HireQuest, Inc.

Greetings and welcome to the HireQuest Incorporated third quarter 2023 earnings call. At this time all participants are on a listen only mode and 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, Mr. John Nesbitt of IMS Relations. Sir, you may begin.

Thank you. Good afternoon, everyone. I'd like to welcome everybody to the call. Hosting the call today are HireQuest Chief Executive Officer Rick Hermans, and Chief Financial Officer David Burnett. 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, and other comparable terms involve risks and uncertainties because they relate to events and dependent circumstances that will occur in the future. These statements include statements regarding the intent, belief, and current expectations of HireQuest and members of its management, as well as the assumptions in 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 uncertainty, including those described in HireQuest 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 change conditions. I would now like to turn the call over to the Chief Executive Officer of HireQuest, Rick Hermans. Go ahead, Rick.

Thank you, everyone, for joining today's call. I'll begin by providing an overview of our financial and strategic highlights from the third quarter. And then I'll turn the call over to David, who will share more details around our third quarter results. The third quarter of 2023 was highlighted by increased revenue growth and healthy profitability, primarily related to our acquisition of MRI Network, which has driven increases in franchise royalties and underlying system-wide sales. Our total revenue in the third quarter grew 18.1% to $9.3 million, and franchise royalties increased 19.9%, to $8.9 million compared to $7.4 million in the prior year period. System-wide sales for the quarter increased to $151.2 million compared to $123.2 million in the third quarter of 2022. As mentioned, the majority of system-wide sales growth continues to be driven by our acquisition of MRI Network with additional increased contributions from our drive request and trade core offerings compared to the prior year period. This growth was offset by HireQuest Direct's relatively moderate year-over-year decline of just 5.4% and Snelling's decline of 17.2%. SG&A expenses in the third quarter were $6.4 million compared to $2.1 million in the prior year period. The increase was primarily related to increased costs associated with workers' compensation insurance as well as expenses to support increased system-wide sales from acquisitions and organic growth, particularly the MRI network. Excluding workers' compensation and impairment of notes receivable, SG&A expenses in the quarter grew 34.1% year-over-year and represented 49.5% of total revenue compared to 43.6% of total revenue in the third quarter of 2022. SG&A Excluding workers' compensation, an impairment of notes receivable has decreased for two consecutive quarters as a percentage of total revenue from 57.4% in Q1 of 2023 and 54.9% in Q2, as well as in absolute dollars. Workers' compensation has negatively impacted our results for the last few quarters, and in this third quarter, we recorded a $1.5 million expense which is a $2.8 million net increase from the $1.3 million benefit we recorded in Q3 of 2022. Prior periods also benefited from a workers' compensation reserve that we assumed from a 2021 acquisition, but the remaining liability there has remained relatively stable in 2023. Moving forward, we don't expect that liability to impact year-over-year comparisons as meaningfully as in recent quarters. Like we mentioned in the press release, there are a number of factors that have contributed to the increase in our workers' compensation expense, some in our control, some outside of it. On a more macro level, while medical costs have been rising in recent years, workers' compensation insurance rates have actually been declining. When combined with general wage inflation, it seems unlikely that the current relationship between workers' compensation benefits and premiums can be sustained. Also, as we've grown in recent years and added franchisees, specifically to our Snelling offering, the composition of our franchisees' clients and job types have shifted. We are working with our partners in this area to adjust our plan to better reflect our current business mix, as well as the overall market, in order to reduce the impact in the future. However, no meaningful improvement can be expected until the second quarter of next year. SG&A expenses have also grown to support the increased system-wide sales. During Q4 of 2022, we increased our operational footprint with the acquisition of MRI Network in additions to certain areas that support growth in our HigherQuest Direct, Snelling, and other temporary staffing offerings. When we announced the MRI Network acquisition, we said we would be carrying additional costs as we integrated its operations. and that integration was largely complete at the end of the third quarter, and we believe expenses for MRI Network are now in line with its current revenues. SG&A, excluding workers' compensation and impairment of notice receivable, was $4.6 million in this past quarter, a roughly $1 million reduction compared to Q1 of this year, which was the first full quarter after the acquisition. Professional recruiting and staffing has different support needs to our traditional temporary labor staffing, but we expect to be able to leverage what we have today to support future growth. I've said in previous quarters, M&A continues to be a key part of our growth strategy, and opportunities such as our pending acquisition of tech staffing services that we announced last month are part of why we have maintained operating staff levels over the past couple of quarters. TECS 10 offices throughout Northwest and Central Arkansas provide light, industrial, clerical, technical, and professional staffing services and generated over $34 million in revenue for the trailing 12-month period ended September 30th, 2023. TECS operations align well with our Snelling franchise offering and is a good example of our core acquisition strategy to acquire businesses and convert them to franchise operations. So in contrast to MRI network, we have the resources in place and the capacity to support the additional system-wide sales with little to no incremental expenses, thus restoring some of the operating leverage that the company has lost as a result of the current economic environment. With that, I'll pass it along to our CFO, David Burnett, who will provide a closer look at our third quarter results. David?