Good afternoon, ladies and gentlemen, welcome to the HireQuest Incorporated Second Quarter 2022 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Jennifer Belodeau. The floor is yours.

Thank you, operator. I would like to welcome everybody to the call. Hosting the call today are HireQuest's CEO, Rick Hermanns; and CFO, David Burnett. I'll 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 ended in 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 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 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 higher 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'll now turn the call over to the CEO of HireQuest, Rick Hermanns. Go ahead, Rick.

Thank you for joining us for today's call. To begin with, I will provide an overview of financial and strategic highlights for the quarter, and then David will share more details surrounding our second quarter results. This was a very strong quarter for us across the board. We continue to see revenue growth both from recent acquisitions and organically from our existing franchisees. Franchise royalties grew 32.5% to $7.2 million, and organic franchise royalties grew 40.7% compared to the second quarter of 2021. Overall, total revenues increased by 62.8% to $9.3 million compared to the prior year period. Keep in mind that last year's Q2 was still impacted by the pandemic, making for a favorable comparison. But nonetheless, this was an exceptional quarter. This revenue growth resulted in another quarter of strong profitability for the business with adjusted EBITDA of $5.9 million, a 34.2% increase from the second quarter of 2021. Multiple factors drove our strong performance for the quarter. First, a number of the franchise locations that were opened within the past 12 months are starting to hit their stride and contributed to our results. A key component of our model is supporting our franchisees as they build their own businesses and the strength of this model for the staffing sector continues to be reinforced. The economic recovery from the pandemic as well as the addition of a strong commercial staffing offering with Snelling provided expansion opportunities for franchisees; second, we are seeing the benefit of the strategic diversification of our geographic coverage and end markets. The 3 acquisitions we consummated in Q1 significantly advanced the strategy. Just to remind everyone, the staffing division of dmDickason expanded our franchise base in West Texas and New Mexico. The Dubin Group and Dubin Workforce Solutions marked our entry into Pennsylvania and Northbound Executive Search adds New York to our map and expands our franchise offerings into higher-margin executive placement vertical. With these acquisitions, we have substantially expanded our geographic and industry coverage and now have a foothold in a majority of the segments of the $168 billion staffing and recruiting marketplace. Third, the current economic backdrop of rising wages and labor shortages is creating a favorable demand environment. By utilizing HireQuest, companies are reducing the cost of permanent hiring while gaining access to quality workers in a supply-constrained environment. Fourth, the team here has become quite adept at executing and integrating acquisitions, utilizing the experience of our management team and asset-light platform we have in place. Our processes enable us to very quickly integrate acquisitions and provide the support and tools that help both new and experienced franchisees succeed. With that, I'll pass it along to our CFO, David Burnett for a closer look at our second quarter results. David?

Thank you, Rick, and good afternoon, everyone. Thank you for joining us today. As Rick mentioned, total revenues for the second quarter were $9.3 million compared to $5.7 million for the same quarter last year, an increase of 62.8%. Our revenue is comprised of 3 components: franchise royalties, which is our primary source of revenue; service revenue, which is generated from fees for various optional services and interest charge to our franchisees on overdue accounts. And third is direct staffing revenue from owned locations. Franchise royalties and service revenue are derived from our franchise base. From time to time, we may have owned location staffing revenue from acquired businesses that are not converted to franchises. During Q2, owned revenue included the Dental Staffing Operations acquired in December of 2021. One of the 2 locations acquired as part of the Dubin transaction in February, is also owned but is reported as discontinued operations, while we continue to market it to prospective franchisees. Franchise royalties for the quarter were $7.2 million compared to $5.5 million last year. an increase of 32.5%. In addition to the contribution from acquired locations, royalties from our existing franchises saw a strong growth of 40.7% during the second quarter. System-wide sales for the quarter were $120 million compared to $89.7 million for the same period in 2021, an increase of 33.7%. Organic system-wide sales, which exclude the effect of acquisitions, grew 29.8% for the quarter. System-wide sales include sales in all offices, whether owned and operated by us or our franchisees. Selling, general and administrative expenses for the quarter were $3.5 million compared to $2 million in the same quarter last year. Most core operating expenses remained relatively flat as a percentage of system-wide sales. The increase in SG&A expenses is primarily related to higher compensation and…

