Greetings, and welcome to the HireQuest Inc. Fourth Quarter and Year-End 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I would now like to turn the conference over to your host, Jennifer Belodeau. You may begin.

Thank you, Kelly. I would like to welcome everybody to the call. Hosting the call today are HireQuest's CEO, Rick Hermanns; and CFO, David Burnett. Let me 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 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 changed conditions. Let me now turn the call over to the CEO of HireQuest, Rick Hermanns. Go ahead, Rick.

Thank you for joining us for today's call. I will start by providing an overview of our financial and strategic highlights for the quarter, after which David will share more details about our fourth quarter results. We achieved strong top line growth in the fourth quarter, primarily due to a 26.4% increase in franchise royalties, totaling $7.7 million. Total revenue rose 23.1% to $8 million. Income from operations grew 68.4% to $2.8 million, while net income from continuing operations increased 21% to $2.6 million or $0.19 per basic and diluted share. Adjusted EBITDA for the fourth quarter reached $4.4 million, compared to $3.4 million in the fourth quarter of 2021, demonstrating our capacity to maintain profitability across our business. For the full year, franchise royalties increased 35.6% to $28.9 million from $21.3 million in 2021. Income from operations saw a substantial increase of 109.6% to $16 million, up from $7.7 million in 2021. Our net income from continuing operations saw a slight increase to $12 million or $0.87 per basic and diluted share compared to $11.8 million or $0.88 per basic and $0.87 per diluted share in 2021, largely due to acquisition costs incurred throughout 2022. However, after adjusting for these acquisition-related expenses and other non-cash costs we expect to recover as we integrate our acquisitions, adjusted EBITDA actually rose by 78.9% to $22 million compared to $12.3 million in 2021. We believe we are well positioned to maintain profitability while pursuing a strategy of accretive acquisitions that support the organic growth of our business. Regarding our acquisition strategy, in the fourth quarter, we announced and completed our acquisition of certain assets from MRI Network, the third largest recruiting network globally, adding over 200 offices to our franchise network in the U.S. and internationally. MRI provides us with immediate scale in the executive recruiting and professional staffing markets, complementing our current HireQuest direct and selling offerings. We have made significant progress in integrating MRI into our operations, although there will be some transition items and associated expenses carried into the first half of this year. Additionally, we successfully expanded our franchise base through three other acquisitions during 2021. These transactions typically involve acquiring businesses with one or more offices and reselling them as franchises. As noted on previous calls, we have become efficient at executing and integrating such acquisitions and expect them to constitute a majority of our future transactions. We are very satisfied with our fourth quarter and annual results and are encouraged by our progress both organically and through our acquisition strategy throughout fiscal 2022. We are focused on identifying accretive opportunities in the market to continue expanding our franchise network and brand offerings while complementing our organic growth. As we progress through 2023, we believe we are positioned for continued growth amidst the current uncertain economic environment, where many businesses may opt for temporary staffing solutions rather than permanent hires. Additionally, this uncertainty could lead to consolidation in our industry, presenting acquisition opportunities. While we recognize the challenges of a recession, we will remain vigilant as the year progresses. I'll now turn the call over to our CFO, David Burnett, who will provide a detailed look at our fourth quarter and full year results. David?

