HireQuest, Inc.

Good afternoon and welcome to the HireQuest Inc. third quarter 2025 earnings conference call. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, John Nesbitt of IMS Investor Relations. John, the floor is yours.

Thank you, Tom. I'd like to welcome everyone to the call. Hosting the call today are HireQuest Chief Executive Officer Rick Hermans and Chief Financial Officer David Hartley. I'd like to take a moment to read the Safe Heart Restatement. 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. These statements include statements regarding the intent, belief, or current expectations of FireQuest 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 and involve risks and uncertainties, including those described by HireQuest's periodic reports filed with the SEC, and the 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. Please go ahead, Rick.

Good afternoon, and thank you for joining our call today. As you can see from our third quarter results, the staffing market is much the same as it's been for the past 10 quarters now in terms of staffing demand and broader market sentiment. With that said, I'm pleased to report that we delivered another quarter of profitability highlighted by net income of $2.3 million, or 16 cents per share, and we continue to keep our expenses in check despite market uncertainty. Our results in this quarter underscore the flexibility and strength of our franchise model, which has consistently enabled us to remain profitable in soft markets when many others in our industry have struggled. Over the history of HireQuest, our model has proven to perform well and importantly be profitable in all cycles. Since its inception over 20 years ago, HireQuest has been profitable each year through all of the economic downturns and consistently provided valuable operational and financial support to our franchisees. Over the long term, we are confident that this is a winning formula for shareholders. The overall staffing market has provided some mixed signals throughout 2025, which has been impacted by a variety of macroeconomic factors, including tariffs, immigration policies, and impending interest rate cuts. Our temp staffing and day labor offerings are outperforming permanent placement and executive search, which can be less predictable by nature. While demand for temp and day labor staffing can fluctuate based on locations and seasonality, our franchisees have a keen understanding of the market, and with our support and resources, they are able to provide the very best in temporary and day labor staffing services. This dependability and service quality is what keeps our customers coming back to HireQuest in the many geographies that we operate in throughout the United States. Snelling, our nationwide temporary and direct hiring recruiting service, performed well in the third quarter relative to our other offerings, with some of these franchisees scoring big wins, indicating at least a slight increase in demand for longer term staffing in the light industrial and administrative fields. Permanent placement and executive search continues to lag, which has been the case for well over a year now, as many of you know. In addition to macro uncertainties that have been amplified by tariffs and other uncertainties, the MRI network mostly saw, one of the biggest problems was several MRI network franchisees elected to not renew their franchise agreement. over the last few quarters, which has negatively impacted year-over-year comparisons. While this is unfortunate, our current MRI network franchisees saw shrinking declines in their PERM placement business over the quarter, which is positive. I do want to emphasize that MRI franchises operate differently from the traditional franchise model that you see in our HireQuest Direct or Snelling offices. Our MRI offices are more of a network of somewhat related recruiting firms. In fact, many of them have their own names instead of a tight network of offices that share the same name, brand, and operating standards like HireQuest Direct, for example. In other words, these are essentially independent recruiting offices operating under the MRI umbrella, making franchisee retention less of a sure thing than our traditional model, especially in a down market. As always, M&A remains a key part of our growth strategy. There are several opportunities that we are looking at that could be immediately accretive to the higher quest model, and we're keeping our ears close to the ground for any new deals. This is an especially interesting time for deals given the status of the market, where smaller firms or long-term owners eyeing retirement may be planning their exit strategies. We're constantly scanning for new opportunities, and we're well-equipped with a proven strategy that's helped us to close and successfully implement numerous acquisitions over the lifespan of the company. With that said, I'll now turn over the call to David to provide a closer look at our third quarter financial results. David?

