expense management continues to be a priority. We reduced SG&A expenses by over 15% in the quarter when compared to the third quarter of 2023 as we continue to mitigate workers' compensation expense that impacted our profitability in the second half of 2023.
Rick Hermanns: Specifically, workers' compensation expense in the third quarter decreased nearly 67% when compared to the third quarter of 2023.
Rick Hermanns: We believe that we can maintain and even improve on these results. And as I mentioned on last quarter's call, we see no indication that workers' compensation will reach 2023 levels moving forward.
Rick Hermanns: We view permanent placement and executive recruiting as a significant long-term opportunity that ideally complements our existing staffing offerings, and MRI Network is the cornerstone of our growth strategy in this market.
Rick Hermanns: That said, the overall market for permanent placement and executive recruiting has faced industry-wide challenges for several quarters, and while we anticipated some contraction of MRI at the time of the acquisition,
Rick Hermanns: We did not project the protracted industry-wide downturn that we've experienced.
Rick Hermanns: To better reflect the current fair value of MRI Network to our business, we made the decision to write down certain non-cash assets related to MRI, resulting in a one-time non-cash impairment charge of just over six million dollars.
Rick Hermanns: This charge significantly impacted our profitability in the quarter and in the year-to-date period.
Speaker Change: for which Steve will provide more detail in his prepared marks.
Speaker Change: compared to the third quarter of 2023, demonstrating not only our ability to deliver strong growth and value on a year over year basis, but also our ability to do so in the face of headwinds that have continued to impact the entire staffing industry.
Speaker Change: As we close out the year, we believe that we are well positioned to drive enhanced financial performance as we enter a period where we expect to capitalize on a stabilizing staffing market and employ prudent expense management across our business.
Speaker Change: I would like to conclude my prepared remarks by reiterating some important data points that we presented on last quarter's call.
Speaker Change: Since our command center merger in the summer of 2019, our operational results have consistently outpaced the broader staffing industry, regardless of macroeconomic factors.
highlighted by a four-year
Speaker Change: adjusted EBITDA CAGR of 12.6% from 2019 to 2023 that is more than double almost all other commercial or professional staffing companies in our peer group.
Speaker Change: This quarter, we achieved our highest adjusted EBITDA since the third quarter of 2022, and with the visibility that we have today, we believe that we're in a strong position to continue this trend. Overall, we're pleased with our third quarter results and we're optimistic
Speaker Change: that the market for both temporary and permanent staffing solutions is entering a more favorable economic environment. We're ready and eager to capitalize on the opportunities that become available to us as demand for staffing services strengthens.
Speaker Change: I'll now pass the call over to our Chief Financial Officer, Steve Crane, who will provide a closer look at our third quarter results. Steve?
Steve Crane: Thank you, Rick, and good afternoon, everyone. Thank you for joining us today.
Steve Crane: Total revenue for the third quarter of 2024 was $9.4 million, compared with revenue of $9.3 million in the same quarter last year, an increase of 1.6%.
Steve Crane: 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 services and interest charged to our franchisees, as well as other miscellaneous revenue.
Steve Crane: Franchise royalties for the third quarter were $9 million compared to $8.9 million for the same quarter last year.
Steve Crane: 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.
Steve Crane: System-wide sales for the third quarter were $148.6 million, compared to $151.2 million for the same period in 2023.
Steve Crane: The decrease in system-wide sales was primarily driven by a decline in our professional recruiting and staffing brands
Steve Crane: Service revenue was $428,000 for the third quarter compared to $366,000 for the same quarter a year ago.
Steve Crane: Service revenue is composed of interest charged to our franchisees on overdue accounts receivable, service fees, other miscellaneous revenue, and MRI Network's advertising fund revenue.
Steve Crane: Service revenue can fluctuate from quarter to quarter based on a number of factors, including changes in system-wide sales, accounts receivable, insurance renewals, and similar dynamics.
Steve Crane: Selling general and administrative expenses for the third quarter were $5.4 million compared to $6.4 million in the prior year period.
Additionally, we continue to prioritize expense management across our business.
Steve Crane: Net workers' compensation expense in the third quarter of 2024 was approximately $499,000 compared to a net expense of approximately $1.5 million in the third quarter of 2023.
Steve Crane: Also included in our SG&A were salaries and benefits, which continues to be the largest component of our operating expenses.
