Earnings Call Transcript - HQI Q2 2025

Operator, Operator

Good afternoon, everyone, and thank you for participating in today's conference call to discuss HireQuest's financial results for the second quarter ended June 30, 2025. As a reminder, this conference is being recorded. I would now like to turn the call over to John Nesbett of IMS Investor Relations. Please go ahead.

John Nesbett, Investor Relations

Thank you, and good afternoon. I'd like to welcome everyone to the call. Hosting the call today are HireQuest's Chief Executive Officer, Rick Hermanns, and Chief Financial Officer, David Hartley. 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 and terms such as anticipate, expect, intend, may, will, should, and other comparable terms involve risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. These statements include statements regarding the intent, belief, and 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. I would now like to turn the call over to the CEO of HireQuest, Rick Hermanns. Please go ahead, Rick.

Richard F. Hermanns, CEO

Good afternoon, and thank you for joining our call today. Our second quarter performance unfolded much as we had expected as we continue to face a challenging hiring environment that has persisted now for over two years. As we've mentioned on previous calls, employers of all types are taking a wait-and-see approach and delaying certain hiring decisions in what has been an uncertain macroeconomic climate for the first half of 2025. Moreover, the recent Bureau of Labor Statistics job report reflects continued overall softness. The manufacturing industry continued to contract for the fifth straight month, shedding an additional 11,000 jobs in July, driving down factory employment levels to their lowest point since July of 2020. That said, our proven franchise model provides us with a solid operational foundation that enables us to deliver superior operating results for our industry with strong margins and consistent profitability even when the industry landscape is difficult. The market for permanent placement and executive search solutions continues to be slow, particularly in the manufacturing and IT sectors. This, combined with several franchisees not renewing their franchise agreements over the last couple of quarters, impacted the results of MRINetwork. We remain focused on controlling what we can to position MRI to benefit when demand levels for permanent placement and executive search return. Temporary staffing and day labor offerings have performed better relative to MRI, but even so, the upper Midwest has been weak. As we mentioned on our first quarter call, we are encouraged by the newly heightened approach to the enforcement of immigration regulations. Relaxed immigration policies throughout the previous administration had a negative impact on our temporary and day labor offerings as employers chose to use undocumented workers to reduce labor costs. As an E-Verify employer, HireQuest welcomes the enhanced enforcement efforts around hiring documented workers, efforts which we believe create a level playing field in a very competitive space. Acquisitions have historically played an important role in our growth strategy as we look to further expand our market reach and geographic footprint. We've had a great deal of experience and success executing an effective M&A strategy while maintaining a strong balance sheet and managing dilution. It's been six years since our merger with Command Center, and over that time, we've completed over $77 million of acquisitions. By the end of the second quarter, with only $4.3 million of debt on the balance sheet, we believe that we are well positioned with the financial flexibility and resources to pursue value-creating opportunities as we identify them. While the first half of 2025 has brought its share of challenges, we have built a strong and flexible business model that has consistently delivered strong margin performance and profitability. HireQuest is well positioned in the markets we serve with a portfolio of recognized staffing and executive search brands that have allowed us to establish a solid foundation for growth when demand returns in earnest. With that, I will turn the call over now to David to provide a closer look at our second quarter financial results.