Thank you, Rick, and good afternoon, everyone. Appreciate you all joining us today. I'll now provide a summary of our third quarter results. Total revenue was $8.5 million compared with revenue of $9.4 million in the prior year, or a decrease of 9.8%. 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 charge to our franchisees, as well as other miscellaneous revenue. Franchise royalties were $8.1 million, compared to $9 million for the same quarter last year. And our service revenue for the quarter was $387,000 compared to $428,000 last year. Underlying these franchise royalties are system-wide sales, which are not a 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 in the third quarter were $133.6 million compared with $148.6 million last year. Sequentially, system-wide sales increased about 6.1% this year over Q2, which was favorable compared to last year when the increase was only 1.7%. The third quarter is typically our best sales period for HireQuest Direct and, to a lesser extent, Snelling. And this year, both offerings saw double-digit sequential growth compared to only mid-single digits last year. Selling general and administrative expenses in the third quarter were $5.1 million compared to $5.4 million in the third quarter of 2024. I'd also like to point out that we recognized a workers' compensation benefit in the third quarter of just under $100,000. compared to Q3 of last year when we had a net expense of $500,000. We are pleased with the results from the changes we've implemented to our work comp program, but just so you guys don't get the wrong idea about the other expenses, I think it would be helpful to break down SG&A just a bit more. For SG&A, which excludes the impact of net workers' comp insurance, MRI ad fund-related expenses, and any other non-recurring operating expenses was $4.6 million for the quarter, which is flat with last year. We provide a table in the press release issued earlier this afternoon with a detailed reconciliation of core SG&A to SG&A, as well as tables for the non-GAAP profitability metrics, net income to adjusted net income, and net income to adjusted EBITDA that I'm going to talk about shortly. Our net income after tax this quarter was $2.3 million or $0.16 per diluted share compared to a net loss of $2.2 million or a loss of $0.16 per diluted share last year. Adjusted net income for this quarter was $3.4 million or $0.24 per diluted share compared to last year when it was $2.8 million or $0.20 per diluted share. Adjusted EBITDA was $4.7 million compared to $4.9 million last year, and our adjusted EBITDA margin this quarter rose to 55 percent from 52 percent last year. For both adjusted net income and adjusted EBITDA, a large component of the favorable year-over-year results this quarter can be attributed to our controlling of network comp expense, And while there have been times over the past few years where it would have been nice to be able to include it as an adjustment, we're pleased that the changes we've implemented in recent years are moving us in the right direction. Moving on to the balance sheet, our total assets as of September 30, 2025, were $94.9 million compared to $94 million at December 31, 2024. Current assets included $1.1 million in cash and $46.9 million of net accounts receivable. Well, current assets at 2024 year end included $2.2 million of cash and $42.3 million of net accounts receivable. Working capital was $31.5 million as of September 30 compared with $25.1 million at 2024 year end. Current liabilities were 42% of current assets as of September 30 versus 49% at 12-31-2024. We had a $2.2 million draw on our credit facility as of September 30, 2025, and that gives us about $42.5 million in availability, assuming continued covenant compliance. So that puts our net debt at the end of this quarter at around $1.1 million, which is down about a million from the end of Q2 and down about $11 million compared to 9-30-2024. So as we stand today, we have a good amount of flexibility and room for short-term working capital needs, as well as the capacity to capitalize on potential acquisitions. We've paid a regular quarterly dividend since the third quarter of 2020. Most recently, we paid a $0.06 per common share dividend on September 15th. 2025 to shareholders of record as of September 1st. 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, David. As always, I'd like to thank our employees and franchisees for their hard work and commitment, and we look forward to speaking with you again when we report our year-end results in March. With that, we can now open the line to questions. Thanks.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you wish to join the queue to ask a question at this time, please press star 1 on your telephone keypad. Once again, you may press star 1 at this time if you wish to join the queue to ask a question. And we do ask if listening on speakerphone today that you pick up your handset while asking your question to provide optimal sound quality. Once again, that will be star one to join Q's ask a question at this time. Please hold a moment while we poll for questions. And the first question today is coming from Kevin Steinke from Barrington. Kevin, your line is live. Please go ahead. Great. Thank you.

I wanted to start out by asking about the day labor business. It sounds like a little more optimism around that business this quarter. I think on the second quarter call, you talked about some of the softness in the manufacturing environment impacting that business. I'm just wondering if there was a meaningful improvement and trend in that business that you saw in the third quarter compared to the second quarter. Kevin, thanks for the question.

Good to talk to you. I don't know if I would go as far as it has been stabilizing, I think is the best way of putting it. And it's been generally a reasonable market for the on-demand labor in many markets. We have a couple that are still a bit more troublesome and typically are related to one or two companies. clients that have either stopped using temporary staffing or there's just not the same volume that's there. So anyway, that's a muddled way of saying we're approaching the bottom, we think. But I mean, we were still down a bit overall, obviously, from where we wanted to be. But again, there is room for optimism. And I would say the other part is in the fourth quarter, we've had, obviously we're, we're what we're, um, we're five weeks in and of the five weeks in half of those weeks, we beat our prior year, you know, year over year comparisons for the Snelling and higher quest direct division. And, you know, the other couple of weeks we've been down, but again, So there's room for optimism that we've hit that bottom.

Okay, good. And then you called out there some big wins for the Snelling franchisees in the quarter. I mean, should we think about those as competitive takeaways or, I don't know, again, a sign of, I guess, as you said, at least some stabilization or small improvement in the market.

So I think it's obviously large, the, the, the large wins are more just the result of, you know, exceptional franchisees earning more business. That said, even throughout it's in most markets, it's been, it's, it's been better. And so, you know, Snelling in particular performed pretty well. Now, again, obviously, large accounts are great when you get them, and they're terrible when you lose them. But this past quarter, we've been fortunate in that, you know, picking up a couple more than what we lost. And so, you know, again, but it's more, as you said, though, it's more competitive wins than it is, you know, overall improvements. But again, that said, it's pretty stable right now. It seems, you know, it feels pretty stable right now. And so I say feels. I point back to the, you know, where we are so far in the fourth quarter with a couple of weeks exceeding the prior, you know, the prior year period, similar period.