Thanks, David. Our solid second quarter was very telling of the strength across the business and the success we've seen in acquiring companies that significantly broadened the scope of our offerings. I'd like to thank our team, our franchisees and their workers for the continued excellence demonstrated throughout the quarter, especially given the challenging economic environment we are all currently facing. We have a long-established history, and this is not the first time we've experienced economic uncertainty. I'm confident that we are well positioned to handle any challenges that may come. As always, we remain focused on providing unparalleled support to our dedicated team of franchisees. Now I'll open the line to questions. Thank you.

[Operator Instructions] Our first question is coming from Mike Baker, D.A. Davidson.

Okay. Great quarter. I guess, you sort of addressed it in the press release in the prepared remarks, but any more color you could provide on the current labor market? It's current -- it's tight. We know that. We see that in the numbers that come out that came out last Friday. On the other hand, we're hearing more and more layoffs and -- or less hiring. So I wonder if you could just tell us a little bit about what you see in the way of markets from where you sit and then how that is impacting your business.

Thank you, Mike. At this point, we haven't really seen much of a change for the better or for the worse as far as sort of striking an equilibrium. So what I'm getting at is basically we are still more short of workers than we are orders. And that hasn't really changed. That said, we probably aren't as far behind in filling orders as what we were a quarter ago. So it really -- this quarter, I think, and the fourth quarter will be very critical in determining sort of aggregate demand compared to what the workforce is available. I was just reading though in fact today, how there are nearly 2x as many open jobs as there are people who are employed seeking to fill them. So I think that it will take quite a few layoffs or cutbacks on planned hirings before we get to a point that our overall demand will be affected.

Okay. Makes sense. The -- and then the idea of the higher wage is remind us how that helps you because I presume you have to pay people more, but I suppose you passed that right through to your customers?

Yes. So don't misunderstand me. I don't think that high wages to the extent that they make us less competitive with Mexico or China or Vietnam or whatever helps the overall economy and in the long run, will hurt demand for us. That said, in the short run, obviously, to the extent that wages go up, our aggregate billings go up and our royalties go up. So in the short run, it's certainly good for us when wages go up.

Okay. Yes, that's what I thought. One more. Last quarter, you said something along in the line. The question is about M&A and understanding you're integrating a couple acquisitions right now, but I think there was some comment last quarter that if we see another quarter of negative GDP, companies -- people are going to be running for the exits and looking to sell, and that's going to be good for you. Well, 3 months later, we've seen another quarter of negative GDP. So Wondering what you're seeing with respect to potential M&A, people looking to sell, et cetera? And should we expect -- what should we expect for deal making this year?

Great question. We have a steady supply of deals that we're looking at. That said, I wouldn't say that it's any more at this point yet than what it's been for the last year or so. We are definitely though, seeing a good supply, but we're maintaining a really tight view as far as on what we're willing to spend in part because of the uncertainty for ourselves, right? When we're looking at we're using TTM results to the extent if we were to go, I'll say, deeper into a recession, I don't want to wade into whether 2 quarters of negative GDP growth constitutes a recession. But classically it has. And -- but it's still obviously with 3.6% unemployment, it's not like any other recession either. That's a long way of saying that. We haven't necessarily seen a huge uptick in distressed companies looking to sell, but that's still sort of jades how we look at things going forward as far as buying someone. We obviously just don't want to buy off of a peak. But we're going to continue to maintain our disciplined approach towards acquisitions. But the supply is really is there. Looking at it, there are something like 44,000 staffing companies in the United States, which means no matter what, whether unemployment at 2% or 20%, there are always going to be plenty of acquisition opportunities. It's just a question of whether they're priced properly. And so my remarks from the last call, which still holds is that the more difficult the economic environment, the more reasonable that people are willing to sell their -- sell their businesses and the more apt we are to be able to actually close on a deal.

