HireQuest - Earnings Call - Q1 2020

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the HireQuest First Quarter twenty twenty Earnings Conference Call. All lines have been placed on a listen only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, Mr. Brett Moss of Hayden IR. Sir, the floor is yours.

Speaker 1

Thank you, operator. I would like

Speaker 2

to welcome everybody to the call. Hosting the call today are HireQuest CEO, Rick Herman and CFO, Corey Smith. Please be aware that some of the comments made during our call may include forward looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations containing words such as may, could, would, will, should, believe, expect, anticipate and similar expressions forward looking statements. These statements involve risks and uncertainties regarding our operations and future results that could cause HireQuest results to differ materially from management's current expectations.

We encourage you to review the Safe Harbor statements and risk factors contained in the company's earnings release and its filings with the SEC, including without limitation, the most recent annual report on Form 10 ks, most recent quarterly report on Form 10 Q and other periodic reports, which identify specific risk factors that also may cause actual results or events to differ materially from those described in forward looking statements. Copies of the company's most recent reports on Form 10 ks and 10 Q may obtain or may be obtained on the company's website at www.hirequest.com or the SEC's website at sec.gov. The company does not undertake to publicly update or revise any forward looking statements after the call or date of this call. I'd like also to remind everyone this call will be available for replay through May 25. A link to the website replay of the call was also provided in the earnings release and is available on the company's website, higherquest.com.

I'd like to now turn the call over to CEO of HireQuest, Rick Herman. Rick?

Speaker 1

Thank you for joining us. We delivered solid results for the 2020 against the backdrop of extreme change in the labor market and increasing economic uncertainty brought about by the COVID-nineteen pandemic. The operating margin of our core business, excluding a onetime reserve we placed on notes receivable, remained steady for the first quarter on higher revenue that was largely due to the recent merger. Our proven franchise model generated nearly $5,500,000 in cash from operations and we remain debt free with more than $10,000,000 of cash on hand. Total revenue increased to $4,100,000 and income from continuing operations was $06 a share despite inclusion of the notes receivable reserve.

The successful integration of the merger and improvements we made to our operating processes last year resulted in a lean franchise operating model with significant scale that was instrumental in driving these results. While the COVID-nineteen pandemic has shown signs of stabilizing across the country with certain states beginning reopening procedures for example, the situation is constantly evolving. Fortunately, through diligent management of our balance sheet and capital structure and a business model that consistently generates operating cash flow, we are better equipped than a lot of our competitors to weather economic cycles. With no debt to service and a lean cost structure, we remain focused on serving our franchisees and protecting our business as volatility is expected to continue in the short term. Our franchisees are facing challenging conditions as a result of the pandemic with certain regions and industries being more affected than others.

As I've said in the past, our business is quite susceptible to economic fluctuations. This is proving true yet again. To date, our franchisees have closed or consolidated 13 offices at least in part due to the ongoing financial impact of COVID-nineteen. Of these closures, 11 were in metropolitan areas where our franchisees still maintain a presence to serve customers. The other two locations did not historically produce large volumes of sales.

We do not expect the closures in and of themselves to have a significant impact on our revenues. In general, franchisees whose businesses are oriented towards construction, manufacturing, logistics or waste services have been less impacted than those whose businesses are more oriented towards hospitality services and auto auctions. Fortunately, we do not have any branches operating in the Northeastern United States or in California, two of the largest hotspots. However, due to the rapidly changing situation, the impact of our operational and financial performance over the coming quarters is difficult to predict. To the extent COVID-nineteen has led to a recession, it is a near certainty that our system wide sales will decline in 2020.

We have already taken appropriate action to significantly reduce our fixed costs to account for the anticipated drop in revenues. Should the current situation continue to deteriorate into the summer, more actions will be taken. To the extent that our revenues have begun to decline, we'll mostly likely also experience a decline in income. The larger the decline in revenue, the more difficult it will be to maintain our core operating margin, which approached 55% in the 2020 when excluding the impact of the $1,400,000 one time reserve on notes receivable. The recently passed CARES Act, which provides loans and grants to small businesses, is expected to provide some relief for our franchisees.

Many of our franchisees have already received funds or have been approved for funds under the Paycheck Protection Program and we are optimistic that this program will help to circumvent some of the downward pressure on their business, at least in the near term. We have also advised our franchisees to be cautious in extending credit to their clients and we continue to monitor the quality of our accounts receivable. During the first quarter of this year, we recorded a $1,400,000 reserve against outstanding notes issued in conjunction with the sale of office locations acquired as part of the Command Center merger. This reserve is directly related to the negative impact COVID-nineteen has had on the economy. There was no impact to cash, although it did negatively impact our net income.

