Greetings and welcome to the HireQuest Inc. Third Quarter 2023 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Mr. John Nesbett of IMS Relations. Sir, you may begin.

Thank you and good afternoon, everyone. I’d like to welcome everybody to the call. Hosting the call today are HireQuest’s Chief Executive Officer, Rick Hermanns; and Chief Financial Officer, David Burnett. 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 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 Chief Executive Officer of HireQuest, Rick Hermanns. Go ahead, Rick.

Thank you everyone for joining today’s call. I’ll begin by providing an overview of our financial and strategic highlights from the third quarter, and then I’ll turn the call over to David, who will share more details around our third quarter results. The third quarter of 2023 was highlighted by increased revenue growth and healthy profitability primarily related to our acquisition of MRINetwork, which has driven increases in franchise royalties and underlying system-wide sales. Our total revenue in the third quarter grew 18.1% to $9.3 million, and franchise royalties increased 19.9% to $8.9 million compared to $7.4 million in the prior year period. System-wide sales for the quarter increased to $151.2 million compared to $123.2 million in the third quarter of 2022. As mentioned, the majority of system-wide sales growth continues to be driven by our acquisition of MRINetwork with additional increased contributions from our DriverQuest and TradeCorp offerings compared to the prior period – prior year period. This growth was offset by HireQuest Direct’s relatively moderate year-over-year decline of just 5.4% and Snelling’s decline of 17.2%. SG&A expenses in the third quarter were $6.4 million compared to $2.1 million in the prior year period. The increase was primarily related to increased costs associated with workers’ compensation insurance as well as expenses to support increased system-wide sales from acquisitions and organic growth, particularly the MRINetwork. Excluding workers’ compensation and impairment of notes receivable, SG&A expenses in the quarter grew 34.1% year-over-year and represented 49.5% of total revenue compared to 43.6% of total revenue in the third quarter of 2022. SG&A, excluding workers’ compensation and impairment of notes receivable has decreased for 2 consecutive quarters as a percentage of total revenue from 57.4% in Q1 of 2023 and 54.9% in Q2 as well as in absolute dollars. Workers’ compensation has negatively…

Thank you, Rick, and good afternoon, everyone. Thank you for joining us today. Expanding on some of the numbers Rick just mentioned, let’s start with total revenue, which for the third quarter of 2023 was $9.3 million compared to $9 million in the second quarter of 2023 and $7.8 million for the third quarter of 2022. The year-over-year increase of 18.1% is primarily due to the addition of MRINetwork. Our total revenue is made up of 2 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. We did not report any revenue from company-owned operations, although at September 30, 2023, we owned 1 location classified as held for sale and reported below the line as discontinued operations. For continuing operations, franchise royalties for the third quarter were $8.9 million compared to $7.4 million for the same quarter last year, an increase of 19.9%. The MRINetwork accounted for $1.6 million of the increase in royalties for the third quarter as royalties from pre-existing locations had a net decrease of approximately 119,000. Underlying the growth in royalties are system-wide sales, which are not part of our revenue, but can serve as a key contextual performance indicator. System-wide sales reflect sales at all offices, including the location currently classified as discontinued. System-wide sales for the third quarter of 2023 were $151.2 million compared to $123.2 million for the same period in 2022, an increase of 22.7%. Similar to the growth in royalties, growth in system-wide sales was driven by the addition of MRINetwork, which accounted for $39.3 million of the year-over-year increase for the third quarter as combined sales from other locations decreased on a net basis by approximately $11.3 million. Service revenue, which is generated from…

Thank you, David. Despite a challenging economic environment for our industry, I’m proud of our franchisees’ performance and HireQuest’s ability to generate continued profitability. We have a long-term view of our business and looking out beyond the current economic environment and near-term increases in expenses we believe that we are well positioned to continue our record of strong performance as a leading provider of temporary workforce hiring and professional recruiting solutions. As always, I’d like to thank our employees for their hard work and dedication this quarter. And as CEO of HireQuest, I look forward to continuing to drive operational success and value for our shareholders. With that, we can now open the line to questions. Thank you.

[Operator Instructions] Thank you. Our first question is coming from Mike Baker with D.A. Davidson. Sir, your line is live.

