HireQuest - Earnings Call - Q1 2021

Transcript

Speaker 0

Good afternoon, ladies and gentlemen, and welcome to the HireQuest Inc. First Quarter twenty twenty one Earnings Event. At this time, all participants have been placed on a listen only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Brett Maas with Hayden IR. Sir, the floor is yours.

Speaker 1

Thank you, operator. I would like 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 today may include forward looking statements within the meaning of federal securities laws. Statements about our beliefs and expectations contain words such as may, could, would, will, should, believe, expect, anticipate and similar expressions constitute forward looking statements.

These statements involve risks and uncertainties regarding our operations and our future results that could cause I request 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 and other periodic reports, which identify specific risk factors and may also cause actual results or events to differ materially from those described in the forward looking statements. Copies of the company's most recent reports on Form 10 ks and 10 Q may be obtained on the company's website at hirequest.com or at the SEC's website, 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 would also like to remind everyone that this call will be available for replay through May 31.

A link to the replay on the website of the call was also provided in the earnings release and is available on the company's website at higherquest.com. I would now like to turn the call over to CEO of HireQuest, Rick Herman. Rick?

Speaker 2

Thank you for joining us. As most of you know, on March 1, we completed our acquisition of certain assets of Snelling, a sixty seven year old staffing company headquartered in Richardson, Texas. On March 22, we completed our acquisition of the franchise relationships and certain other assets of Link, a family owned staffing company headquartered in Houston, Texas. These two acquisitions significantly increase our scale and accelerate our entrance into the traditional commercial staffing model, giving us an additional franchising model to sell and additional revenue streams. We were able to complete these acquisitions at favorable terms due to the challenge our industry is experiencing due to the pandemic and our unique position as a franchisor.

To be sure, these challenges have impacted us as well, resulting in lower system wide sales and lower royalty revenues. It's been particularly challenging for our franchises, though they have responded admirably. But our model is structured to minimize the risk of events like these and while it has been challenging, others in our industry have fared much worse. As a result, we were able to take advantage of our balance sheet and our profitable business model and make these two highly strategic and accretive acquisitions. Because these were both completed late in the first quarter, the impact on our revenue and net income was minimal.

However, 1,400,000.0 in acquisition related expenses have shown up in the first quarter and we expect additional impact in the second quarter. Our efforts since closing these two acquisitions have focused on integrating the new franchisees and taking steps to derisk the transactions. And we have made significant progress on both fronts. At this point, the operational integration of the new franchises is largely complete. Our franchisees and the corporate team put in substantial time and effort to accomplish this.

And as a result, we don't have the financial or operational burden of running multiple systems. In our efforts to de risk the transactions, first we assigned the California based franchise agreements of six linked franchises and one Snelling branch to a third party. This third party will serve as the franchisor and will pay HireQuest a royalty of 9% of the gross profit of the offices in perpetuity. This royalty revenue represents yet another lucrative low risk revenue stream for us. We also sold the three remaining California Snelling branches to the same third party.

These branches will also be part of the same royalty agreement in perpetuity once the buyer receives regulatory approval to disfranchise the offices. Finally, we sold four previously Snelling branches and one on-site location to a different third party for consideration of approximately $1,000,000 cash. This was a straight sale. The result is that after normal consolidation, we have added a net 64 locations to our portfolio, including 36 Snelling branches and 28 Link branches. The vast majority of these offices will operate as Snelling on a go forward basis.

We will see the full contribution of these branches in the second quarter, but our efforts continue to improve operations and efficiency at these acquired branches. As I stated previously, the two models, first on demand staffing where we have historically excelled and second traditional commercial staffing, which is the historical model of Link and Snelling are complementary and they deliver several benefits for us which include one, they increase our national scale, making it easier to sell to national accounts and making our various trade names more recognizable. Two, by adding commercial or weekly pay staffing models to our existing on demand staffing operation significantly diversifies our approach. Three, we were able to meaningfully grow our system wide sales at attractive valuations, taking advantage of the inherent leverage in our business model. Four, as it relates to Snelling, we acquired a sixty seven year old brand name that is well regarded throughout the industry.