Steve Crane: In the third quarter of 2024, we recognized $2.8 million in compensation-related expenses compared to $2.9 million in the third quarter of 2023.
Steve Crane: Our year-to-date compensation-related expenses decreased 11.1% to $8.5 million, primarily driven by headcount reductions we made during 2023 related to the integration of the MRI network acquisition.
Steve Crane: Net loss after tax was $2.2 million in the third quarter of 2024, or loss of $0.16 per diluted share compared to a net income of $1.5 million, or earnings per diluted share of $0.11 in the third quarter of 2023.
Speaker Change: As Rick mentioned in his prepared remarks, we recognized a one-time non-cash impairment charge of $6 million in the quarter related to the MRI network assets we acquired in December 2022.
Speaker Change: This non-cash impairment charge had a considerable impact on our profitability, both in the quarter and year-to-date in 2024.
Speaker Change: As such, we decided that providing an adjusted net income figure for the quarter and the year-to-date period as of September 30, 2024, would be a helpful metric to better showcase the growth and progress that we've achieved.
Speaker Change: With that said, adjusted net income for the third quarter of 2024, which excludes the one-time non-cash impairment charge.
amortization of acquired intangibles and other non-recurring
Speaker Change: one-time expenses, net of the tax effect from these adjustments was $2.8 million or 20 cents per diluted share compared to adjusted net income of $2.2 million or 16 cents per diluted share in the third quarter of 2023.
Speaker Change: Adjusted net income for the nine months ended September 30, 2024, was $7.3 million or $0.52 per diluted share compared to adjusted net income of $7.3 million or $0.53 per diluted share in the prior year period.
Speaker Change: We did provide a table in the press release we put out earlier this afternoon with a detailed reconciliation of net income to adjusted net income.
The
Speaker Change: Adjusted EBITDA in the third quarter of 2024 was $4.9 million compared to $3.7 million in the prior year period.
Speaker Change: Adjusted EBITDA margin for the quarter was 52% compared to 40% in the prior year period. 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 net income to adjusted EBITDA is provided in our press release and our 10-Q.
Moving now to the balance sheet
Speaker Change: Our current assets at September 30, 2024 were $58 million compared to $51.5 million at December 31, 2023.
Speaker Change: Current assets as of September 30, 2024 included $1.6 million in cash and $50.5 million of net accounts receivable, while current assets at December 31, 2023 included $1.3 million of cash and $44.4 million of net accounts receivable.
Speaker Change: Current assets exceeded current liabilities by $23.4 million at September 30, 2024, versus year-end 2023 when working capital was $15.7 million.
Speaker Change: Current liabilities were 59.7% of current assets at September 30, 2024, versus 69.4% of current assets at December 31, 2023.
Speaker Change: At September 30, 2024, we had $13.4 million drawn on our credit facility and another $26.9 million in availability, assuming continued covenant compliance.
Speaker Change: Importantly, our credit facility was not impacted by the one-time non-cash impairment charge that we recognized in the quarter. We believe our credit facility provides us with flexibility and room for short-term working capital needs, as well as the capacity to capitalize on potential acquisitions.
Speaker Change: We have paid a regular quarterly dividend since the third quarter of 2020.
Speaker Change: Most recently, we paid a $0.06 common share dividend on September 16, 2024 to shareholders of record as of September 2nd. We expect to continue to pay a dividend each quarter subject to the Board's discretion. With that, I'll turn the call back over to Rick for some closing comments.
Rick Hermanns: Thank you, Steve, and I'd like to thank our employees and franchisees for their hard work and dedication this quarter. And we look forward to closing out the year strong and speaking with you again on our year-end call. With that, we can now open the line to questions. Thank you.
Speaker Change: Thank you very much. We will be conducting our question and answer session. If you would like to ask a question, please press star 1 on your phone keypad now.
Speaker Change: A confirmation tome will indicate that your line is in the queue.
Speaker Change: You may press star 2 if you would like to remove your question from the queue. For any participants using speaker equipment, it may be necessary to pick up your handset before you press the keys. Please wait a moment whilst we poll for questions.
Speaker Change: Thank you very much. Your first question is coming from Mike Baker of DA Davidson. Mike, your line is live.
Mike Baker: Great, thanks. So, a lot of CEOs have been saying there's a lot of uncertainty out there because of the election. That's been a common refrain for, I don't know, three, six months.