Thank you, Rick and good afternoon, everyone. Thanks for joining us today. At the risk of repeating some of the numbers Rick mentioned, let's start with total revenue which for the fourth quarter of 2022 was $8 million compared to $6.5 million for the same quarter in 2021, an increase of 23.1%. Total revenue for all of 2022 was $31 million, an increase of 37.4% over 2021 when total revenue was $22.5 million. Our total revenue is made up of two components: franchise royalties our primary source of revenue which makes up roughly 95% of our total revenue and service revenue which is generated from service fees, interest charged on overdue accounts and other miscellaneous franchise-related revenue. On occasion, we will report a third component, company-owned revenue, which would be related to operations that are not marketed as a potential franchise and are managed by us instead of a franchisee. At December 31, 2022 we operated two such locations, but they did not meet this criteria and instead were classified as held for sale and reported below the line as discontinued operations. Even though we previously have reported one of these as company-owned revenue, we reclassified it in the fourth quarter and retroactively as we began the process of franchising it out. I won't refer to those operations specifically and they are not included in the revenue I just mentioned. But it is important to keep in mind that we are still benefiting from them. And once they are franchised out, we will retain the royalty stream. For continuing operations, franchise royalties for the quarter were $7.7 million compared to $6.1 million for the fourth quarter of 2021, an increase of 26.4%. For the full year 2022, royalties were $28.9 million compared to $21.3 million in the full year 2021, an increase of 35.6%. Underlying the growth in royalties are system-wide sales, which for the quarter were $127.9 million compared to $106.8 million for the same period in 2021. System-wide sales for the full year 2022 were $472.2 million compared to $354.5 million in the full year 2021, an increase of 33.2% primarily related to acquisitions completed in 2022 and organic growth related to the rebound from the economic downturn lingering in 2021 due to COVID-19. Selling, general and administrative expenses for the quarter were $4.7 million compared to $4.4 million in the fourth quarter of 2021. For the year, SG&A decreased from $13.3 million in 2021 to $12.9 million in 2022. The decrease was primarily driven by a $2 million benefit in net workers' compensation, $1.2 million of which is attributable to the Snelling workers' compensation reserves that were assumed at the time of the acquisition and are currently in runoff mode. This decrease was offset by a net increase in compensation expense of approximately $800,000, which includes additional headcount to keep pace with our growth. Compensation-related expenses remain by far the largest component of SG&A and most of the costs we took on from the MRI acquisition are related to human capital. Income from operations which is total revenue less SG&A, depreciation and amortization was $16 million in 2022 versus $7.7 million in 2021, an increase of 109.6%. Most of the $8.5 million increase in total revenue fell straight to income from operations, reflecting our ability to leverage incremental revenue without rapid increases in core operating expenses. Income tax expense for the quarter was approximately $1.9 million, an effective tax rate of 13.7%. This was over double the effective tax rate for 2021, which was 5.1%. The lower rate for 2021 was the result of a large non-taxable bargain purchase gain recognized as part of the Snelling acquisition. Our normal effective tax rate is expected to be in the teens and will fluctuate based on significant permanent items like the Work Opportunity Tax Credit. All in net income for the quarter was $2.7 million or $0.20 per diluted share compared to net income of $2.2 million, or $0.16 per diluted share in the fourth quarter last year. For the year, net income was $12.5 million or $0.91 per diluted share compared to net income of $11.9 million in 2021 or $0.87 per diluted share. Adjusted EBITDA in the fourth quarter of 2022 was $4.4 million compared to $3.4 million in the fourth quarter of 2021. And as Rick highlighted earlier, our adjusted EBITDA for the year was $22 million compared to $12.3 million last year. We believe adjusted EBITDA is a relevant metric for us going forward due to the size of non-cash operating expenses running through our P&L. A detailed reconciliation of adjusted EBITDA to net income will be provided in our 10-K. Moving on now to the balance sheet. Our current assets at December 31, 2022 were $51.9 million compared to $42 million at December 31, 2021. Current assets as of December 31, included $3 million of cash, and $45.3 million of accounts receivable while current assets at December 31, 2021 included $1.3 million of cash and $38.2 million of accounts receivable. Current assets exceeded current liabilities by $15.2 million at December 31 versus a year earlier when working capital was $20.5 million. The decrease in working capital reflects a larger balance on the credit line, following the acquisition of the MRI network assets late in the fourth quarter. At year-end, we had $12.5 million drawn on our credit facility and another $12.2 million in availability after accounting for certain reserves and letters of credit. In February 2023, we replaced this Truist Bank facility, plus a term loan we had at Truist Bank with a new $50 million credit line from Bank of America. We believe this new facility provides us with the flexibility and room for both organic growth, 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 yesterday, we paid a $0.06 per common share dividend to shareholders of record as of March 1. We expect to continue to pay a dividend each quarter subject to the Board's discretion.

