HireQuest, Inc. (NASDAQ:HQI) Q1 2023 Earnings Call Transcript May 11, 2023

HireQuest, Inc. misses on earnings expectations. Reported EPS is $0.17 EPS, expectations were $0.27.

Operator: Good afternoon everybody. And welcome to the HireQuest Incorporated First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to your host, John Nesbett, Investor Relations. John, over to you.

John Nesbett: Thank you. And good afternoon. I would like to welcome everyone to the call. Hosting the call today are HireQuest’s Chief Executive Officer, Rick Hermanns; and Chief Financial Officer, David Burnett. Let’s 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, 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: Thank you for joining us for today’s call. To begin with I will provide an overview of the financial and strategic highlights for the quarter. And then David will share more details surrounding our first quarter results. Our first quarter results were driven by strong performance at our organic locations in the integration of strategic, accretive acquisitions into our business. Total revenue grew 40% to $9.9 million with franchise royalties increasing 41.8% to $9.3 million. System-wide sales for the quarter increased to $153.5 million compared to $101 million in the first quarter of 2022. And net income from continuing operations increased 372.1% to $2.3 million or $0.17 per diluted share. Last quarter, we announced that we had completed our acquisition of MRI Network, a top permanent placement and executive search firm and professional staffing network based in the United States and the third largest executive recruiting network in the world.

This was a transformative acquisition for us, adding over 200 franchise offices both in the United States and international to our staffing network. Excuse me. Our acquisition of MRI Network is a perfect example of our broader M&A strategy. We are intently focused on identifying, evaluating, and executing accretive acquisitions that we believe will further enhance the organic growth of our business. MRI Network allows us to add immediate scale in a brand new service focused on the executive search and professional staffing market. And in a way that supports our existing HireQuest Direct and Snelling offerings. As is the case with any acquisition we also encourage certain expenses related to our purchase of MRI Network that are reflected in this quarter’s results, particularly in our SG&A.

These are near term, one-off expenses that we planned for as part of the acquisition and we expect them to have – expect them largely phased out by the end of the third quarter. We will note here that certain expenses related to MRI have been a bit more difficult to eliminate as quickly as we would have wished. That said, we are pleased with the progress we’ve made this quarter, particularly our ability to efficiently integrate large acquisitions into our business to have a near term – near, immediate positive impact on our results. This is especially true in the current economic environment where many staffing companies have been reporting declining revenues year-over-year for their U.S. and North American businesses. With the first quarter now closed and a little more visibility into 2023, I’m confident that we are well positioned to continue driving our growth strategy to deliver consistent, improved results as we move through the balance of the year.

With that, I will pass it along to our CFO, David Burnett, who will provide a closer look at our first quarter results. David?

David Burnett: Thank you, Rick. Good afternoon everyone. Thanks for joining us today. Expanding on some of the numbers Rick mentioned, let’s start with total revenue, which for the first quarter of 2023 was $9.9 million compared to $7.0 million for the same quarter last year, an increase of 40%. 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 and other miscellaneous revenue. On occasion, we will report a third component, company-owned revenue, which would be related to company-owned locations that are not marketed as a potential franchise and are managed by us instead of a franchisee.

At March 31, 2023, we owned one location but it did not meet this criteria and instead is classified as held for sale and reported below the line as discontinued operations. Those operations are not included in the revenue I just mentioned, but it is important to keep in mind that we are still benefiting from this location and once it is franchised out, we will retain a royalty stream. For continuing operations, franchise royalties for the quarter were $9.3 million compared to $6.6 million for the same quarter last year, an increase of 41.8%. Almost all of the increase in royalties relates to acquisitions. Although organic sales grew modestly, we are proud to be able to maintain organic sales in an uncertain and declining market. Underlying the growth in royalties are system-wide sales, which for the quarter were $153.5 million compared to $101 million for the same period in 2022.

System-wide sales reflect sales at all offices including those classified as discontinued. Similar to the growth in royalties, growth in system-wide sales is primarily related to acquisitions completed in 2022, but unlike many of our competitors, we did not lose organic sales year-over-year. Service revenue, which is generated from interest charged to our franchisees on overdue accounts receivable, service fees and other miscellaneous revenues such as license fees was $534,000 for the quarter compared to $468,000 for the same quarter a year ago. Changes in service revenue are generally related to growth in system-wide sales and the resulting increase in accounts receivable. Selling, general and administrative expenses for the quarter were $5.8 million compared to $2.7 million in the prior year period that is an increase of 120.1%.

The increase was primarily driven by two large items. First, we had a tough comparable for our workers’ compensation expense. For the first quarter in 2023 workers’ compensation expense was approximately $185,000 compared to a $613,000 benefit in network of compensation expense in the first quarter of 2022. That is a $798,000 swing in worker’s compensation expense from Q1 2022 to Q1 2023. This benefit in the prior year included a $365,000 reductions related to the Snelling workers’ compensation reserves assumed at the time of acquisition that have been winding down. There was no such adjustment in 2023. Generally, workers’ compensation expense will fluctuate quarter-to-quarter based on the mix of worker classifications, the level of payroll and claims resolution both recent and historical.