Elections over, no disruption, so that's now behind us.
Speaker Change: You said in your call that things were getting better prior to that. Now, first of all, why do you think things are getting better? What's getting better in the environment and how does the resolution, the relatively calm resolution of the election,
lead to even more improvement in the environment.
Speaker Change: Thanks for the question, Mike. I would say three things. One is, of course, the reduction of interest rates today further reduces the chance of a meltdown in the commercial real estate.
Speaker Change: market and commercial construction, which is, you know, a big driver of our business. So that's one, you know, that's one thing. And of course that already started during this quarter, you know, so that's that's a very helpful, that's a very helpful factor. I also, and
You know, the reality is that
On top of it is
with...
In June...
Speaker Change: Obviously, the federal government started changing a bit of the way it was handling, you know, the illegal immigration. And I think we're starting to see some of that as well because we, you know, particularly our higher class direct
and the wine.
basically competes directly with
Speaker Change: undocumented workers and so that I think is a is a favorable thing that's happened throughout throughout the summer and then with that being resolved it just you know it it takes that issue off the table.
Speaker Change: And then the other part is we can just see it on our numbers that things have, that we're getting orders where we weren't getting them before. I think that our franchisees have
the market post
Speaker Change: pandemic was very strange. There was, it was hard to find employees, it was hard to find permanent employees and good business development people and some of those things have started to normalize and so I part of what where I feel good about it is that our franchisees themselves are sort of returning
Speaker Change: to habits that they had pre-pandemic and, you know, normal incentives are starting to
Speaker Change: take effect. So those would be, you know, those would be the reasons for our optimism.
Speaker Change: Yep, yep, that's very helpful And and so then if I could ask one follow-up within all those things getting better are there
Speaker Change: specific, you know, lines of business or types of businesses that are getting better. You're actually starting to see commercial real estate and construction get better. And then same question geographically.
Commercial construction has been strong.
really for the last.
Yes, sense for that matter, really sense.
Speaker Change: 2020, it's been consistently strong, and even really during 2020, so that's been a bright spot throughout.
Geographically it's the same.
Speaker Change: the same areas that are good for us, which is Texas, Tennessee, Tennessee is hurting a little bit, but Florida, Georgia, they've all been, you know, the Southeast has been very strong for us. But now we're also
Speaker Change: having some better success, even in the Mid-Atlantic is getting stronger. And I would say also, our skilled trades division is really picking up as well. So we're getting some help from that as well.
Awesome. Thank you. I'll turn it over to someone else.
Speaker Change: Thank you very much. If you would still like to ask any questions on the phone lines, please press star 1 on your phone keypad now to join the queue. That's star 1. Thank you.
Speaker Change: Your next question is coming from Kevin Steinke of Barrington Research.
Kevin, your line is live.
Thank you. So you talked about...
Temporary staffing, returning to system-wide sales growth.
Speaker Change: But at the same time, the executive recruiting and permanent staffing market
Speaker Change: being a little tougher. Well, I think in your actual press release, you said you're optimistic at the market for both temporary staffing and...
Speaker Change: permanent staffing is entering a more favorable economic environment. So I'm just wondering if you're seeing signs of...
Speaker Change: stabilization or improvement on the permanent staffing side and you know your outlook or your level of optimism for that part of the business.
Thanks for that question.
Speaker Change: The perm staffing, I'm sorry, perm placement business has been incredibly tough the last seven quarters I'm not going to sugarcoat that it's it's been really bad and so
Speaker Change: It's nothing else the optimism, you know, I guess the optimism is almost based on it almost can't stay that it's at abnormally low levels and so
Speaker Change: It almost has no place to go but up. And again, sort of what I alluded to in responding to Mike's question regarding
Speaker Change: Now they're kind of waking up and saying, you know what, I don't really like where I'm at. And, you know, sort of readjusting, you know, readjusting to...
you know their own office
Speaker Change: habits basically to be a bit more to be a bit more aggressive but it's also there was that overhang in 2022 where people were hiring
Speaker Change: pretty much is anything they could do to hire a person, they would. And so 2023 came as a bit of a shock almost, where it's, gosh, now I have...
Speaker Change: 58 computer programmers, but I really only needed 30, but I was just grabbing them because I couldn't find, I couldn't find them.