Five, they enable us to efficiently leverage our corporate resources and our workers' compensation efforts, creating incremental profitability. Going forward, we will continue to evaluate additional strategic transactions, screening for fit within our existing business structure and solid economics that contribute to our financial results in a positive and meaningful way. Deploying a disciplined approach to M and A, including taking steps to de risk transactions as we have with the Snelling and Link transactions, we are focused on accretive opportunities that open to us new geographies and lines of business, strengthen the presence of our existing franchisees or provide access to targeted national accounts. Before I turn over the call to Corey to discuss the financial results further, I wanted to mention that the Board of Directors has decided to increase our regular quarterly dividend. We will pay a $06 per share dividend on June 15 to shareholders of record on June 1.

Our expectation is that we will continue to pay a 6% dividend quarterly going forward. With that, I'll turn the call over to Corey. Corey?

Speaker 3

Thank you, Rick, and good afternoon, everyone. Thanks for joining us. Our total revenue is made up of two components franchise royalties, which make up roughly 90% of total revenue and service revenue. Total revenue for the 2021 was $3,400,000 compared to $4,100,000 for the same quarter last year, a decrease of 17.4%. Franchise royalties for the quarter were $3,300,000 compared to $3,700,000 last year, a decrease of 12%.

This decrease was primarily due to the economic shutdown caused by COVID-nineteen. Service revenue, is generated from interest charged to our franchisees on overdue accounts receivable and fees for various optional services, was $144,000 compared to $415,000 last year, a decrease of 65.3%. This decrease was largely due to a decrease in miscellaneous fees charged for optional services. Selling, general and administrative expenses were $3,800,000 in the 2021 compared to $3,300,000 in the first quarter of twenty twenty. This increase was primarily due to $1,400,000 in non recurring expenses related to our two acquisitions, a relative decrease excuse me, increase in charges related to workers' compensation costs of approximately $892,000 and an increase in computer related costs of approximately $89,000 These increases were partially offset by a decrease in professional fees of $130,000 in the absence of the $1,400,000 note impairment incurred last year.

As Rick mentioned,

Speaker 4

there will be additional transaction related expenses recognized in second quarter.

Speaker 3

Net income for the quarter was $3,700,000 or $0.27 per diluted share compared to net income of $875,000 or $06 per diluted share last year. Net income this year included miscellaneous income of approximately $3,900,000 related to the transactions surrounding the Link and Snelling acquisitions. Also included approximately $1,400,000 in non recurring acquisition related expenses. Moving on to the balance sheet. Our current assets at 03/31/2021 were $34,500,000 compared to $39,000,000 at 12/31/2020.

Current assets at 03/31/2021 included $2,000,000 of cash and $29,700,000 of accounts receivable, while current assets at 12/31/2020 included $13,700,000 of cash and $21,300,000 of accounts receivable. Our notes receivable balance net of reserve at 03/31/2021 was $3,300,000 compared to $5,900,000 at 12/31/2020. We collected approximately $5,500,000 in cash from these notes during the first quarter, which included approximately $5,300,000 related to the sale of specific notes and payments of approximately $249,000 Beginning in the third quarter of twenty twenty, our Board approved and the company paid its first quarterly dividend of $05 per common share. Subsequently, the Board approved a $05 cash dividend for payments in December and again in March. As Rick mentioned, the Board increased the dividend to $06 per share, which we paid on June 15 to shareholders of record as of June 1.

We expect to pay this increased quarterly dividend each quarter in 2021 subject to our Board's discretion. And with that, I will turn the call back over to the operator for Q and A.

Speaker 0

Thank you. Ladies and gentlemen, the floor is now open for questions. And our first question today is coming from Aaron Edelheit at Mindset Capital. Your line is live.

Speaker 4

Hi. I wanted to ask you what conditions you're seeing when I think about the first quarter and I think about lots of lockdowns and the surges. And we're in a very different place, thanks to the vaccines today. And can you just describe what you're seeing business condition wise and the demand for your services now versus what was going on in the first quarter?