C. David Hartley, CFO

Thank you, Rick, and good afternoon, everyone. I appreciate you all joining us today. Total revenue for the second quarter of 2025 was $7.6 million compared with revenue of $8.7 million in the same quarter last year, a decrease of 12%. 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 second quarter were $7.3 million compared to $8.2 million for the same quarter last year. Underlying franchise royalties are system-wide sales, which are not part of our revenue but are a helpful contextual performance indicator. System-wide sales for the second quarter were $125.9 million compared to $146.1 million in the second quarter of 2024. Sequentially, system-wide sales increased by 6% in the second quarter of 2025 compared to system-wide sales of $118.4 million in the first quarter of this year. Service revenue was $354,000 for the second quarter compared to $479,000 in the second quarter last year. Selling, general and administrative expenses for the second quarter were $5.9 million compared to $5.3 million in the second quarter of 2024. Driving the increase was approximately $929,000 in transaction expenses, which were partially offset by a decrease of roughly $400,000 in workers' compensation expense. Workers' compensation expense was a drag on our earnings in 2023 and 2024, and we're pleased that our efforts to control costs in this area have achieved cost savings of approximately $1 million through the first six months of 2025 compared to the same period in 2024. Shifting to profitability metrics. Net income after tax was $1.1 million in the second quarter of 2025 or $0.08 per diluted share compared to net income of $2 million or earnings per diluted share of $0.15 in the second quarter of 2024. Adjusted net income for the quarter, which excludes amortization of acquired intangibles and other nonrecurring one-time expenses, was $2.1 million or $0.15 per diluted share compared to adjusted net income of $2.5 million or $0.18 per diluted share in the second 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 $3.3 million compared to $4 million in the prior year period. Adjusted EBITDA margin for the quarter was 43% compared to 47% in the second 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 was filed this afternoon. Moving on now to the balance sheet. Our total assets as of June 30, 2025, were $94.3 million compared to $94 million at December 31, 2024. Current assets as of June 30, 2025, included $2.7 million in cash and $42.8 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 $28.6 million at June 30, 2025, versus December 31, 2024, when working capital was $25.1 million. Current liabilities were 45% of current assets at June 30, 2025, versus 49% of current assets at December 31, 2024. As of June 30, 2025, we had $4.3 million drawn on our credit facility and another $35.9 million in availability, assuming continued covenant compliance. Just to put that in perspective a bit, we had roughly $16 million in total debt at the end of the second quarter last year. 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. As stated on our first quarter call, we most recently paid a $0.06 per common share dividend on June 16, 2025, to shareholders of record as of June 2. 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.

Richard F. Hermanns, CEO

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 third quarter results. With that, we can now open the line to questions.

Operator, Operator

And your first question today is coming from Mike Baker from D.A. Davidson.

Michael Allen Baker, Analyst

I wanted to ask about your mention of having resources available for acquisitions. Given that you announced a potentially significant acquisition since the last call, could you provide an update on TrueBlue? If you're not able to discuss it now, can you share your general outlook on where you're focusing and how you view the acquisition pipeline? You have the resources, but can you complete a deal?

Richard F. Hermanns, CEO

So I'll answer that, and thanks for the question, Mike. Two things. One is, consistent with our prior public disclosures, we remain interested in pursuing a transaction with TrueBlue. Beyond that statement, there's nothing new to report. As far as the second part of your question, with other companies, we continue to look at other opportunities. And so I would say simply that there's a good group of leads out there as well. So we're not a one-trick pony just waiting on one deal. So again, I feel good about where we're at with that. And as you noted, we have a lot of dry powder right now.

Michael Allen Baker, Analyst

Yes. No doubt. Okay. Fair enough. A couple of others. I just wanted to ask you, where do you feel like you are in terms of market share on the system-wide sales down about 13%? We can compare that to some other public guys or some industry data. And I'm just wondering your view on how your market share is faring versus some competitors.

Richard F. Hermanns, CEO

So part of what complicates the numbers a little bit is, and as we stated in the prepared remarks, we had a couple of fairly significant MRI franchisees not renew their franchise. So when you look at market share, obviously, do you include them or do you not include them? So compared to last year, we probably lost a bit of ground because we lost those franchises. That said, our individual franchisees are performing in line, I would say, with the market. I think that it's very much though segment dependent. And so like if you look at whatever places we're weak in, there are macroeconomic effects that are definitely playing a big role in that. I'll just use as an example, like in the D.C. market, which is heavily construction for us, is struggling a bit, particularly relative to last year. That makes sense in the context of what's happening with the changeover in the administration. And so I don't know if that answers your question, but I would just say a lot of it is definitely circumstantial related to the local economy. And again, that's why we brought out the part about manufacturing in the prepared remarks as well. The Northern Midwest and the Northern Great Plains is really probably our weakest area. Well, again, it's consistent with the data that BLS is putting out.