Speaker Change: And I think we're getting back again to just more at least of a normal market. And I think again, 23 and 24 were
abnormally depressed because of the strength of 22.
Bye.
Speaker Change: I don't know if that answers your question, but that's a lot of how I see it.
Yeah, absolutely. Yeah, that makes sense.
So, great, so on the expense side,
I apologize if you called it out, but...
Um, um, um, [inaudible]
Speaker Change: Just you've talked about the core SG&A in the past and then also the
Speaker Change: The workers' compensation expense, I can't recall if you gave the exact number. I'm backing into it being about $500,000 or so, but I was wondering if you could review those numbers for me.
Speaker Change: Yes, and I'm kind of going to back into these. We didn't give the core, or do you have it, Steve? Well, I've got the net workers comp. You were spot on. It's about $500,000 in the third quarter of this year, and then $1.5 million in the third quarter last year.
Speaker Change: So, a million dollars was the improvement, which really, so core SG&A stayed flat at 5.4 million, but obviously overall SG&A dropped by a million, you know, due to the improvement in workers' comp.
Speaker Change: So, we were able to hold our costs flat from the third quarter of last year.
Speaker Change: which is pretty much consistent with our sales being flat as well.
or year over year.
Speaker Change: Yep, okay, understood. Yeah, that's helpful. And so going forward with...
Speaker Change: The demand picture appearing to pick up here. Do you think you can hold those?
Speaker Change: core SG&A expenses relatively flat. I know you've talked about maybe having some excess capacity to add system-wide sales or, you know, I just again want to get back to how much capacity you think you might have in terms of
Speaker Change: That's a great question. Yeah, Kevin, that's a great question. So here's how I would answer it. Yes, we still have the ability to
Speaker Change: take on, I would argue, probably a, you know, five to ten percent sales increase with no appreciable increase in costs.
So yeah, we still have some slack capacity.
Speaker Change: dampen that in my mind would be to the extent that the environment you know the economy improves
a bit.
I do believe that there's going to be
a very
Speaker Change: real potential for wages to go up, and so while we may not have a major headcount increase, it's easy for me to see our perm payroll expenses go up.
Speaker Change: So I don't think we can stay flat, but I do think our head count will stay almost exactly flat.
OK, yeah, got it, that's fair.
And so you've talked in previous calls with this.
Speaker Change: software demand environment that it typically has created more acquisition opportunities for you. Just wondering if that's been the case still or you know what the pipeline looks like.
And you're just kind of overall appetite for
Speaker Change: Kevin, I'm glad you asked that question. I'm glad you asked that question. So obviously our threshold for reporting acquisitions, you know, as we've grown has.
Speaker Change: become significantly higher. So even in this quarter, we made two acquisitions, small, but two acquisitions. And so we have
You know we have
We have a fair number of...
Speaker Change: nothing so significant as to, you know what I'm saying, trigger any disclosures or anything, but we have, but like I said, we have a number of small deals that are in various points.
Speaker Change: of completion. So, like I said, we did two deals already in the last three months and, you know, would anticipate, you know, there's no reason for me to believe that that will slow down.
Speaker Change: Okay yeah obviously like you mentioned that too small to even register from a materiality perspective but were those just kind of typical
commercial staffing or you know what areas
Speaker Change: Yes, they're typically, well I shouldn't say that, actually they were on demand. Two of them were on demand.
Speaker Change: The two are on demand this this quarter You know, but really there tends to be more opportunities in the commercial because the commercial, you know, the traditional commercial staffing is a larger
portion of the staffing industry, so
We tend to have more of those opportunities.
Speaker Change: So, which we had one of each like this last quarter. So there they're nice deals there there there are very limited risk.
Speaker Change: And you know like I said, just strengthen our overall presence.
Speaker Change: Great.
Speaker Change: Yeah helpful update.
Speaker Change: I will turn it back over thanks for taking the questions.
Speaker Change: Sure.
Speaker Change: Thank you very much well we appear to have reached the end of our question and answer session I will now hand, it back over to the management team for any closing remarks.
Speaker Change: Thank you Jenny and thank you for joining us on this call.
Speaker Change: I certainly hope you will agree that despite the write down of the MRI assets that Theres a lot of information.
Speaker Change: In there that sort of validated our strategy as far as being a franchise or of staffing companies and it demonstrates our resilience despite a C.
Speaker Change: The headwinds that you can clearly see.