And fair enough. One more just related to that, so a follow-up to that same question. Does the fact that you've made -- I think it's now if I count right, 5 acquisitions, right? Since last first quarter, from the last 6 quarters. Is that in any way hindrance because you got to integrate them like you guys integrate things really quickly. I'm just wondering if we're being disciplined because of the uncertainty in the economy and does the fact that you've got a lot going on here, does that impact -- how does that impact decision-making process? Or are those all done acquired, integrated and not really an impact?

No, I would say not really at all with the acquisitions that were that have been completed in the last -- the 5 acquisitions, frankly, are as integrated as they're pretty much ever going to be. So it's really not holding us back. And frankly, we missed out it, we just missed by a hair on what would have been a nice deal. So it comes, it will come. The -- that's not holding us back at all. It's just really finding -- don't get me wrong, it's holding us back only from the perspective of we were obviously only closing the last of those deals in March. So we kind of take our foot off the gas as we were looking for new deals, let's say, April, May and a lot of these take a few months to really come to fruition. So I would say, sure, there's been a little bit of an impact as far as what would be available now. But like I said, there's no -- there's nothing with respect to integration of old deals that is affecting what our possibilities are.

Yes. Understood. Foot can now be back on the gas, I guess, is the point. if it weren't.

Yes, that's right.

Our next question is coming from Aaron Edelheit of Mindset Capital.

Rick, great quarter again. I wanted to just confirm something that I'm fairly confident that I know is that your -- this is not your seasonally strongest quarter, your seasonally strongest quarter is Q3. That's correct, right?

That is correct.

Okay. And last quarter, when we had our conference call, you mentioned that it was full theme ahead or you made some comment that you were -- the business was chugging and everything was fine. Do you feel the same way you felt at the end in what I think the call was in May? Or is there any update in terms of how you see the business chugging along.

So fair question. And if you look at it, we had almost $120 million of system-wide sales in the quarter. So just annualizing it, puts you at a run rate of $480 million. That's really pretty exceptional for us, and that's really exceptional for us. And thus far, I don't see anything stopping that momentum that we have. Now I always want to be a little cautious because I can look at 2 quarters of negative GDP growth, a new tax increase coming, all these are things that aren't good for the economy. So we're not going in there without an appropriate level of caution. That said, business is really -- has been strong, obviously, as indicated by $120 million of system-wide sales in the second quarter.

And nothing so far into the current quarter, you don't see any change to that?

No. But this quarter -- and as I said earlier, this quarter and the fourth quarter, I think, will be really good gauges for us as to the status of the economy overall, staffing companies are really great barometers of economic activity. And if we start weakening a bit, then to me, that's like the surest indication of the overall economy is starting to slip. It's just really hard to make strong predictions when you have this backlog of people wanting to buy something as simple as a car. And I'm not saying the manufacturer of a car is simple, but when you think of how long cars have been manufactured in the United States, you sit there and say, [indiscernible], there's a shortage of them. How do you have a recession at the same time that you have a shortage of supply. And so it's just the weirdest circumstance I've ever experienced in 33 years of running this company, the -- or 31 years of running this company, and it's like I said, it's just really hard to figure that out. But I guess things are really strong.

Yes. Okay. That was what -- now another and maybe this is kind of a rough way to think about it. But if I think about that Q3 is typically the strongest quarter, followed by Q2 and then Q1 and Q4 are weak. Is a rough rule of thumb, assuming there was no change to the economy and labor compared to what it is today. Could you just as a rule of thumb annualize this quarter's numbers? Or how would you have investors think about -- how would you have investors think about, I guess, annualized results. You just mentioned something on system-wide sales in terms of where the company sits versus this quarter.

So -- and I'm going to caveat the living daylights out of this statement, right? It means no acquisitions, no weird charges, no special items, no big change in workers' comp, et cetera, et cetera. Is that the way I would things would be to say, Q2 and Q4 should be similar, Q3 should be 10% to 15% better and Q1 should be 10% to 15% less. That would be -- so personally, I would just use as a sort of a metric, I would say, well, Q2 x 4 equals the annual result in a static environment. Now static environment almost never happens. So just again, I want to caveat the living daylights out of it.