Absent this reserve, our net income would have been approximately $2,300,000 excluding any tax effect, 35.2% higher than the year ago period. As the economic cycle ebbs, there may be opportunities for growth through acquisitions. We continue to search for and consider opportunities for growth through acquisitions that could add markets where we currently lack presence, strengthen the presence of our existing franchisees or perhaps provide access to certain national accounts. As always, we are taking a disciplined and prudent approach to any acquisitions with the ultimate goal of acquiring assets that can be transitioned to our franchise model as quickly as possible. In many cases, we provide buyer financing and fortunately our balance sheet affords us the flexibility to do just that.

Historically, we've been able to recoup much of the cost of most acquisitions by immediately reselling the location to a franchisee. And that will be our intended model again should acquisition opportunities arise. We remain optimistic about the long term prospects for our business. Our business model is proven, profitable and generating positive cash flow. Our balance sheet remains healthy and provides us with the stability to navigate the current economic environment and the flexibility to selectively pursue a strategic transaction should we identify an opportunity that is attractively valued.

Let me turn the call over now to Corey to discuss the first quarter results. Corey?

Speaker 3

Thank you, Rick, and good afternoon, everyone. Total revenue in the 2020 was $4,100,000 compared to $3,500,000 in the first quarter of twenty nineteen, an increase of nearly 19%. This increase is primarily due to our merger with Command Center, was completed in the third quarter of last year. Breaking revenue out a little further. Franchise royalty revenue in the 2020 was $3,700,000 compared to $3,200,000 in the first quarter of twenty nineteen, an increase of 17.4% with $783,000 of this increase attributable to branches acquired in the merger.

Service revenue, which is generated from interest charged to our franchisees on overdue accounts receivable and fees for various optional services was up 31.3% to $415,000 compared to $316,000 in the first quarter of last year. This increase was largely related to an increase in interest charged on outstanding accounts receivable. Selling, general and administrative expenses in the 2020 were $3,300,000 compared to $1,600,000 in the first quarter of last year, an increase of $1,700,000 This $1,700,000 increase included a 1,400,000 reserve placed on notes receivable that we issued to finance the sale of offices we acquired in the merger. This reserve is directly related to the negative impact COVID-nineteen is having on the economy, as Rick discussed earlier. The remainder of this increase in expense was primarily related to additional costs associated with being a public company, including stock based compensation, which we did not incur in 2019, as well as higher legal and attestation services that were partially due to completing an initial public company audit as well as additional costs associated with finalizing the purchase accounting related to the merger.

These increases were partially offset by a decrease in workers' compensation costs as we continue to promote and incentivize our franchisees to provide our temporary employees with a safe work environment. Inclusive of the $1,400,000 reserve on notes receivable, income from continuing operations was $835,000 or $06 per diluted share in the 2020 compared to $1,700,000 or $0.17 per diluted share in the first quarter of twenty nineteen. Moving on to the balance sheet. As of 03/31/2020, we had current assets of $40,600,000 which included cash of $10,000,000 and accounts receivable of $24,400,000 At the end of twenty nineteen, current assets were $37,000,000 which included cash of $4,200,000 and accounts receivable of $28,200,000 While the future is uncertain in this current unprecedented economic environment, our cash balance is sufficient to fund operations for no less than the next eighteen months and we are pleased to see the economy moving towards a safe scaled reopening. And with that, I'll turn the call back over to Jess, our operator, for Q and A.

Speaker 0

Thank you. We'll go first to Peter Rabover at ARTCO Capital.

Speaker 4

Hey, Nick. Hey, nice quarter, nice cash flow generation. Just I guess a couple of questions. One, is it fair to say that exclusive of the 1.4 note reserve that you placed that the SG and A run rate is about $2,000,000 kind of going forward is what should we look forward to I guess to see if it changes or if it's a different number?

Speaker 1

That sounds about I mean that sounds about right. It should actually be a little bit lower actually than that going forward because we were pretty heavy on audit expense in the first quarter. So I would think it'd be a little bit less to be honest with you.

Speaker 4

And the stock comp as well?

Speaker 1

What's that?

Speaker 4

And the stock comp as well, is that a first quarter thing?

Speaker 1

No, I think that Corey, that's amortized over the entire period of the grant, is it not?

Speaker 3

It is, but it's weighted a little bit more heavily at the beginning of the grants, which were granted recently. So it should taper off unless we have future grants.

Speaker 1

So I would say it's still going to exist but not quite as heavy.

Speaker 4

Okay. And then maybe if you know, it's been a few weeks since the last call, but maybe you can share some thoughts on what you're seeing in the economy and, you know, you have some places that have been opening up for the last couple of weeks and just seeing what the response for temporary workers has been since then.