Speaker 2

Sure. And good to talk to you, Aaron. Aaron, so recognizing the first quarter as the first quarter progressed, demand became progressively stronger. And throughout the first quarter, really especially once it got to about March, things definitely were picking up. And so we're at a point now where if you compared us to let's say the first quarter of twenty nineteen, at least on a sort of on the comparable store basis, we're probably getting close to being within 5% to 10% of what we were in 2019.

So to sort of take a trip down memory lane, in the fourth quarter of last year, we were typically running 18% to 20% behind. And so we are now at a point where, like I said, we're running, you know, 5%, 7% behind 2019. Not 2020, we're way ahead of 2020. But of course, you know, April, May were the two worst months. So that's not surprising.

As far as the vaccine, there's no question things have opened up. Although again, you know, as you can tell, stadiums still are not full. Not everything is back to normal. And so I anticipate further strengthening of revenues. That being said, the single biggest challenge we face right now is a lack of, you know, the ability to find workers is a real challenge for our franchisees and for us.

It's basically that, you know, particularly that, you know, as you know, we, you know, our typical employee is, you know, around the $9 to $13 an hour employee. And those are people who in particular, the attraction of the $300 federal bonus for unemployment, you know, puts a true disincentive on working. Because basically you make, really you truly make more money staying on unemployment than you do working. And so that's been a real, real challenge. We probably, our revenues could probably be I would say 12% to 15% higher were we able to find people.

I think last week or the week before it came out that there are about 7,500,000 job openings in The United States and I think we have 7,400,000 of them. I'm being facetious. We obviously don't have 7,400,000 open jobs. But we have a lot. And that's really the biggest challenge we have right now.

It's not demand. It's demand. It's finding workers.

Speaker 4

Gotcha. And, you know, it's amazing how your company and the business model has performed in the last year considering all these cross wins and cross currents from either COVID or, you know, when you described disincentives and and encouraging people to get out. I wanted to go to another thing that's hitting all the headlines, which is inflation. And if I understand correctly, you're a cost plus business. How should I think about the impact of inflation or higher wages?

Or how should I think about it? How do you think about it for HireQuest?

Speaker 2

So that's a good question. And higher wages, frankly, answer, you know, defies a simple explanation. In other words, first of all, own position is that any time you have to go to your client and ask for a price increase, it's just an opportunity for them to potentially leave. And so I would rather not have to do it. So stability in wages is better in that perspective.

That being but it really depends on whether the client realizes that they're short of people that then they're willing to raise the paid wage high enough to make recruiting easier. And so it's a double edged sword. There are some clients that absolutely refuse to raise the pay rate even if they end up getting short filled orders every day. They just refuse to increase the pay rates. Others do because they recognize that the market is a lot different than what it was a year ago.

And so it's really a mixed bag. The largest clients though typically, you know, again are paying sort of on a markup basis. And so to your point is that it is somewhat of a cost plus. The issue gets more to are they sort of asleep at the switch when it comes to, you know, raising, know, there's a temptation sometimes for them to say, gosh, you can't get us people at $10 an hour anymore. We need to go see, we need to go look find a new staffing company when in reality $10 an hour is probably $2 beneath the going rate for that type of a worker in that market.

So I realize that's not a particularly clear answer but I would just say that it really and truly can create risks for losing clients and yet on the other hand, it creates certain opportunities for us as well because it's, you know, even to the extent that if we have, this is just more of almost like a math, it's a math lesson that I'm sure most people don't really need. But if we have a, we'll just say a 45% markup on a $10 pay rate, if that pay rate goes up to $11 an hour, our franchisee will make more money at that constant markup. And so it can definitely be beneficial to the franchisee long as they can continue to retain the client despite the higher pay rate.

Speaker 4

Yeah. So it sounds like there might be some short term just issues as the market, the labor market kind of normalizes. But in the long run, that will all it will all get settled out. Right? Yeah.

Presumably, I mean,

Speaker 2

there's a fairly, you know, there's a fairly defined market price for, you know, let's say warehouse labor in Indianapolis. I mean it's really, you know, it'll settle down to whatever it, know, it'll reach its equilibrium.