Okay. So good job on the top line and controlling what you can control. I guess maybe to me, at least, the obvious question is, is the workers comp, you gave some color on expecting that to continue. But I guess when you say continue to be elevated, and I know it’s hard to estimate, but do we think continue to be elevated at the same level, i.e., $1.5 million a quarter? And then I guess the second part of that question is, how do we think about the other costs, the $4.6 million, excluding workers comp and the impairment. Is that sort of a reasonable run rate going forward now that you’ve worked through the MRI integration? Or does that come down? In other words, how much of the MRI integration is in that, still in that $4.6 million for this quarter?

Thanks Mike. So thanks for that question. Let me – obviously, there are two very, very important questions in there. And I guess I’ll really just to back it out even further is clearly, the quarter was impacted by 3 main factors. One, obviously, being the workers comp. And so part of the reason why we are saying, for example, no meaningful improvement will occur until basically Q2 of 2024 is because our renewal is March 1 for our workers comp program. So some of the things that we’ve identified that we need to change, like I said, we’re locked into our policy. We’re locked into our policy until March 1. The – but the other things are as far as from an elevated standpoint, our – some of them are a little bit – some of them – how can I put this? We’re not – the reality is, and it maybe was put in a little bit. It was put in subtly. But basically, obviously, you have medical inflation that’s taking place. You have wage inflation, and yet you have workers comp rates that have dropped. Now part of it, we suspect and we think that workers comp rates can’t keep going down at a time when the cost of workers comp generally, the components obviously being indemnity benefits, which are tied to higher wages and medical costs, which, of course, are subject to a lot of medical inflation. So it’s hard for – frankly, it’s hard for me to imagine that rates won’t go back up. And to the extent that rates go back up, it assists us in then. But I have – we literally – in that area, we have literally no control. One of the other factors that has happened to us over time…

Yes. No, no, no. It obviously did one really quick follow-up that last thing you said by 1Q ‘24, excluding working comp, SG&A back to normal levels. What’s the normal level? Is that that I think you said 50 – around 54% of royalties or just fall...

No. We shoot for less. Look, we shoot for less than that. I mean I would – I mean I would certainly target less than 50%. That’s really more where – that’s more what we’re targeting. Now again, obviously when we – it’s kind of an interesting thing. When we bought MRI at the end of 2022 and they had done around $260 million, $270 million worth of system-wide sales. And of course, we had done – we were on target to do $450 million, something like that. So obviously – and we knew due to some franchise terminations in the MRINetwork, we were never going to hit that $270 million figure, but we knew – but obviously, professional recruiting has been hit heavier than staffing. But net you sit there and say, well, gosh, we should – it would have been fair to think that we would have been pushing $7 million odd of system-wide sales. obviously, you just have to look at the numbers, we’re not even close to that. And so we have lost a good amount of operating leverage. And really, the relative declines in MRI have been worse. But I go back to – we are still thinking we are still hitting our targets, our – at least our original assumptions for EBITDA within MRINetwork. And so we do expect to get back to where we are sort of excluding the workers’ comp part. That’s a bit more of a wildcard. And again, I’m not going to sugarcoat it. It is something that will – it will – it is something that will dog us for at least 6 months, and it may well be 1.5 years to 2 years before it goes back to what I would call normal. And then maybe a new normal, because I don’t – I’m not the CEO of Chubb, I’m not the CEO of AIG. So I don’t control workers’ comp rates.

Yes. Yes. Okay. Understood. So yes, couple of there. I guess, as one other one in the sort of the offset is the TEC acquisition. Where are you in terms of – I think – so those are company-owned offices. I think the plan is to refranchise those and in some respect, that helps pay for not, maybe not all of the acquisition, but a lot of it. Where are you in terms of the refranchising process for those...

I’m glad you asked that question. So we’ve had staff out in Arkansas in the last couple of weeks. I myself was out there. And like I said, a lot of senior management has been out there. And so I would just say that we are in very, very advanced – at a very advanced stage to have all of them converted. We’re trying absolutely as hard as we can that when we have an anticipated close of November 27, and it is our goal, and I think it’s a reasonable goal. I certainly cannot make a promise, but it’s – but we are well on our way to hitting our goal of having them all refranchised or all franchised on November 27. And if they’re not, we’re still far enough along that I’m saying it wouldn’t be long thereafter.

Yes. Makes sense. Okay. Appreciate that. Yes. It sounds like a great acquisition. Alright, thanks a lot.

You got it.

Thank you. [Operator Instructions] Our next question is coming from Kevin Steinke with Barrington Research.