No. No. No. That I understand. So I was just trying to understand just the rough runway. Great quarter. Keep up the great work.

Our next question is coming from Kevin Steinke with Barrington Research.

I jumped on a little late, so I apologize if this has been covered. But can you just -- you commented how the economic backdrop of rising wages and labor shortages is creating a favorable demand environment. Can you speak to just labor shortages and any constraints that's causing on your ability to fulfill demand? Has that loosened up at all? Or -- have you seen more workers coming off the sidelines or kind of what's the current status there?

So what I would say is that demand has remained very strong and frankly, beyond our capacity to fill it. I would say that it's our abilities to fill orders are improving somewhat and -- but not -- but again, not enough to offset the gap between what our orders are and what our supply is. And I think that the further you go up the skill chain, the more difficult the fill is. And that's always pretty much true in the staffing business. Someone who -- a position that requires 12 different specific skills is always harder to fill than a general warehouse worker who just has to unload a truck. That said, we're still -- like I said, we're still -- we could probably place significantly more people if we had them. And so would I say they're coming off the sideline like you asked? No. I still wouldn't -- I still would not say that. But as some of these other companies cut back on their hiring plans. And as some people start laying off workers, I would expect that we would start seeing more traffic and more of an ability to fill the unfilled orders that we have now.

Okay. Understood. And what are you seeing from your franchisee base in terms of appetite for opening new locations and leveraging the commercial staffing platform and just some of the other kind of specialties that you're providing for your franchisee base to grow their businesses?

So I love that question. I wish we could always sell more and open more new offices than what we did. But we've definitely started to see more openings. Obviously, it took a while for our franchise base to clear through the pandemic experience. Obviously, that left a scar in the conscience of everybody who -- really anybody who runs any business other than -- unless you're like an online retailer or something, obviously, you're cautious going forward. And so we've had a pretty good expansion of offices. I think that we can do better and -- so I wouldn't say, gosh, it's great. We're opening a new one every week. It's not that at all. But we've opened in the last 12 months in a couple of very significant markets that I do believe that in time will really help put some tailwinds behind us as well. I just use as an example like opening -- we just had a Snelling opened in the Boston area recently and not too, too long ago in Chicago. Well, those are probably 2 of the 7 or 8 largest metro areas in the United States. So those could become really large markets for us, and both franchisees have experience in those markets. So we're hopeful that -- and really not just hopeful, but really our focused on organic growth as well. The other part that I would bring up, unfortunately, it's still going to take a while yet. But part of what we experienced in the past was the willingness to open new branches expand is frequently and necessarily tied to the amount of cash flow that the franchisee has available from existing operations. And one of the things that's coming in the next couple of years is the vast majority of our franchisees that came from the Command Center merger 3 years ago will have paid off their acquisition debt. And I certainly hope that -- there are some people out there who have been paying a fairly significant amount of money for what their original office cost them that will then have the ability to either devote more money to sales in their existing market or then say that then think that with their new cash flow that they want to expand. And so I'm feeling very good about our opportunities and likelihood of expanding our number of units in the next 2 to 3 years.

Okay. That's helpful. That's an interesting dynamic that you brought up there. Is the -- I guess the emphasis is still on obviously, having existing franchisees open new locations. But has there been any change in your efforts to maybe bring in franchisees new -- from outside the current network to grow that location count?

Yes. It's funny and I'm glad you asked that question. I really didn't want to say it because it's so new, but we did actually this quarter hire -- this quarter, meaning the third quarter, hired a person who is going to work at least part time, on selling franchises and basically to people from the outside. So we are starting to expand those efforts as well.

Congratulations on the good result here.

As there are no questions in the queue, this concludes our Q&A session today. We want to thank you for your interest and participation in the conference, and you may disconnect your lines at this time.