HireQuest - Earnings Call - Q3 2021

Transcript

Speaker 0

Good afternoon, ladies and gentlemen, and welcome to the HireQuest Third Quarter twenty twenty one Earnings Call. 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. 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 may contain and include forward looking statements within the meaning of 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 actual 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 higherquest.com or at the SEC 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 would also like to remind everyone that this call will be available for replay through November 25.

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

Speaker 2

Thank you for joining us. This past quarter marked a milestone for us with weekly sales from our legacy HireQuest direct franchisees pulling even with 2019 numbers for the first time since the beginning of the pandemic. Over the course of the quarter, weekly sales weekly sales results improved from trailing 2019 comps 10 to 15% in early July to pulling even by the September. Given the continued uncertainty and headwinds from the pandemic, we're excited by their momentum going into the end of the year. Q three system wide sales of $99,600,000 and total revenue of $6,900,000 both represent record results for HireQuest and were driven by a combination of organic growth and the contributions from our Snelling and Link acquisitions.

We also had record adjusted EBITDA of $5,300,000 This is especially notable given that given we recently completed two large acquisitions at the end of the first quarter. Our ability to integrate both Snelling and LINK and within two quarters see the results from the increased scale highlights the benefits and potential operating leverage of the franchisor model. Adjusting for the extraordinary non cash compensation and the non recurring note charge in the quarter, we comfortably achieved our stated net income target of 3.5% to 4.5% of system wide sales. Subsequent to the end of the quarter, we announced two acquisitions. First, our acquisition of Recruit Media at the October accelerates our development efforts and will provide new tools for our franchisees to better serve their clients and workforce.

Second, we announced that we entered into a definitive agreement to acquire Dental Power Staffing the Dental Powered Staffing division of Dental Power, and we expect to close this transaction before the end of the year. As we've said in the past, we believe that our franchise model can be applied across a broad range of staffing verticals and service industries, and we continue to evaluate the best avenue to enter these verticals, internal development, acquisitions, or a combination. Smaller transactions such as dental power give us a platform to build on both organically and through add on acquisitions. 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 our regular quarterly dividend. We will pay a $06 per share dividend on December 15 to shareholders of record on December 1.

Our expectation is that we will continue to pay a $0.06 cent dividend quarterly going forward. With that, I'll turn the call over to Corey. Corey?

Speaker 3

Thank you, Rick, and good afternoon, everyone. Thank you for joining us. Total revenue for the 2021 was $6,900,000 compared to $3,400,000 for the same quarter last year, an increase of 103%. Our total revenue is made up of two components franchise royalties, our primary source of revenue, which typically accounts for about 95% of our total revenue and service revenue. Franchise royalties for the quarter were $6,500,000 compared to $3,200,000 last year, an increase of 103%.

While the addition of Snelling and Link locations contributed to this growth, we experienced organic growth of 52% during the third quarter. We also achieved a milestone this quarter with system wide sales matching twenty nineteen levels, levels we have not seen since the pandemic began in early twenty twenty. Service revenue, which is generated from interest charged to our franchisees on overdue accounts receivable and fees for various optional services, was $341,000 compared to $164,000,000 compared to $1,400,000 last year. This increase was partially due to additional expenses to support the Snelling and Link acquisitions, but also included an additional $460,000 in non cash compensation dollars related to an increase in the reserve placed on notes receivable related to the 2019 sale of locations in the State of California. Net income for the quarter was $3,200,000 or $0.23 per diluted share compared to net income of $2,000,000 or $0.15 per diluted share last year.

Adjusted EBITDA in the 2021 was $5,300,000 compared to $2,900,000 in the third quarter of last year. We believe adjusted EBITDA is a relevant metric for us going forward due to the size of non cash operating expenses running through our P and L. A detailed reconciliation of adjusted EBITDA to net income is provided in our 10 Q. Moving on to the balance sheet. Our current assets at 09/30/2021 were $46,700,000 compared to $39,000,000 at 12/31/2020.

Current assets at September 30 included $4,800,000 of cash and $38,400,000 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 reserves at September 30 was $4,300,000 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 room for both 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 quarterly dividend. And in June 2021, our board approved an increase in our quarterly dividend from $05 to $06 per common share. As Rick mentioned,

Speaker 2

we will pay this $06

Speaker 3

dividend on December 15 to shareholders of record as of December 1, and we expect to continue to pay this increased dividend each quarter in 2022, subject to the Board's discretion. And with that, I will turn the call back over to the operator for questions and answer.

Speaker 0

Okay. Hello, everyone. Please submit your questions at this time. We do have a question from Aaron Eidelhart. As a reminder, the floor is now open for general questions.