Thanks, David. Our fourth quarter and full year results demonstrate our ability to drive sustainable growth, across our business both organically and through acquisitions that broaden the scope of our franchised operations and expand our geographic presence. As always, I would like to take the time to acknowledge our team, our franchisees, and their workers for their continued excellence and dedication to the success of our business. This is an exciting time for our business, and we believe that we – that with our significantly expanded franchise network and dynamic offerings, for a variety of staffing and other talent-related needs, we are well positioned to continue driving improved results, and value for our shareholders as we move through 2023. With that, we can now open the line to questions. Thank you.

Certainly. The floor is now open for questions. Your first question is coming from Mike Baker with D.A. Davidson. Please pose your question. Your line is live.

Okay. Thanks. Lot I could ask, but I guess I'll ask this. You guys are in a pretty interesting and unique position to have an opinion on the job market, which is obviously a huge topic right now and wages and all those kinds of things. So I guess, I'll just ask you a bigger picture, what's your view of the job market right here of where wages are going? Is it easier or harder to find temporary staffing? And how does your business typically react in the recession? And would that be different this time, around just because of the diversification that you guys now have through your acquisitions? Thanks.

Thank you, Mike. First, I want to point out that there has definitely been a noticeable decrease in demand. The number of job openings has dropped, making it easier to find candidates. However, wages continue to rise, which helps mitigate the impact of reduced demand. It's important to recognize that while the overall demand is slowing down, we are still experiencing very low unemployment rates. This situation feels different from past recessions since there is still a significant shortage of skilled talent. Although I acknowledge the slowdown in demand, in many cases it still exceeds our ability to fulfill it. It would require a significant further decline in demand before we see a substantial effect on our numbers. Thank you for your question.

Sure. As a follow-up to that, I understand that you don't provide forward guidance, and I appreciate that. However, how should we consider your system-wide sales? In the past, we've viewed them as growing at a rate similar to GDP. Is that still a reasonable perspective on system-wide sales?

Let's set aside MRI for a moment, as it creates a new dynamic for us. In our core Snelling and HireQuest Direct, GDP serves as a good indicator of our system-wide sales direction. If we anticipate a recession, it's reasonable to expect that our sales could decline by 2 to 3 times the percentage drop in GDP. Growth doesn't play as significant a role unless we are emerging from a trough. For example, looking back at 2017 and 2018, we had been in a growth phase for roughly five to six years. Therefore, I wouldn't expect a 3% GDP growth to necessarily lead to a 9% increase in our system-wide sales. However, similarly, as we move out of a recession, our growth could also reflect a recovery of what was lost during that time, potentially increasing by 2 to 3 times in the immediate few quarters after the recession. Does that clarify what I'm conveying?

Yes. No, I got it. I'm with you, I’m following you.

Okay. So, that's…

But that is MRI…

Going back to the MRI part mentioned in our updated investor presentation from late December or early January, the system-wide sales, once we factor in MRI, are likely to be much more variable than in the past. MRI has many franchisees that pay significant franchise royalties which aren't necessarily linked to their sales volume. Therefore, it's important to note that system-wide sales may not be as predictive in the future as they have been previously. This difference will definitely be significant. Going forward, we will provide segmented information, and I wanted to clarify this point as well.

Okay. So, using the old math in other words of net income should equal 3% to 4% of systemwide sales, you're saying that that doesn't really hold anymore?

Yes, that's pretty much out the window except for our traditional Snelling and HireQuest Direct offices. The MRI situation is significantly different. As we mentioned in December, we're now focusing more on the percentage of our royalty revenues, which have increased due to the MRI acquisition. In the past, we avoided relying on GAAP revenue because it was relatively small and jumpy, risking a yo-yo effect on margins. The good news is we're now approaching over $40 million in franchise royalties, bringing more stability. Moving forward, our primary focus will be on operating income as a percentage of royalties or revenues, which is more appropriate until MRI settles into a consistent pattern. Comparing it to the past is less meaningful because some franchisees are now paying much lower amounts than we previously expected.