Speaker 1

That's a good question. So, you know, I would say that we bottomed out, you know, we bottomed out right probably about the April was the bottom. And we've sort of slowly, and when I say slowly, I mean slowly ticked up a little bit since that point. Frankly, the reopening will be more robust. Think there are just certain markets in particular where it's still completely basically completely shut down.

And as much as it's nice from a personal standpoint, maybe to be able to sit in a restaurant, that's not really so far it really hasn't had a great impact on us. The biggest probably the biggest impact will be once, I would say, for example, once auto auctions are running again, will have a more appreciable effect on our business. When, again, certain states allow construction and manufacturing again, that will have a big impact. But right now it's all just been in dribbles and drabs. It's really been remarkably stable frankly since probably like March 25.

So, you know, unfortunately, like I said, well, having a little more personal freedom at least in Florida where I live is great. It hasn't necessarily had a huge impact on business yet. But again, to the extent that you start seeing large manufacturers such as let's say the auto industry going again, there's a lot of downline supply firms that will start picking up and then we'll get closer to normal.

Speaker 4

You thank you, by the way. Do you usually have a big like summer hospitality surge that you're probably not gonna see this year? Or is that you know, how should we think about that piece of the business?

Speaker 1

Yeah. So what I would say is is I would look at frankly, I would look at hospitality as a complete as a complete wipeout for the year. I can't listen. If you start seeing if you start seeing people in the stands at baseball games or football games, then yes, you'll know that we've probably gotten a piece of that business. But so long as stadiums stay empty and arenas stay empty and convention centers stay empty, that will be a washout.

As far as the seasonality of it, that's actually, you know, the each you know, we we do basketball. You know, we do basketball arenas. We do baseball stadiums. We do football stadiums. So it's really pretty well scattered throughout the year.

So it's not really a seasonal there's not much of a seasonal effect on that.

Speaker 4

Okay. And then I guess could you just really talk about the health of your franchisees? You know, I'm sure some of them are probably don't have any business. Maybe some of them are hospitality oriented. Are you supporting them?

What loans, etcetera, or discounts on the franchise fees? So I guess thinking more through, are these guys are you going to come out with the same number of franchisees at the end of the year, all else equal, unless you acquire more? Will they be able to make it through this year?

Speaker 1

The so there's sort of a multipart question. What I would say to you is that number one and what's probably the single most important effect at this point is the PPP loans. The vast majority of our franchisees have either been approved or have already been funded for PPP loans. And that's a big deal. And fortunately, one of the things you're reading about is how for some companies, some companies have not even applied for them because payroll represents a relatively small portion of their, you know, their expenses whereas rent or certain other ones are, you know, they're a lot heavier on that.

So the good news for us is that our franchisees, typical franchisee, probably 75% to 80% of their costs is their permanent personnel. And therefore, these PPP loans are really, really effective. And therefore, you know, as we modeled it out, they probably, you know, the PPP loan probably accounts for a good even though they're designed to last for eight weeks, they really probably blunt any negative effect of any negative effect on income from a drop of sales for probably four to five months. So the good news is there's a fair bit of time for them to recover from that. The other part is that, I'm not sure if I said it in the last conference call, but I'll say it now.

One of the one of the obviously, every recession's a little bit different. The good thing about this sort of COVID-nineteen induced recession is that you can't miss it. All you gotta do is turn on the TV and you know that it was there. Whereas if you go back to the 02/2008, 2009 recession, was far more difficult really to know when we sort of when we got into it because obviously construction already started getting really toppy in 02/2007. And so we kept a lot more, let's say, branches active and we're losing money.

In this respect, we know what we're dealing with and therefore, you know, the vast majority of our franchisees have been able to adjust their staffing costs to account for the volume. Now, as far as will they survive to the end of the year and stuff like that, I mean, you could argue I mean, the answer is perhaps not, right? There's probably but that's true in almost any year because there's a lot of local factors that have a part of it. But, you know, I guess it's just to say that, you know, no, I would expect certain ones I would expect certain certain ones to fail. But but like I said, if you asked me on January 1 of any year, I would expect certain ones to fail.

Speaker 4

Hey, thank you so much for the color. I really appreciate it

Speaker 1

and I

Speaker 4

hope you guys are all hanging in there. Thanks.

Speaker 1

Thank you. Thank you.

Speaker 0

And I currently do not have any other questions signaled. I'll turn the conference back to management for any additional or closing comments.

Speaker 1

Well, I thank everybody for joining us on the call.

Speaker 2

Actually, have one. Dave Levine just queued up, if you want to take him.

Speaker 0

Sure. Absolutely. David Levine, Trickle Research. Your line is open. David, you may want to check your mute button.

Your line is open.