If you have a question or a comment, please press star one on your phone. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold on while we poll for additional questions. Aaron, the floor is yours.

Speaker 4

Yes. Rick, can you hear me?

Speaker 2

I can.

Speaker 4

Oh, okay. Great. Congratulations on the great results. I was really surprised happily on the operating leverage and wanted to ask you, is there some step change? Or how should we think about this quarter?

When I look at your adjusted EBITDA margin, that was much higher than I expected and very happy with it. Going forward, was this was was this an anomaly, or how should I think about this?

Speaker 2

Thank you, and, appreciate the question. I would say that, no, it's not an anomaly really at all. It's just hitting pretty much right about exactly where we should be. The, you know, the prior periods obviously were affected by the pandemic. So when you go back to 2020, you know, we were even though we did a lot of expense cutting in the beginning of the pandemic, you can only still cut so far.

And so really, the operating leverage has come back significantly with the, you know, with the sort of bit of the releasing of the pandemic's grip on the economy, and of course, the acquisitions of Snelling and LINK having boosted it, you know, having boosted our operating leverage as well. So, no, I wouldn't look at it as anomaly as well and at all.

Speaker 4

Okay. Now we've been I obviously, you've opened the newspaper and you talked to anyone in business and there are shortages of labor. I have to assume HireQuest is experiencing similar things. Do you have any idea if there were bottlenecks for you to provide labor to your customers? Can you give me any metrics of what you could be doing if there weren't, either shortages of labor or or if there are bottlenecks?

Could you give me any thoughts on how much better you could have done even though I'm really happy with these results?

Speaker 2

Yeah. So that's a it's a double edged sword. So let me first state that I do think that the ending of the supplemental $300 a week unemployment benefits really helped our filling of orders towards the end of the quarter. And as I stated earlier, is we went from running, you know, 10 to 15% behind 2019 numbers to basically even by the end of the quarter. A lot of that had to do with the return.

It's sort of like return of the Jedi. Well, this was like return of the worker. And so the the ending of that $300 supplemental, you know, supplemental pay for not working really brought a fair number of people back into the workforce. Now as far as bottlenecks and stuff like that, we certainly have more unfilled orders now than we've ever had in the company's history. However, I and so sure.

We could probably be 10 to 15% higher if we could fill every order. But I wanna be careful in overstating that because the shortage of workers also leads to more orders, and so it probably balances it probably balances itself, if that makes any sense.

Speaker 4

Yeah. No. It makes sense. Last question about kind of new verticals. I remember on the last call, I asked a question about trucking.

You announced your first foray into health care with the dental, staffing business. When I look long term and I think about the opportunities of this vertical, how big do you think could could dental be like a a billion dollar, you know, system sales business? Or, you know, you had mentioned last quarter that you thought that that trucking could be enormous. I'm just wondering how you think about in the long term. I'm not looking for next quarter or next year, but just how big could some of these verticals or specifically the dental opportunity be?

Speaker 2

Right. So, obviously, with trucking, when you have it, you know, pretty much widely acknowledged that there's a shortage of 500,000 truckers right now, it's easy to see where it becomes literally, you know, a 9 to 10 figure opportunity. On the other hand, you know, dental is not dental is not that, and it's not really our strategy necessarily to, you know, to be necessarily it doesn't have to be a huge it doesn't have to be a huge segment. Part of going into dental what's helpful about going into dental is this where, and yet in a limited way to start with, is for us to develop our own system so that we can grow from there. So I would say medical, more broadly, is obviously a huge opportunity.

Dental is not a small opportunity, really should be viewed more as an entree into the more skilled and professional, areas. Gotcha.

Speaker 4

So it's kinda like dipping your toe into the medical field, and we should maybe this isn't the last announcement we're gonna see in that Yeah.

Speaker 2

And that's not saying that there's anything now. You know, it's it's we truly you know, there's a lot of credentialing, and, you know, medical is significantly different than, you know, a person working on an assembly line. And so, you know, we wanna make sure that we do the you know, that we do a good job with it. Now that being said, that's why we bought a more than forty year old company to get forty years of experience within that industry or our bond. I'm sorry.

We, you know, are contracted to buy it. You know, that that's part of the reason for buying a company with that much experience is is that, like I said, it'll help us develop our systems.

Speaker 4

Gotcha. Thank you so much.

Speaker 2

Sure thing.

Speaker 0

As a reminder to our participants, simply press star one on your phone at this time We do not currently have any participants in the q and a field at this time.

Speaker 2

Alright. Well, then I'd like to thank everybody who joined us to, thank you for joining us, and, we look forward to seeing what the fourth quarter brings. And, again, we thank you, and have a good