HireQuest, Inc. Q1 FY2025 Earnings Call

Good afternoon everyone and thank you for participating in today's Conference Call to discuss HireQuest's Financial Results for the First Quarter ended March 31, 2025. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to Jennifer Belodeau of IMS Investor Relations. Please go ahead.

Thank you, Jenny. I would like to welcome everybody to the call today. Hosting the call today are HireQuest's CEO, Rick Hermanns; and CFO, Steve Crane. I would 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 and 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. With that out of the way, I'd like to turn the call over to the CEO of HireQuest, Rick Hermanns. Go ahead, Rick.

Good afternoon and thank you for joining our call today. Our first quarter results are reflective of the broader staffing industry which continues to be impacted by macroeconomic headwinds that are causing employers to slow or even suspend their hiring decisions as they wait out this uncertain market. As many of you know, this has been a trend for several quarters now. And despite this challenging environment, we continue to achieve solid margins and profitability, supported by the resiliency and strength of our franchise model. Expense management remains a key focus for us as well and we continue to drive cost reduction initiatives across our business and I'm pleased to report that we're making progress on our expense management goals supported by consistent reductions in SG&A expenses on a year-over-year basis. We will continue to strategically reduce costs and reallocate capital in ways that position us for sustained long-term growth. Our M&A pipeline is strong and we're encouraged by the many opportunities that we're seeing in the market. Acquisitions are a key part of our strategy and allow us to expand into new geographic regions and market verticals more quickly than we're typically able to through organic growth. With our visibility today, we believe that we are well positioned with a strong pipeline of potential deals and the resources needed to execute our strategy. While the industry as a whole experienced a challenging first quarter, we continue to see encouraging progress on the legislative front as more stringent immigration laws are enforced under the current administration. As we mentioned last quarter, relaxed immigration policies throughout the previous administration had a negative impact on our temporary and day labor offerings as employers frequently chose to hire undocumented workers at lower costs, therefore, reducing demand for staffing services that comply with E-Verify regulations. Enhanced immigration enforcement by ICE is now requiring employers to hire documented workers. And as an E-Verify employer, we are ideally positioned to benefit from this increased demand. I'd like to take a moment to thank Steve Crane for his contributions as Chief Financial Officer of HireQuest. Steve has been a valuable member of our leadership team since he joined as CFO in November of 2023. We wish him well in his retirement. Steve will be succeeded by David Hartley, our current Vice President of Operational Finance and Corporate Development, effective May 31. David has extensive financial experience and a deep understanding of both our business and the staffing industry, making him ideally suited to take over as CFO in a planned transition that follows multiple years of preparation and planning. Importantly, in his current role, David has served as the main architect of more than 15 acquisitions completed over the past several years, giving him the experience and knowledge needed to continue growth and shareholder value. To conclude, we're pleased to have delivered another quarter of profitability and we're energized about what is on the horizon for our business. We believe that we are well positioned with a strong team and a flexible model to drive enhanced value for our shareholders in 2025. With that, I'll now turn over the call to Steve to provide a closer look at our first quarter financial results.

Thank you, Rick for the well wishes and good afternoon, everyone. Thank you for joining us today. Total revenue for the first quarter of 2025 was $7.5 million compared with revenue of $8.4 million in the same quarter last year, a decrease of 11.2%. 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 charged to our franchisees as well as other miscellaneous revenue. Franchise royalties for the first quarter were $7 million compared to $7.8 million for the same quarter of last year. Underlying franchise royalties are system-wide sales which are not part of our revenue but are helpful contextual performance indicators. System-wide sales for the first quarter were $118.4 million compared to $134 million in the first quarter of 2024. Service revenue was $512,000 for the first quarter compared to $588,000 in the year-ago period. Selling, general and administrative expenses for the fourth quarter were $5.3 million compared to $5.6 million in the prior-year period, a decrease of 6.5%. Shifting to our profitability metrics. Net income after tax was $1.4 million in the first quarter of 2025 or $0.10 per diluted share compared to a net income of $1.6 million or earnings per diluted share of $0.12 in the first quarter of 2024. Adjusted net income for the quarter which excludes amortization of acquired intangibles and other nonrecurring one-time expenses, was $1.8 million or $0.13 per diluted share compared to adjusted net income of $2 million or $0.15 per diluted share in the first quarter of 2024. 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 was $2.8 million compared to $3.4 million in the prior-year period. Adjusted EBITDA margin for the quarter was 37% compared to 40% in the first quarter of 2024. We believe adjusted EBITDA is a relevant metric for us due to the size of noncash operating expenses running through our P&L. A detailed reconciliation of adjusted EBITDA to net income is provided in our 10-Q which we filed this afternoon. Moving now to the balance sheet. Our total assets as of March 31, 2025, were $93.7 million compared to $94 million at December 31, 2024. Current assets as of March 31, 2025, included $2.1 million in cash and $42.2 million of net accounts receivable, while current assets at December 31, 2024, included $2.2 million of cash and $42.3 million of net accounts receivable. Current assets exceeded current liabilities by $27.4 million at March 31, 2025, versus December 31, 2024, when working capital was $25.1 million. Current liabilities were 46% of current assets at March 31, 2025, versus 49% of current assets at December 31, 2024. As of March 31, 2025, we had $5.5 million drawn on our credit facility and another $34.8 million in availability, assuming continued covenant compliance. We believe our credit facility provides us with the 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. As stated on our fourth quarter call, we most recently paid a $0.06 per common share dividend on March 17, 2025, to shareholders of record as of March 3. We expect to continue to pay a dividend each quarter subject to the Board's discretion. With that, I'll turn the call back over to Rick for some closing comments.

