HireQuest - Earnings Call - Q2 2021

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the HireQuest Inc. Second Quarter twenty twenty one Earnings Call. All lines have been placed on a listen only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Brett Motts.

Sir, the floor is yours.

Speaker 1

Thank you, operator. I would like

Speaker 2

to welcome everybody to the call.

Speaker 1

Hosting the call today are HireQuest CEO, Rick Herman and CFO, Corey Smith. Please be aware 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 constitute forward looking statements. These statements involve risks and uncertainties regarding our operations and our future results that could cause higher question 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 that 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'd also like to remind everyone that this call will be available for replay through August 23. A link to the website replay of the call will also be provided in the earnings release and is available on the company's website, hirequest.com. I'd like to now turn the call over to the CEO of HireQuest, Rick Herman.

Rick, floor is yours.

Speaker 3

Thank you for joining us. I'd like to congratulate our franchisees for a successful quarter. This time last year, none of us knew what the next day would bring, but our franchisees have adapted to the evolving business environment. Every day, our franchisees across the country service their clients and provide thousands of people the opportunity to work. Our organic system wide sales were up 30% for the second quarter, and when you include the acquisitions of Snelling and Link, we were up over 100% despite some lingering headwinds from COVID.

The second quarter was notable due to the fact that it's the first period with significantly reduced impact from external factors. The 2019 was impacted by significant costs related to the merger with Command Center, and in 2020, we, like the rest of the world, were managing through the pandemic. As this past quarter developed, we were largely free from all that noise. The second quarter results are beginning to demonstrate the amount of operating leverage our franchise model can generate. The acquisitions of Snelling and Link are important factors in getting us back to a level of system wide sales where we can hit our stated target of 3.5% to 4.5% net income, although the additional amortization expense from these transactions may require an adjustment in our targets.

System wide sales are still lagging a bit behind what we would expect non pandemic levels to be, but that provides an opportunity for further organic growth as the economy continues to rebound in the second half of twenty twenty one. One of the benefits of our geographic footprint is that our franchisees are spread across 35 states with a good number in economically dynamic states like Florida and Texas, who have largely resisted mass business shutdowns. We also launched a new franchise offering, DriverQuest, focused on staffing for transportations and logistics industry. Long haul and last mile trucking have become a growing industry segment for a number of years in conjunction with the growth of ecommerce. The pandemic accelerated further adoption and growth in this area and ex exacerbated the supply and demand issues for companies trying to find drivers.

This is a specialized industry with specific needs, and we wanted to make sure that we were able to structure an offering that benefits the employees, clients, and franchisees. We're excited about the growth opportunities DriveRequest offers to new and existing franchisees. We believe that our franchise model can be applied across a broader range of service industries, and we continue to evaluate the best avenue to enter these new verticals, internal development, acquisitions, or a combination. Before I turn over the call to Corey to discuss the financial results further, I wanted to mention that the Board of Directors has declared a regular quarterly dividend. We will pay a $06 per share dividend on 09/15/2021 to shareholders of record on September 1.

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

Speaker 4

Thank you, Rick, and good afternoon, everyone. Thank you for joining us. Total revenue for the 2021 was $5,700,000 compared to $2,900,000 for the second quarter of last year, an increase of 96.7%. While the acquisitions of Snelling and Link contributed to this growth, we also experienced organic growth of approximately 40% for the quarter. Our total revenue is made up of two components franchise royalties, our primary source of revenue, which typically accounts for over 90% of our total revenue and service revenue.