The predominant item driving the increase in SG&A is compensation and benefits. Compensation related expenses have always been the largest component of SG&A. There was a $1.6 million increase in compensation related expenses from Q1 2022 to Q1 2023. When we acquired MRINetwork in December 2022, we took on over 30 new corporate employees. During the first quarter we have absorbed significant costs as we integrate MRINetwork into our operations. We are handling the integration in a disciplined manner in the hopes of creating an annuity like payback from cost savings for the foreseeable future. Because high costs often creep back in over the near term, it is critical for us to be patient and secure cost synergies that will hold for several years.

In addition to increased salaries and benefits, we have also absorbed other MRINetwork SG&A expenses including marketing, IT, insurance, professional fees, and the like. As we communicated in our last earnings call we expect to carry certain transition items and associated expenses through at least the first half of this year and into the third quarter. The increase in SG&A can be felt in income from operations, which is total revenue less SG&A, depreciation and amortization. Income from operations was $3.3 million in the first three months of 2023 versus $3.9 million in the first three months of 2022, a decrease of 14.7%. Net income includes income from operations adjusted for miscellaneous items, interest, income taxes and discontinued operations.

Interest in financing expense included a $318,000 loss on debt extinguishment related to the refinance of our line of credit. This was largely offset by a $340,000 gain on the conversion of our Dental Power business into a franchise, which is reflected net of tax in discontinued operations. Net income for the first quarter of 2022 included $3.6 million of losses resulting from the conversion of acquired operations into franchises. All in net income for the quarter was $2.6 million or $0.19 per diluted share compared to net income of $603,000 or $0.04 per diluted share in the first quarter last year. Adjusted EBITDA in the first quarter of 2023 was $4.6 million compared to $5.3 million in the first quarter of 2022. 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-Q. Moving on now to the balance sheet. Our current assets at March 31, 2023 were $59.6 million compared to $51.9 million at December 31, 2022. Current assets as of March 31st included $8.2 million of cash and 41, excuse me, $48.1 million of accounts receivable. While current assets at December 31, 2023 included $3 million of cash and $45.3 million of accounts receivable. The elevated cash balance reflects some cash management inefficiencies as we change banks from Truist to Bank of America. Current assets exceeded current liabilities by $14.7 million at March 31 versus year-end when working capital was $15.2 million. The decrease in working capital reflects a larger balance on the credit line following the acquisition of MRINetwork.

At year end we had 21.2, I’m sorry, at quarter end we had $21.2 million drawn on our credit facility and another $19.1 million in availability, assuming continued covenant compliance. As I’ve referenced a couple times in February of 2023, we replaced a line of credit facility at Truist Bank, plus a term loan we had at Truist Bank with a new $50 million line of credit from Bank of America. We believe that this new facility provides us with the flexibility and room for short-term working capital needs, as well as the capacity to capitalize on potential future acquisitions. We have paid a regular quarterly dividend since the third quarter of 2020. Continuing that pattern, we paid a $0.06 per common share dividend on March 15, 2023 to shareholders of record as of March 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.

Rick Hermanns: Thanks David. As I said before, I am confident in HireQuest’s ability to drive sustainable growth across our business and generate positive operational results in 2023 and beyond. As I – as always, I would like to extend my sincerest thanks to our team, our franchisees, their workers for their excellent work and dedication. I’m very encouraged by the progress that we’ve made in expanding our franchising network and offerings to address a broad spectrum of staffing needs, and I look forward to leveraging our network to drive growth and value for our shareholders. With that we’ll now open the line for questions. Thank you.

Q&A Session

Operator: Thank you very much. [Operator Instructions] Okay. Your first question is coming from Kevin Steinke of Barrington. Kevin, your line is live.

Operator: Thank you. Thank you very much. Your next question is coming from Matthew Hayes from D.A. Davidson. Matthew, your line is life.

Operator: Thank you very much. Your next question is coming from Mike Albanese of EF Hutton. Mike, your line is live.

Operator: Thank you very much. Your next question is coming from Aaron Edelheit of Mindset Capital. Aaron, your line is live.

Operator: Thank you very much. There appears to be no further questions in the queue. I’m going to hand back over to management for any closing remarks.

Rick Hermanns: Well, I want to thank everybody for listening in. I hope that you will agree that the quarter was momentous in that again, we took on an entity that represented almost 50% of what HireQuest was previously, and that there are a lot of opportunities out there that we are working towards. Admittedly little – the opportunities are in some ways bigger and therefore the investments are bigger. But anyway, I do want to thank you for joining us. And look forward to continuing the success as we go through 2023. Thank you very much.

Operator: Thank you, everybody. This does conclude today’s conference. You may disconnect your phone lines at this time and have a wonderful rest of the day. Thank you for your participation.