Thank you, Steve. 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 second quarter results. With that, we can now open the line to questions. Thank you.

Your first question is coming from Kevin Steinke of Barrington Research.

Great. I just wanted to start off by asking about recent trends you may be seeing in your business. Obviously, you referenced the macroeconomic headwinds impacting the broader industry as well as your results in the first quarter but we started to see a lot of the major headlines around tariffs, et cetera, at the beginning of April. So I don't know if you have any commentary on maybe what you've seen in April and the first several weeks of the second quarter?

Yes. Thanks for the question, Kevin. There hasn't really been a dramatic shift either way since the second quarter began. So there hasn't necessarily been a tangible impact from the tariff standoffs in the real world that we work in and yet it's still holding people at bay. I mean, frankly, as I said in the last earnings call, we had started to pick up a bit towards the end of the year. But then that stopped. And so that's just continuing on.

Okay, I understand. You mentioned again, as you did last quarter, that more stringent immigration policies are benefiting the overall market for your services. I believe you've stated recently that you've gained some new business because of this. Have you started to notice more of that in your pipeline or in new business wins that you could directly associate with the stricter immigration policies?

Yes, there's no question that there are some wins that we're definitely getting as a result of it. This week, we had a lot of our franchisees in Charleston for basically a training seminar. And just in talking with some of them, there are a lot of stories of clients coming back or clients that are saying, 'Yes, we were raided,' or they know of somebody who was raided. So it's definitely reopening doors for us that had been kind of closed off to us for four years. It's happening. I'm not saying that it's not every client because we still have a lot of clients. But again, there is good movement that way and good positive movement. There are certain companies that are very large users of staffing that historically haven't taken much care as far as whether they were hiring documented workers or undocumented workers. So we're very hopeful about immigration helping us.

Okay, that's helpful. I wanted to ask also about the trend in SG&A and you mentioned continuing to work on cost reduction and expense management. I wanted to hear more about that but also specifically to the first quarter SG&A of $5.3 million was up sequentially from the fourth quarter, although you had a sequential decline in workers' comp expense of about $300,000 from fourth quarter to first quarter. So just kind of wondering what influenced the trend quarter-to-quarter and then what you're working on from a cost management perspective.

There were some unusual figures in the first quarter that likely obscured the results. Specifically, $190,000 in professional fees were deferred to the second quarter of 2024 but should have been recorded in the first quarter of 2025, creating a timing discrepancy. This would have aligned us better with our expected performance. Additionally, we implemented a minor reduction in force during the first quarter, which involved some long-tenured employees. This led to an increase in expenses for the first quarter, but these costs will be off by the second quarter. Overall, these factors may have negatively influenced our performance. The improvement was somewhat masked by the timing issue with professional fees and the costs associated with the reduction in force.

All right. Yes, that makes sense. And you mentioned that the strong M&A pipeline, you feel like you're well positioned to make some deals. And it sounded to me, maybe I'm reading into it a little bit too much, but it sounds like maybe you're a little more confident of getting some deals done. So any comment on just the pipeline or potential near-term opportunities and if the environment continues to create more opportunities for you?

Well, I think a lot of it is definitely driven by the ongoing weakness in demand. For a staffing company that's not very well capitalized, it's one thing to go through one or two quarters of suppressed demand. But now we just finished basically quarter nine of fairly muted demand. And so it's just showing up now where we're starting to see ones that are more distressed and are becoming more realistic with their prices. So we are definitely more hopeful about not just the number of deals we're seeing. Those are always fairly consistent but at price points that make a lot more sense for us.

Okay, that's helpful. And just lastly, on the CFO transition. Congratulations to Steven on your upcoming retirement. But with David taking over the CFO role, as you mentioned, he's done a lot on the corporate development side and sourcing deals and acquisitions. And I was wondering if you're maybe looking to backfill that a little bit now that David is going to take on more responsibility, if you'd like to maybe add on the corporate development side.

Well, that's a possibility. It's more apt to be filled, not at his level but more at a level of finding a deal sourcer. Keeping in mind, David came from the investment bank that represented Command Center in our merger. So he served as a classic investment banker. And so we don't necessarily need another full-on dealmaker on our staff. But to your point, we've already had that discussion and we will almost certainly add a person to source deals and at least get them to a point. But will we see another VP of Corporate Development? No, that's unlikely. Not in the short run, that's not likely.

Well, we appear to have reached the end of our question-and-answer session. I will now hand back over to Rick for any further closing comments.

Thank you, Jenny. So I just thank everybody for tuning in and we remain optimistic and confident in our model. One of the things that we're seeing in these difficult times, and certainly hope the investment community sees, is that through our franchise model, we are very well situated to remain profitable at other times while some of our competitors are really struggling with maintaining profitability. It's a great time to see that value. As I've said going back to as long ago as really 2019 is that the one good point of suppressed demand is the fact that it does tend to create buying opportunities. So we're again hopeful and confident that this will prove itself to be true. Thank you for joining today. Thank you for the questions, Kevin. We look forward to speaking with you again in a few months.

Thank you very much. This concludes today's conference call. You may disconnect your phone lines at this time and have a wonderful day. We thank you for your participation.