Franchise royalties for the second quarter were $5,500,000 compared to $2,600,000 last year, an increase of 106.5%. Service revenue, which is generated from interest charged to our franchisees on overdue accounts receivable, license fees, and fees for various optional services we offer our franchisees, was $256,000 compared to $262,000 last year, a nominal decrease. Selling, general and administrative expenses were $2,000,000 in the second quarter of this year compared to $1,900,000 in the second quarter of last year. This increase was due to non recurring acquisition related expenses of approximately $168,000 increased compensation cost of approximately $212,000 increased dues and subscriptions of approximately 92,000 and increased stock based compensation costs of approximately $58,000 These increases were partially offset by a decrease in workers' compensation costs of approximately $190,000 and a decrease in bad debt expense of approximately $263,000 Adding to what Rick said, as demonstrated by our results this past quarter where we saw our net income and system wide sales double while only having a modest impact on our cost structure demonstrates the scalability that we can leverage in our business model. Net income in the second quarter was $2,700,000 or $0.20 per diluted share compared to net income of $1,200,000 or $0.09 per diluted share for the second quarter last year.

Included in net income this quarter was approximately $168,000 in nonrecurring acquisition related expenses. Adjusted EBITDA in the 2021 was $4,400,000 compared to $1,200,000 in the second quarter of last year. We believe adjusted EBITDA is a relevant and important metric for us going forward due to the magnitude of non cash and non recurring items running through our income statement and is thus useful when analyzing our results of operations. Moving on to the balance sheet. Our current assets at 06/30/2021 were $41,200,000 compared to $39,000,000 at 12/31/2020.

Significant components of current assets at 06/30/2021 included $2,200,000 of cash and $35,100,000 of accounts receivable, while current assets at 12/31/2020 included $13,700,000 of cash and $21,300,000 of accounts receivable. The decrease in cash is directly related to the acquisitions of Snelling and Link and the associated increase in working capital needs. Our notes receivable balance net of reserve at 06/30/2021 was $4,800,000 compared to $8,100,000 at 12/31/2020. During the second quarter, we closed on a new $63,200,000 credit facility comprised of a $60,000,000 revolving credit facility and a $3,200,000 term loan. We believe that this new facility provides us with flexibility and access to working capital to facilitate organic growth as well as the capacity to capitalize on potential future acquisitions.

Beginning in the third quarter of twenty twenty, our Board approved and the company paid its first quarterly dividend of $05 per common share. Since then, we have paid a regular cash dividend each quarter. Recently, our Board approved an increase in our dividend from $05 to $06 per common share with our first $06 dividend being paid in June. We will pay our next $06 dividend on September 15 to shareholders of record as of September 1, and we expect to continue to pay this increased dividend each quarter for the rest of the year, subject to Board's approval. And with that, I will turn the call back over to the operator for Q and A.

Speaker 0

Thank you. The floor is now open for questions. If you do have a question, please press star one on your telephone keypad at this time. Questions will be taken in the order they were received. If at any time your question has been answered, you can remove yourself from the queue by pressing 1.

Again, ladies and gentlemen, if you do have a question, please press star one on your telephone keypad at this time. Our first question comes from Aaron Eidhite. Please state your question.

Speaker 2

Hey, Rick. Congratulations to you and your team on a just a great quarter. I wanted to ask you, big picture wise. I love the announcement of DriveRequest, and, I I wanted I just, like, how big do you think that could be? And more importantly, if I think about HireQuest as kind of a platform of what you're doing, I can think of many other verticals, and I believe we've discussed, you know, security guards, etcetera, where you could do similar things.

And I'm just wondering if you could give just some thoughts on the opportunity in trucking and logistics and using HireQuest as a platform for organic growth going forward.

Speaker 3

Sure. And, good to talk to you, Aaron. The DRIVERQuest is very is a very nice, add on to our existing product offering, in part because it fits within a lot of what we were already doing. Due to the specialized nature of the liability related to it, we stayed away from trucking. Over the beginning of the year, we developed risk procedures to be able to make that offering.

We're very excited about it, if only because we've been turning away a lot of trucking related business for years. We think that we will be able to capitalize it. As far as the extent of it, it's a really large industry and growing. You know, there's no reason why it couldn't rival the size of our other divisions. You know, there's there's there's nothing really restraining.

It is a large it is a large market. And, you know, we're we're out there always looking for as far as going on to security guards, etcetera, we are always looking for those other opportunities. As we've said in the past, our model is, very scalable, not just within the temporary staffing not just within the staffing industry per se, but also, as it relates we have very similar characteristics. We're excited about the opportunities because you know, the the our there really isn't a cap on our growth that, you know, that we would end up having to go into bad sort of jurisdictions or chase after low margin business. So, really, the sky's the limit.