Okay. Okay. Thanks for that help. I will turn it over to someone else.

Your next question is coming from Aaron Edelheit with Mindset Capital. Please pose your question, your line is live.

Hi, Rick, how are you doing?

Good. How are you?

I'm doing well. I wanted to specifically ask about the pipeline. You released an 8-K that was impressive to review regarding the potential impact of MRI on your growth. It seems we will see that effect without certain charges and transitional issues in the first half. I understand it may be inconsistent. However, as a shareholder observing your acquisitions like Snelling and MRI and the growth in cash flow, I'm eager to know if you can continue this trend. What does the pipeline look like? As the economy slows, does that increase the likelihood of further acquisitions, or how should we consider your pipeline?

Thank you for the question. I will break this down into three parts. First, regarding our pipeline, it’s always as full as we want it to be, and we focus on maintaining discipline. However, given the economic uncertainties, we might not be as selective right now due to potential recession risks. A challenging economy doesn't benefit us, but it does create opportunities, especially for smaller companies in the staffing industry that may not be well-capitalized. Therefore, a recession can present more opportunities at favorable prices, which we often find to be the silver lining. Historically, our best deals have come from distressed companies. As Warren Buffett famously said, it’s better to pay a fair price for a great company than a great price for a fair one. With our franchise model, paying a lower price for a fair company can also work as we can improve management through our franchisees. So, indeed, we see many opportunities during a recession. The second part of my answer relates to our pipeline with MRI. The MRI acquisition provides a solid franchised opportunity, particularly through its contract staffing division, which is essentially high-paid temporary staffing. Additionally, they've been a long-time franchisor for executive search franchises, which we hope to stabilize and enhance as economic conditions permit. What attracted us to MRI was the potential for growth. I want to emphasize that this acquisition was structured so that we don’t rely on any specific events to ensure its success. Nonetheless, there are additional opportunities that emerge from it. We’ve gained over 200 franchisees globally, providing us with a vast network that allows us to introduce them to other services we offer. For instance, we’re incentivizing MRI franchisees to generate leads for our Snelling and HireQuest Direct divisions, offering the same incentives we've always provided. This allows us to grow existing business simply because we now have more opportunities. We’re also pursuing other strategic initiatives internally, but the main takeaway is that we foresee many ways to enhance efficiency within the MRI network, benefitting Snelling, HireQuest, and MRI while creating more opportunities across our major offerings. Greater opportunities for franchisees lead to increased system-wide sales, which means more royalties for HireQuest—a truly beneficial situation for everyone involved. For example, one of our MRI franchisees has a strong connection with a manufacturing facility in Georgia that uses about $2 million a year in temporary staffing. There may already be discussions occurring about this. If we secure this business, the referring MRI franchisee will earn a commission, the Snelling franchisee will gain a valuable client, and we will see additional royalties. This represents the kind of success we expect to achieve, benefiting the entire network, us, and our shareholders.

Okay. What I understand is that the pipeline is still full with plenty of opportunities, and you are maintaining discipline. There could be even more opportunities if conditions weaken, and you're noticing several cross-selling opportunities along with the benefits of MRI cross-selling and encouraging MRI to promote some of your existing offerings. Is that an accurate summary?

No, that's a fair summary.

I would like to discuss your insights on the current state of the economy. Based on what you are observing on the ground and feedback from your franchisees, how do you perceive the situation? Considering the economic slowdown and increased openings, it seems you are facing challenges with labor availability, while at the same time, wage rates are rising. Last year, your system-wide revenue, excluding MRI, was around $470 million. Looking at the present situation, I'm not seeking a prediction about the economy but rather how things appear through the first quarter. Given that you now have better access to labor to fulfill orders, but possibly with fewer orders as wages rise, how do you view these dynamics?