Good afternoon, Rick and David. I wanted to start off by asking about just the overall tone of demand environment and the economy as you see it, do you think it’s been kind of stable since you reported second quarter 3 months ago? Has it worsened a bit. I think you mentioned maybe Snelling decelerated a bit more in the third quarter, but just kind of maybe your general overall read on where the demand environment stands today relative to a few months ago?

Yes. Kevin, thanks for the question. I think that from an, let’s say, an aggregate standpoint, we – probably by June had hit from a comparative standpoint, we’ve leveled off, right? So you would just have to say, well, okay, we – I’m saying we found our level, so to speak, in demand, which is certainly off from the prior year. It is still absolutely true what I said really the last couple of quarters is, it is very, where it is weakest is definitely it’s not uniform at all. And I think, in fact, maybe the best way of looking at it is construction has held up significantly better than logistics and warehousing. There’s no question about that. And so while I’m sure there are a lot more factors at play than, let’s say, than what we might see, I would probably argue that the sort of the weakness you see in e-commerce is probably what is affecting, let’s say, Snelling more whereas, again, our construction remains significantly, significantly stronger than relatively speaking, than our logistics, our offices that are more focused on logistics. The – and that tends to be geographical as well. And that’s why, so for example, HireQuest Direct has remained stronger while it’s also more heavily centered in Texas, Tennessee, Georgia and Florida, which now the question is, is it just because the economies are better in those states? Or is it because we’re more heavily towards construction. And it’s probably a bit of both, whereas Illinois, Washington and a couple of other states that are probably more tied to distribution and logistics have been definitely more of a challenge. And I would go back to probably ties back to sort of PeopleReady and TrueBlue again, was down. I think they reported, they were down…

Okay. That’s very helpful. And just talking again about the pending acquisition of TEC. Wondering if you could provide any background or color on how that deal came about? And is that a business that maybe was a little more financially stressed with the downturn in the economy? Or how healthy were they? Are they just trying to get a sense as to how that plays into the pipeline and...

Yes. So it was not – no TEC was not a distressed company at all. The owner seller is – but is somebody who – he’s been in the business for 40-some-odd years. And so this was – and just clearly a retirement strategy. And so he is a pretty advanced age. So it was completely related to that. That said, we’re buying it going in sort of the $34 million that we put out there is what the TTM sales are that’s probably 15% to 18% off what it was what the TTM would have been, let’s just say, in January of ‘23. So the good news is the sort of the decline in sales has been sort of already absorbed within that. So that’s a good thing. And from that perspective, it is a – as far as how it was came about, it’s just basically our VP of Corporate Development, David Hartley, just out there sourcing deals. We’re always out there sourcing deals. And so it was one of 10 different ones that we were looking at, let’s say, in April, May. And fortunately, we were able to come to a deal. It’s a very nice deal for us insofar as it’s very typical of the types of people that we place historically. So there’s no – it’s right down the fairway. And maybe for us, what I like about the deal as well is geographically, it strengthens our presence in the state of Arkansas. We’ve had a presence there, but it really fleshes it, it really fleshes it out. And we’re hopeful that some of the national accounts that we have are going to be able to be – are going to be able to access those in Arkansas, where TEC hadn’t in the past. And so we’re very bullish on it. We’re very bullish on it.

Okay, that’s great color. Appreciate that. And thanks for taking the questions. I will turn it back over.

Thank you. We have no further questions in the queue at this time. So I will hand it back over to management for their closing remarks.

I want to thank everybody who has joined us. I realize that sort of the top line, at least if you count earnings is kind of the top line are less than what we would have hoped. I – hopefully, if you listen carefully to what’s being said, number one, it comports with what, really what I said for the last few years, which is an expansion even if it means that we leave one out of three open positions unfilled is better than a recession or better than a stressed economy. And so what you’re seeing really what started in Q1, but has especially become apparent in Q2 and Q3 is we are absolutely subject to the cyclicality of the economy. And the fundamentals of what we do haven’t necessarily changed outside of the workers’ comp, which, like I said, we believe that we will be able to rectify a significant portion of that, again, not promising that, that some of that may not be a little bit of an impairment, but it’s not – we certainly do not expect any more quarters like we did this past quarter. We think that we will be definitely – we’re making progress towards sort of rectifying at least the bulk of those negative comparisons. So again, I want to thank our franchisees, I want to thank our employees, and I want to thank our investors and look forward to a great fourth quarter. Thank you.

Thank you, ladies and gentlemen. This concludes today’s conference, and you may disconnect your lines at this time, and we thank you for your participation.