Speaker 1

And,

Speaker 2

you know, I do foresee that that equilibrium rate will be certainly higher than what it was in say 2019, which was already significantly higher than what it was in say 2017. There has been in this country a pretty strong increase in wages at the blue collar level. There really has been a strong real increase in wages, which is good for the American public, I think. It's a good thing. It's good for our workers.

You know, it's good for our workers and, you know, to the extent that, you know, again, to the extent that our clients allow us to offer market pay to our employees, it makes it easier for our franchisees to recruit as well.

Speaker 4

Great. That's very helpful. When I think about this upcoming quarter and your seasonally strongest quarter, which is normally Q3, And I think about that last year, obviously, the full effects of COVID and you now have added these two acquisitions. Can you talk to what to I don't even know how to phrase this the right way, but what to expect or what do you expect to see in the next two quarters in terms of is it gonna be a slow ramp up? Are you still fixing, you know, or Snelling, or is there stuff you have to do, or are we just gonna see, like, the full impact?

And it feels like it's going to be pretty dramatic when you report in, I guess in August and then for Q3 would be later in the year.

Speaker 2

I think that there won't be you know, I think that as basically as GDP grows so will, you know, so will our revenues. I'm not necessarily going back to one of your questions you embedded in your question, as far as let's say, you know, quote unquote fixing Snelling, first of all, they're all franchised. And so it's not necessarily, the pieces are all in place. It's really more a question of do, you know, does the economy fully recover let's say by the third quarter? And I'll give a good example.

We have one particular office. I won't say what it is out loud but basically I have one in mind that they were and still are heavily, heavily hospitality oriented. And they're still running 70% below last year. So to the extent that I would see anything dramatic, I believe it would still be primarily confined to those markets that are still dramatically behind last year. And there are pockets of those.

We have a number of offices that fit that category. The rest of them though, I would just simply say, you know, that incrementally they will continue to improve the, you know, schools and universities if they're fully opened in fall, again that will be helpful. Do conventions start occurring again? All those are really important, pretty important aspects. Although I have to say that the hopefully it's paired with, you know, a number of states have moved to, you know, become stricter on sort of job seeking activities, you know, prior to getting continued unemployment benefits.

In other words, even if every stadium, every auto auction, every convention center, every hotel was at 100% capacity in August, if we can't find people, we're still not going to see what we could have seen. I realize Yes. That's a little more

Speaker 4

no, no. That's really helpful. That's really helpful just understanding what the short term will look at. Last question, I monopolize some time. Last conference call, you talked about organic growth.

We talked about new verticals expansion. I was just wondering if there if you have any additional thoughts or just either on what you're seeing for organic store growth to new verticals or expanding on verticals?

Speaker 2

Yes. And I would say not to quote me because it's not sure. It's not necessarily set yet. You know, I don't have the exact number in my head is what I'm saying. But we have opened probably already maybe five or six new offices.

And we have commitments from people to open probably another eight or nine more. So I would like to think that we should be in somewhere in the 10 to 15 new organic office openings through this year, which considering it's still a pandemic and particularly given how the, you know, we're almost halfway through the year and so we're still not like 100% out of the woods, that's really a nice, you know, that represents probably a six to 7% increase in our number of units. And so I'm pleased with that. Continue to seek accretive acquisitions. And accretive acquisitions don't necessarily just mean in the traditional staffing environment or the on demand staffing.

But you know, they do include potentially branching out. And so we're still looking, we continue to look for those opportunities. But again, we're not going to chase something that doesn't make economic sense either.

Speaker 4

Got you. Thank you so much and congrats to you and the team for just navigating this and just thanks for the good stewardship.

Speaker 2

Thank you.

Speaker 0

Thank you. We have no further questions in the queue at this time.

Speaker 2

All right. Well I want to thank everybody for having joined us. And I think that as you watch over the next couple of quarters, you know, that you are as excited as we are to see what the future will be with the new Snelling and Link additions to the company. And again, I thank you for your continued support. Have a good day.

Speaker 0

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.