I would say that we are nearly halfway through the first quarter, and currently, the market appears to be flat. It's challenging to determine whether the rise in wages is balancing out a decline in demand. I've also had a discussion this afternoon with a franchisee who has faced a tough first quarter, and his initial point was that the weather has been quite poor. Normally, I avoid citing weather as a factor because it can easily skew perceptions — people often compare current performance to a particularly bad quarter from the previous year that had numerous snowstorms. This makes it easier to frame the narrative positively. However, it is true that the weather has been unfavorable, making it difficult to draw definitive conclusions about the current situation, and I understand that this response may not be very satisfying.

I think that's very helpful, and I appreciate it. When I consider the situation, I want to set aside MRI for a moment. Given that this transition year involves such a significant acquisition, it's likely to be somewhat messy. If possible, it would be beneficial to present our original system-wide revenue alongside additional details for this year in a simplified manner. Regarding the $470 million, if I exclude MRI, I want to ensure that the business model is clear despite the anticipated complexities. I've always thought that the margins on that figure are around 3.5% to 4%, which would imply earnings power of about $1.25 at a 4% margin. Even considering factors like the economy or weather changes from acquiring companies, is this still a reasonable way to assess the normalized earnings potential for what we might call the legacy business or the existing operations?

I do think that that's a reasonable way of looking at it. Perhaps maybe now it's 3.25% to 4% because we've got more amortization than we have historically. So it's possible.

But that amortization really is like…

…maybe that's harder to up at that level just because of the amount of amortization we have. But...

Amortization is not a cash expense, right?

That's correct. Regarding the $470 million, it includes two weeks of MRI, so it isn't a straightforward comparison since you need to account for a specific amount related to MRI. If we consider per ton, let's say it was $450 million. In reality, it's actually $460 million.

Well, you exceeded my number, because I was expecting $443 or so.

So we did that and let's just say it was $460. I would say that it should go up if the economy remains stable, though we understand that many uncertainties exist. Generally, if the economy were stable, it should increase based on when some of our acquisitions happened in 2022. So there should be growth simply from acquisitions, not even accounting for MRI.

Got you. That's really helpful. I'm fascinated by your mention of amortization and the way you break out EBITDA. Normally, looking at adjusted EBITDA can be daunting, but it connects well to your cash flows and what you're building. Now regarding MRI, how do you envision the timeline for its integration? We are clearly expecting a significant revenue increase, but you're also focused on ensuring proper system fixes, branch management, cross-selling, and possibly closing some locations. How do you see this playing out throughout the year? When do you think things will settle down?

I believe that, as stated in the press release regarding the earnings, the first half of the year will still incur costs associated with the transition. There are a few individuals who are essentially holdovers to ensure the integration of our financial systems, which means we can expect additional savings in the future. Additionally, we have some ongoing contracts that will not be renewed. For example, we purchased a specific software that we are not satisfied with, but it will be active until April. Therefore, we are still tied to it for another six weeks. However, it will be removed after that period. By the end of April, or by the end of June, I anticipate that most of the transition costs will align with our expectations.

And so you would expect maybe like Q3 we're seeing kind of a clean kind of integrate – fully integrated quarter?

Sure. Unless we make another acquisition. Then we'll revisit the situation.

I hope so Rick.

That's exactly right. But yes at least from MRI. But yes, all things being equal by the third quarter, we should be at a relatively normal pace. And of course, that's one of the difficulties in looking at our track record over the last four years is every quarter or three out of four quarters tends to have an acquisition in it, or something or a pandemic, and it clearly makes things difficult finally to look at. You got to really pay attention unfortunately. But if you look through it you can – as I think most people can look at it and say, wow, there's a lot of improvements in here and a lot of good things to grab.

Thank you so much.

Sure.

You have a question from Stanford Wyatt at August Partners. Please go ahead with your question. Your line is live.

Hey, Rick. How are you doing?

We’re good.

