HireQuest, Inc.

Greetings. Welcome to the HireQuest, Inc. 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 Nesbitt of IMS Investor Relations. You may begin.

Thank you, Operator. I'd like to welcome everyone to the call. Hosting the call today are HireQuest 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. 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 dependent 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 involves risks and uncertainties, including those described in HireQuest 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 change conditions. I would now like to turn the call over to the CEO of HireQuest, Rick Hermans. Go ahead, Rick.

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 has 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.

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 charge 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. Underlined 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 charge for a 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 general 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 16 cents per diluted share. compared to a net income of $15,000 or zero earnings per share in the fourth quarter of 2023. Net income for the full year is $3.7 million or 26 cents per diluted share compared with net income of $6.1 million or 45 cents 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 19 cents per diluted share compared to adjusted net income of $2.5 million or 18 cents per diluted share in the fourth quarter of 2023. Adjusted net income for the full year was $9.9 million, or 71 cents per diluted share, compared to adjusted net income of $9.9 million, or 72 cents 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 31, 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 31, 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 31st, 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 six cent per common share dividend on March 17th, 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.

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.

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 one if you have a question or comment.

Our first question is from Kevin Stanky with Barrington Research.

Please proceed.

Thanks and good afternoon. Just wanted to start out by talking a little bit more about the demand environment. You know, going back to your third quarter 2024 conference call, of course that's, you know, going back to the first half of November, just a couple days after the election. At that time, it seemed like, you know, there was a little more optimism around an improving demand environment for you and the industry. So, you know, if you could talk about maybe what, if anything, has changed since that time on the demand front that, you know, is maybe making the demand outlook a little more muted or cautious here.

Yeah. Thanks, Kevin. I mean, at that time, you know, sort of the beginning of the fourth quarter, our comparative numbers were really, were running pretty good. And then they, they really started to soften in December. And, you know, the other part is, and it's, it was alluded to in my remarks as well as this seems like a silly thing. And it's, you know, it's, But having Christmas and New Year's on Wednesdays probably cost us the equivalent of at least two days worth of, you know, worth of sales. And, you know, so that drove our comparisons down a bit. So, you know, I think that the, you know, between the tariff, you know, the tariff talk, you know, isn't really helping. you know, isn't helping demand much. And, you know, and so, like I said, demand kind of softened up. I will say that, you know, the first quarter hasn't, there hasn't really been much of an improvement from December. Although even just looking, you know, looking at the last few weeks, it's, you know, it started to, you know, improve significantly. Again, but it's still, it's still a tricky environment for us. It's, it's kind of like a, you know, it's like three steps forward, three steps back. And it, you know, we, we hit some good spots and then, you know, and then, you know, and then we hit some bad. So it's, it's very much, you know, of a meh, you know, market. And that's really backed up by, and I know you cover a couple other companies in the staffing industry. It's really pretty common throughout the staffing industry. It's pretty common. 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 am hopeful But, you know, I think that our industry would benefit from a bit more and really, you know, our clients would benefit from a bit more certainty, you know, with respect to, you know, where supply chains and tariffs are going to be.

Okay. Yeah, that's helpful. Appreciate that. And you mentioned making some changes at MRI. Maybe could you

talk through that a little bit more um and you mentioned that you know positioning you for to benefit from uh an upturn you know when that occurs so maybe just a little more color on that sure um so when we bought mri back in the end of 2022 we we tried to keep as many uh departments separate that we could you know from let's say know staffing versus recruiting and so again we were running parallel departments and you know we we had hoped you know that the market would recover a bit and you know 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 higher quest direct we, we basically, we combine those. And so we've taken a couple, you know, we've taken a few steps like that to, to basically drive more, uh, more efficiencies because it, it, um, you know, just given the, the, you know, the, the slowness in demand.

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

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. And so, you know, we expect to continue to be able to find those. We're working on a couple that are larger. You know, it's just, but we're always, again, I don't want you to read more into that than what there really is, but 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. 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. And so a branch, it's not the same as saying, particularly for the franchisee, two different markets billing a million and a half dollars doesn't equal the same profit as one market billing three million. 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, um, long and short of it is, is that we are, we are out there. We're engaged as we typically are at any given time with, you know, three or four companies.

Okay. Yeah, that's helpful. Appreciate it. And just lastly 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, you know, 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, you know, maybe beyond that?

So if you go back pre-2020, it's really 2021 and before, workers' comp was always, you know, a positive, you know, had a positive effect on our income. And then it started turning, you know, it started turning decidedly negative, you know, in, you know, in 23 in particular. So as we've described before, there are really, there are a couple of factors in it. One was, And again, we had a really, really bad experience, you know, workers' comp experience in 22-23 policy year was bad. And so part of that had to work its way through. And, you know, and so that was where 23, of course, the numbers were really high. 24, we were still absorbing certain loss, you know, certain losses from that. And it's part of the reason why, though, we're pretty confident about 25 is those numbers those claims have mostly closed now and we're, you know, we're moving on from that. Whereas our 23, 24 policy year was sort of a normal year. And so again, that's, so it's pretty predictable, you know, it should be pretty predictable where we're at. And our 24, 25 results were, were, were better. You know, we're actually, we're actually good. And so I say all of that is, is that You know, part of the reason for our optimism is just simply just based on the data, you know, the claims data. And that's consistent throughout the insurance industry, by the way. But, you know, if you look at, you know, 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, is our, you know, our, you know, our rates are somewhat higher now as well. Our rates were inadequate in, you know, 22 and 23. And so that's part of what, and really in 24, 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. So, you know, are we going to get all the way to where we break even on our workers' comp? Maybe, you know, but we do think it'll still be significantly better than 24.

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

Once again, if you have a question or a comment, please indicate so by pressing star 1 on your touchtone phone. The next question comes from Egan Cox with VA Davidson. Please proceed.

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?

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

That makes sense. And then 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? Like how much more could sales fall and how much SG&A could you cut to offset that, I guess?

Well, that's – you know, that – cutting it we 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 you know 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, is that, you know, we always have abilities to drop, you know, to drop our costs significantly, which is why we retained, you know, we retained profitability both in the second quarter of 2020 or even going back to like 2008, 2009. You know, 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. 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 gonna go up 40%. It probably wouldn't even go up at all. So my point is 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, you know, a year and a half, two and a half years down, you know, down the down the road. And the same thing, we've been spending more money on marketing, not, you know, not sales, but actually marketing. Again, those are easy cuts, if we really feel that we, you know, we need to do them. And at this point, we're not, you know, as much as the mark is 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, you know, 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.

Thank you. Okay, we have no further questions in the queue.

I'd like to turn the floor back to management for any closing remarks.

I want to thank everybody for joining us on this call. And, you know, and again, appreciate your following the company or investing in the company. I want to thank our employees, our franchisees. And I would, you know, looking forward to 2025, I do believe that You know, 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.

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