Okay, got it. And in the discussion about MRI, you know, you had talked about some non-renewal of franchisee agreements. Were there any meaningful non-renewals specific to the third quarter, or were you kind of talking about quarters previous to the third quarter?

Yeah, and I think we, I don't recall which quarter we addressed it, but there were a couple of, especially in the first quarter, there were a couple of good-sized departures. And so we're obviously seeing those in the comparisons now. And what I would say, what is a positive sign is during the quarter, same sort of active ongoing MRI franchisees by the end of the quarter were starting to run flat. almost flat anyway, with the prior year similar period. So again, while the active offices were still declining, like I said, that leveled out by the end of the quarter, whereas most of the decline came from those closed or basically people who had left the network. Now, look, I'm not going to sugarcoat it. People losing the network, you know, leaving the network is not good for us. But, like I said, from a sentiment of where the market stands, you know, it again indicates that the market seems to have bottomed out or is certainly stabilized.

Okay. Yeah, I understood. Maybe just a couple more. I mean, you mentioned – looking, you're looking at several, uh, accretive M&A opportunities, um, just kind of wondering what the pipeline looks like in this market environment. Um, you know, has it, has it picked up a bit given, uh, you know, maybe some of the stress on, you know, some of your smaller competitors?

It's been surprisingly stable. Um, we're obviously always in the market to buy competitors. And there are always competitors that are available. I would have thought there would have been a bit more opportunities than maybe what there are, but there's plenty. So don't read that the wrong way. So, you know, there's certainly plenty. I think part of it, we tend to it's towards this time of the year when we start seeing more activity anyway. People try to get through, you know, get through the year so that they have full year results to, you know, thanks that they can package it when they go to sell it. Whereas a lot of people are, you know, they're not going to optimize their, their exit multiple if they're working off of interim, you know, off of interim numbers. So I would expect a bit more opportunities over the next, let's say, three to six months, but there's plenty as they, there are plenty of them as they are right now. I'd like to think that they would be better, but again, they are better than what they were certainly three years ago, which just reflects the state of the market.

Okay, understood. And then lastly, I just wanted to ask about tighter immigration enforcement and you had talked on the last quarter's call about that driving some new business for you given less competition from undocumented workers or companies that use undocumented workers. Has that trend continued or Is that kind of helping your pipeline still?

So here's the thing. There are absolutely a couple of decent-sized business wins that we can point directly towards immigration enforcement without question. I have to be honest with you. The reports that I've seen state that more than 2 million people have self-deported. I really would have expected a much larger uptick in our demand if that were the case. So I'll admit, you know, I don't know how they calculated, you know, the 2 million people self-deported. If they did, you know, like I said, it just seems like our demand would be stronger. So I'm a bit skeptical. I'll admit I'm skeptical about that. That said, a lot of this is cumulative as well. You know, we're in a situation where, you know, the number of people coming in has been at a very low point now for, you know, 11 months, 10 months. And, you know, and so part of that takes a while for it to roll through. I think that what's going to be important in combination with immigration enforcement is once some of these, let's say, reshored facilities actually start employing non-construction people, meaning, you know, basically start staffing up the factories themselves, that will also hopefully push up demand. And so, when you read, okay, Japan has agreed to invest $500 billion in American plants. Well, it doesn't mean that you snap your fingers and those plants are built and all of a sudden there's 150, 200,000 new jobs. So those are going to take a while to fit in. But again, if immigration remains at such a low point and that continues on, It's a very favorable, you know, it should be a very favorable trend for us. Or, you know, it should create a big tailwind for us.

Okay. Great. Well, thanks for the insight. I will turn it back over.

Thank you, Kevin. Thank you.

And as a reminder, if you wish to join the queue to ask a question at this time, you may press star 1. on your keypads. Once again, you may press star one if you wish to ask a question at this time. And there are no further questions in queue. I would now like to hand the floor back to management for closing remarks.

I want to thank everybody for joining us today for our earnings call. Again, I want to thank our employees, our franchisees, and our investors. It's been a challenging time really 11 quarters now. But what has hopefully been demonstrated through all of this is we remain profitable despite the challenging environment. And when you look at our peer group, there are, you know, it is covered with red ink, whereas we've remained profitable, which is one of the main attractions of our model. And so, and I think that this quarter is a great demonstration of that, that despite weaker demand than what we would prefer, we remain solidly profitable and with good adjusted EBITDA, despite the relatively challenging circumstances. And so, again, thank you for joining us, and we look forward to talking to you again in March. Thank you.

Thank you. This does conclude today's conference call. You may disconnect at this time. Thank you once again for your participation and have a wonderful day.