Hey, good. I just had a quick question. I know you noted in the press release that, you put the Dental Power up for sale and excluding – it looks like that costs you about $1.3 million of revenue. So, I guess adding that back your revenue grew over 40%. I know you had a more difficult comparison in the fourth quarter versus third quarter, but that's – I mean, that's showing accelerated growth to last quarter. I guess is that on a normalized basis? Is that the right way to think about it?

I'm not quite sure, I understand the question.

Okay. Yeah. Just I mean, looking at the press release it said, you put Dental Power business as listed for sale and total revenue would have been $9.4 million without that which – yeah so that's – I mean, that's over 40% growth to last year on a normalized.

If you take that out, it certainly alters things, right? So comparing third quarter to fourth quarter is nearly impossible, unless you back out the Dental Power revenues from the third quarter. And so I would simply say that, there wasn't really all that much appreciably different in the real world between the third quarter and the fourth quarter just the reclassification of Dental Power as discontinued operations just change that. So I wouldn't read anything into that part.

Okay. Got it. Yeah. Just looking at the year-over-year growth rates, because I know you had more difficult comparing in 4Q without any COVID hit last year, and then obviously two weeks of MRI in 4Q, which maybe offset that. But nonetheless that's a really high growth rate relative to your peers. So, good to see that continuing. And then one other question just on the kind of the EBITDA margins or just the margin profile overall. I've always looked at kind of the adjusted EBITDA relative to system-wide sales to kind of take out some of the non-cash and some of the transition acquisition costs and all that. And I know that, it looks like the MRI deal will be a lower margin deal. But over time, do you think you get back kind of in line? Does the margin profile get back in line with the core HireQuest business?

That's really a $13 million question, right? The deal wasn't priced based on margins; it was priced on EBITDA. Therefore, the profile may always be different. I don't think we'll ever reach what we have for Snelling and HireQuest Direct. In terms of system-wide sales, we will never come close to that. However, I believe we can get within a reasonable distance of the revenue targets.

Yeah.

But again, part of that and I was literally speaking to our VP of Ops today about that almost specifically using the example of the Georgia manufacturer that I was talking about. Well realistically, if that comes through to fruition, that's the type of kind of like a soft gain that I'm saying that doesn't get priced into it, right? So it's like yes we might not get to that point. That doesn't mean it's not really adding even more sort of more value. And so, your question is really apt. It's just too early to tell, how close we'll be able to get to our traditional margins.

Yeah. Okay. Got it. Well, I know in the deck you highlight the $4 million of EBITDA that MRI could do on a normalized basis just as you get some cost efficiencies there. And the core business doing in the low to mid-20s of EBITDA this year plus the $4 million you picked up. Maybe that's a reasonable way to think about it. And then hopefully there's more upside to the $4 million from MRI as you...

To your point, we had $22 million of adjusted EBITDA compared to $31 million in revenues. When you look at sales pushing 65% to 70%, and then consider that we received $4 million for approximately $11 million in revenues, it can seem disappointing. You might think it's a bad deal when you're below 40%. However, it turns out that this deal was priced at less than 4x EBITDA, specifically around 3.4x, which is actually favorable. Unfortunately, from an analyst or investor perspective, this has somewhat complicated our numbers and it's not as straightforward as it once was. Nevertheless, it's important to note that the deal was evaluated based on EBITDA rather than margins.

Yeah, that's right. My question was about the significant upside potential if you manage to restore your margins. It appears to be an excellent deal for the $4 million you have right now. And then if you are able to...

I'm not sure what to expect. We didn't achieve that.

I understand what you say I mean it's great.

I think said we won't.

Well, thank you, everybody for joining us. I think you will agree that it was a very good quarter for us and a good year and we look forward to the opportunities that will present themselves in 2023. I can assure you that the management team at HireQuest is always working hard and is always looking for opportunities to continue the growth of this company. Thank you for being a part of the company and for your interest and have a good night. Thank you. This does conclude today's conference call and you may disconnect your phone lines at this time. Thank you for your participation and have a wonderful day.