Speaker 2

And so is it accurate to say that you're that you when you announced you have 35 franchisees that that are launching with this, then your franchisees are already providing these services today, and there is franchise not a system wide revenue, but royalties coming in now from trucking? Or is that an accurate statement to make?

Speaker 3

Yes. That that's that that's accurate. But I but I will have to I do have to caution one thing is is, obviously, if, you know, we don't we have well, we have one franchisee that trucking is their primary line. Right? So I I don't want to oversell this and say that we have 35 people sign you know, 35 new people signed up that just want to devote their time to trucking.

This is a lot of those 35 are people who were turning down business in the past and are now, and are now able to fill those orders. So the answer is is yes. We are currently already doing business, generating royalty revenue from Drive Request. That said, it's you know, it's just just to temper it a bit as well, though it's also from people who this this is business we left on the table in the past.

Speaker 2

Gotcha. So this is business, but you see it as an opportunity long term that I I get that it's starting small and that, you know, people have to grow this, but you were turning away business. Now you're not. And over time, this could be a significant driver of of system wide revenue and therefore franchise royalties

Speaker 3

going forward. Absolutely. And and look. Truck drivers are well compensated, you know, are well compensated individuals. And so, you know, it doesn't take it, you know, it doesn't take a lot of people placed in order to generate, you know, to to generate significant revenues.

And so we are we're very excited about the opportunities.

Speaker 2

Great. My next question is just about potential acquisitions going forward. More I know you can't won't you've only announced something when you close, but, like, do you could you describe just the pipeline of opportunities? Are you still excited about what you're seeing, beyond just, like, organic opportunities, of just an acquisition pipeline?

Speaker 3

So, you know, that that's a that's a that's a question I have be careful in answering. We are always out there looking. There are certain ones where if you'd have asked me three weeks ago what the pipeline is, it would be different than what I would say today and what it was three months ago. I would say that the you know, and and sometimes you think you have a deal, and you spend weeks getting it to the point of a deal, and then it falls apart. But I I I think the fact is is that we are actively engaged in seeking out opportunities.

And so there will be you know, I do believe there will be consistent opportunities. The really, the bigger question is is do they fit our parameters from a profitability standpoint that, you know, and basically, that properly priced that we wanna actually execute on it. And that's that's really the bigger issue. There's all sorts of stuff we could overpay for, but that's not, you know, that's not that's not our that's not our goal. Great.

Thank you very much. Question.

Speaker 2

But No. No. No. Absolutely. I mean, I just

Speaker 3

wanna big country. It's a big country, and there's a lot of you know, and there's there's a lot of verticals. There's a you know, so there's a lot of opportunities.

Speaker 2

No. No. That's that's all I wanna and I know that you're gonna be very disciplined with your approach and treat it like it's your capital. So I'm very confident. Thank you, and a great quarter again.

Speaker 1

Thank you.

Speaker 0

Okay. And it doesn't look like we have any further questions coming in. I'll turn it back over to you for closing remarks.

Speaker 3

Well, again, I wanna thank everybody for joining us today. I appreciate your interest in the company. Hopefully, you're a shareholder, then I really appreciate you being on. Again, I I hope that as you take the time to look through the 10 Q, that what you'll see is really the progress that we've made in quickly assimilating the Snelling and Link acquisitions. I think one of the key points that, as we develop, that it's important to stress is our ability to quickly assimilate acquisitions, which gives us the opportunity to grow.

Because of our franchise model, we don't assume nearly as many of the operational, you know, issues to, to integrate, and that allows us to make more acquisitions in a shorter period of time. And I think that if nothing else, the second quarter of this year really demonstrates how quickly that we can we can integrate even even a 50% uptick in our business, that we can do that really with relatively minimal cost and in a very short period of time. And so, again, I wanna thank you, and have a good day. Thank you.

Speaker 0

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.