Speaker 5

Sorry about that. Sorry, I was a little slow on the draw and then I had the mute on. You kind of alluded to this a little bit, but I'm kind of curious what your sort of your general thoughts are about how all of this may impact your industry and your business in general because I'm sort of looking at the landscape and I'm thinking that maybe as this rolls out and things sort of get started maybe slowly and build up, I think you could make a case that this might be ultimately something that might be really good for your business as employers are trying to sort of find their footing and decide how many people they need here or there or wherever. Is that a reasonable assessment? I'm just trying to get your kind of high level of sort of how you see the industry in the context of all of this.

Speaker 1

Well, that's a it's a good question. And so I would answer it a few different ways is that an economic contraction is unambiguously bad for sales volumes and therefore it's bad for income in the short term. I can't put it any other way. It's really not a positive thing. However, we are uniquely, I think, placed to benefit from it.

And there's so there's a couple of benefits that, you know, again from sort of a high level that I think that we've one that we've already experienced and then the other part that I think we'll experience going forward. Then one is that it was with 3.5% unemployment, it was extremely difficult to find qualified staff in the branch. And I'm not talking necessarily for the temporary staff, but really even for managers and sales reps. And, you know, and so in many respects, there were a of our offices that were struggling in part simply because it was hard to find good managers. And, you know, obviously we mitigate a lot of that because of our franchisees tend to be the ones running the offices.

But in cases where the franchisee had multiple offices, it was a very difficult operating environment. And, you know, by having a bit of a retrenchment, a lot of people who, you know, a lot more people are now available for hire. And that's going to have, I think, a positive impact for us in next few months. But the other part is that we have a number of competitors that are highly overleveraged. And a big drop in sales combined with high debt is a really bad position to be in.

And of course, you know, as highlighted in the presentation, you know, we're sitting on $10,000,000 of cash and no debt. And so we're in a great, you know, we're in a great position to pick up where other people are going to be forced to close offices. And so I think that in that respect, will be a good office. The other or a good you know, we'll have a good result from it. The other thing that I would say is that, you know, that coming people are going to be reluctant to add permanent staff in the next, let's say, six to twelve months.

And so I do think that there will be a bit more of a reliance on staffing in the next six to twelve months that might not otherwise exist. You know, that being said, do I think that will be enough to offset, you know, let's say the pretty much washout of hospitality staffing? No, I don't think it's going to be enough to pick that up. But again, the single biggest thing is going to be and this has been true of the last three recessions that I've led a company through is that, you know, failures in our competition, financial failures among our competition is what's going to open up the biggest amount of opportunities for us and our franchisees.

Speaker 5

That's good color. I appreciate that. I mean, the one thing that I was let me just kind of ask it this way. Is one of the harder environments for your industry when you do have kind of where we've come from? And you strung the two together two pretty good quarters, so we came from this environment, I think.

But it seems to me that some of the harder environments you might operate in were that sort of low unemployment, hard to find workers kind of environment. Is that the case or am I just not getting that part right?

Speaker 1

No, it has, you know what, the environment from which, let's say we operated in from 2000 especially 2017, 'eighteen and 'nineteen, which was obviously low unemployment but a lot of demand, has a lot of challenges, right, because of finding qualified workers and it tends to then draw more competition which makes the sort of the fight for qualified workers even more acute. And so it does have its own challenges. That being said, if you ask me could I live perpetually, would I rather perpetually, you know, run a staffing company in a recession or in a time of low unemployment? I'd pick low unemployment every time. Right.

You know, I so I mean, I'm not kidding. You know, I'm not gonna I'm not gonna sit there and and sort of paint a fake picture that that I'd rather be in a recession than in a booming economy. But the funny thing is the absolute worst segment or sort of economic cycle for us is when the market is declining and yet you don't really know it yet because you're kind of holding on to hope. And I'll use as an example, we had back in early late two thousand really it was more like early two thousand and eight, we had a couple of offices in a state we don't operate in anymore. And our franchisee there was losing a fortune.

And yet there was always hope, but, you know, they had lost a couple of accounts because they had lost their accounts. And they lost a lot of money. And it ended up, you know, basically causing them, you know, to lose half their business later on because they didn't realize we were really already at the leading edge of a recession. And that was one of the things I said before is the good news with all of this is this came on like a hurricane. And there's no, you know, are none of our franchisees who are under any illusions that we are in anything other than a recession.

And once you're in a recession, you know, like I said, you can adjust your costs to almost any revenue level if you're willing to put in the effort. And, you know, and so and it's a long answer of

Speaker 4

just

Speaker 1

saying this is workable. It's not enjoyable, but it's workable.

Speaker 5

That's great. Thank you.

Speaker 1

You're welcome.

Speaker 0

And I'll turn it back to management. I have no other questions holding.

Speaker 1

Terrific. All right. Well, thank you everybody for joining us. And we look forward to coming back with what will hopefully be reasonable results for the second quarter. Thank you and have a good day.

Speaker 0

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time and have a great