Michael Allen Baker, Analyst

Yes, that makes sense. I have just one follow-up before I turn it over. Regarding MRI, what is happening with the franchisees not renewing? Is this a common occurrence? Can you provide any insights into why this might have happened and how significantly it affected the numbers? I'd appreciate a bit more information on that.

Richard F. Hermanns, CEO

MRI has historically struggled to grow, seeing only a rebound in 2021 and 2022 following the pandemic. It had been in decline for many years prior. We believe we can turn this around, but it's part of a long-term trend that started 20 to 25 years ago. The nature of MRINetwork means it functions more like a loosely connected group of recruiting firms rather than a traditional franchise. Most of our MRI franchisees operate under their own brand names, leading to less stringent affiliation rules. In contrast, our staffing operations standardize processes, such as using the same software, and we provide financial support to our franchisees, creating a stronger dependency on us compared to independent entities like Snelling or HireQuest Direct. This independent nature of MRI makes it more challenging to maintain franchisee loyalty.

Operator, Operator

Your next question is coming from Kevin Steinke from Barrington Research.

Kevin Mark Steinke, Analyst

Just wanted to ask a little bit more about the overall environment as you see it currently. Obviously, a lot of noise at the very outset of the second quarter around tariffs that's maybe calmed down a bit. And so have you seen any, I guess, stabilization or signs of a little bit better demand? I know you said system-wide sales were up 6% sequentially, but I guess perhaps that's probably just kind of the typical seasonal bump. So I guess any more color on recent trends or trends that you saw throughout the quarter?

Richard F. Hermanns, CEO

Yes, Kevin, I think May and early June were probably the lowest points. We've come back a bit closer to comparisons from the prior year, but I wouldn't say we've exceeded last year's performance even through July. There hasn't been a significant recovery in sales. However, I do agree that there are some positive signs. Honestly, if you had asked me five or six months ago, I would have expected the ICE enforcement to drive more demand for us. While we've regained some clients, it hasn't been as much as I anticipated. That said, I recently saw data indicating that there were only 100,000 deportations in the first half of the year. In relation to the size of the U.S. economy, that's quite small and consistent with past figures. So there might be more talk than action. On a positive note, we just secured a new contract with a food processing plant, which historically has a significant number of non-E-Verified workers. Re-engaging with a client like that could indicate positive trends ahead.

Kevin Mark Steinke, Analyst

Okay. Yes. That makes sense. Just wanted to follow up on...

Richard F. Hermanns, CEO

I apologize for interrupting, Kevin. I want to mention that the financial professionals segment remains a strong area for us, especially on the MRI side, and it continues to grow very well for us.

Kevin Mark Steinke, Analyst

I wanted to ask about the SG&A expense line, excluding transaction-related costs. There were also some professional fees and severance costs in the first quarter. If those are removed, it appears that SG&A decreased slightly on a sequential basis. I'm trying to understand the SG&A run rate going forward and whether you've implemented any additional cost actions given the current environment.

Richard F. Hermanns, CEO

The transaction costs were significant in our comparisons. I would like to recognize David Hartley for successfully completing his first quarter as CFO. It's important to note that Steve Crane, our retired CFO, had his salary accounted for two-thirds into the second quarter, which will slightly affect the third quarter. Aside from that, there isn't anything particularly good or bad anticipated for the third quarter, apart from the decrease related to our former CFO, who will not be reflected in the third quarter.

Kevin Mark Steinke, Analyst

Got it. Workers' compensation continues to decrease. Is there still a possibility that next year it might reach a fully neutral position?

Richard F. Hermanns, CEO

Yes. Our goal is to fully eliminate that expense. There are still some lingering developments from previous years. Currently, we're quite close to where we need to be to maintain stability regarding workers' compensation. I believe there is still potential for improvement, although not as much as last year. We've made significant progress, and I would say there are more improvements to come, not just in the second half of this year but extending into 2026.

Operator, Operator

This does conclude today's Q&A session. And at this time, I would like to turn the floor back to management for closing remarks.

Richard F. Hermanns, CEO

I want to thank everybody for joining us today. I appreciate your support of the company. And again, I want to thank our franchisees and employees for doing a good job in a challenging environment. Thank you, and until next quarter. Talk to you then.

Operator, Operator

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