HireQuest - Earnings Call - Q4 2020

Transcript

Speaker 0

Good afternoon, ladies and gentlemen, and welcome to the HireQuest Incorporated Fourth Quarter and Year End twenty twenty Earnings Event. At this time, all participants have been placed on a listen only mode, and we will open the floor for your 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 is HireQuest CEO, Rick Hermans and CFO, Corey Smith. Please be aware some of the comments made during their call 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 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

Speaker 2

the forward looking statements. Copies of

Speaker 1

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 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 this call will be available for replay through March 25. A link to the website replay of the call was also provided in earnings release and is available on the company's website, hirequest.com. I'd to now turn the call over to HireQuest CEO, Rick Herman.

Rick?

Speaker 3

Thank you for joining us. This has certainly been an eventful period for HireQuest. Over the last one hundred and twenty days, we have taken advantage of our balance sheet and our profitable business model to make two highly strategic and accretive acquisitions during what continues to be a challenging period for our industry. The result of these two acquisitions is that we have additional revenue streams and a stronger national presence. We have augmented our on demand staffing model provided through HireQuest direct franchises nationwide by adding traditional commercial staffing, which will be sold by franchisees of the well respected seventy year old Snelling Staffing name.

These two models are complementary, and they deliver several benefits for us, including one, first, they increase our national scale, making it easier to sell to national accounts and making our various trade names more recognizable. Second, adding commercial or weekly pay staffing models to our existing on demand staffing operations significantly diversifies our approach. Third, we were able to meaningful meaningfully grow our system wide sales at attractive valuations, taking advantage of the inherent leverage in our business model. Fourth, as it relates to Snelling, we we acquired a seventy year old brand name that is well regarded throughout the industry. Finally, they enable us to efficiently leverage our corporate resources and our workers' compensation efforts, creating incremental profitability.

Combined, our system wide sales should exceed $340,000,000 even without a return to pre COVID system wide sales levels. In addition, we have licensed our trademarks for 10 offices in California, which should produce at least another $20,000,000 in system wide sales. HireQuest is built was built on a risk mitigated business model, positioning us to deliver consistent profits even in challenging environments. Indeed, this was as challenging environment for on demand staff for the on demand staffing sector as we are likely to see in our lifetimes, with the cancellation of sporting events, concerts, auto auctions, and many other events which provide significant volume for our franchisees. Nevertheless, we remain profitable.

And while it has been a difficult time for many of our franchisees, most of them have performed admirably and are well positioned to come out on the other side stronger for the challenge. Similarly, we took steps to derisk these two transactions. We expect to further reduce any risk involved in these acquisitions in the future. First, we acquired Stelling Staffing, purchasing 47 locations, generated approximately $87,000,000 of system wide sales in 2020. We determined that it was in our best strategic interest to sell certain Snelling locations to third parties and have done so.

As mentioned before, four of these offices were transitioned to a third party in California who will license the Snelling trademark and pay us a royalty. Second, we have closed the acquisition of Link Staffing, acquiring 35 locations in nine states, adding incremental $57,000,000 in system wide sales. In line with our California strategy, we transferred the franchise agreements of six of these offices to be operated pursuant to the trademark license agreement. We expect these locations to convert to the Snelling name as it is well known in the industry. Financially, our royalty revenue reflects the challenges related to the pandemic.

The temporary employment market began to find its footing following the bottoming out that we experienced over the spring and summer months. That we were able to navigate through the shutdowns and construction delays and the other effects of the pandemic speak to our franchisees' resilience and professionalism. The staffing industry is subject to economic and business cycle risk even under the best of conditions. Our franchise business model was designed with this in mind to reduce quarter to quarter volatility and insulate us from extreme swings in economic activity. Over the course of 2020, we demonstrated the value of our approach and remained profitable on double digit declines in system wide sales and revenues.

Our franchisees rose to the serious challenge of adjusting staffing levels and expenses to align with the current economic conditions and a steep decline in system wide sales. Looking ahead, we are encouraged by the increasing availability of vaccines and what appears to be a moderation in the number of COVID nineteen cases over the last several weeks. As a reminder though, as the economy as a whole shows signs of recovery, there are certain sectors like leisure and hospitality where we have exposure that will most likely be later to recover, which highlights the significance of our recent acquisitions. 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, we are focused on opportunities that provide an entree into new and attractive geographies, strengthen the presence of our existing franchisees, provide access to targeted national accounts, or place us in industries with similar employment dynamics.

Any deals we accept will need to demonstrate an ability to be absorbed into our franchise model quickly and provide a positive financial contribution in a short amount of time. We are not interested in chasing scale or growth that does not fit within our existing profile. For the year, we delivered more than $5,000,000 of net income or $0.39 per diluted share despite the nearly 13% in system wide sales and significant reserves placed on a notes receivable. Importantly, we generated positive cash flow of more than $9,000,000 adding to our cash reserves and providing us with the resources and flexibility to selectively pursue the two strategic transactions I just discussed. Subsequent to these transactions, our balance sheet remains solid, and we expect again to be debt free following the integration of the 80 new locations in a relatively short time.

Disciplined and responsible capital allocation remains a critical cornerstone to our strategic framework and the overall health of the company. Simultaneously, we are allocating a portion of our cash flow shareholders in the form of regular quarterly cash dividends. Beginning in the third quarter of twenty twenty, we declared a cash dividend of 5¢ per common share, which was followed by additional dividends at the same rate in December and March. We intend to continue to pay this dividend on a quarterly basis based on our business results and financial position at the discretion of the board. Our commitment to regular cash dividends underscores our confidence in our business model and our franchisees and the quality of the services they provide.

Let me turn the call over now to Corey to discuss the financial results further. Corey?

Speaker 4

Thank you, Rick, and good afternoon, everyone. Thank you for joining us. Total revenue in 2020 was $13,800,000 compared to $15,900,000 in 2019, a decrease of 13%. It was primarily due to the economic shutdown caused by COVID-nineteen. Total revenue consists of two components, franchise royalties, which make up roughly 90% of total revenue, and service revenue.

Franchise royalties in 2020 were $12,800,000 compared to $14,700,000 in 2019, a decrease of 12.8%. Service revenue, which is generated from interest charged to our franchisees on overdue accounts receivable and fees for various optional services, was $1,000,000 compared to $1,200,000 in 2019, a decrease of 15.5%, which was largely due to a decrease in miscellaneous fees charged for optional services. Selling, general and administrative expenses in 2020 were down 33.7% to $8,700,000 compared to $13,100,000 in 2019. This $4,400,000 decrease was primarily due to $5,100,000 in merger related expenses that were incurred in 2019 but not present in 2020. This decrease was partially offset by an increase in stock based compensation and a reserve placed on our notes receivable that were issued to finance the sale of the offices acquired in the 2019 merger.

This reserve was directly related to the negative impact COVID-nineteen has had on the economy, the financial condition of our borrowers and the value of the underlying collateral. Net income in 2020 was $5,400,000 or $0.39 per diluted share compared to a net loss from continuing operations of $505,000 or negative $05 per diluted share in 2019. Taking a look at the fourth quarter. Total revenue in the 2020 was $3,400,000 compared to $5,900,000 in the fourth quarter of twenty nineteen, a decrease of 42%, again related to the economic shutdown caused by COVID-nineteen. Franchise royalties in the 2020 were $3,200,000 compared to $5,400,000 in the fourth quarter of twenty nineteen, a decrease of 40.2%.

Service revenue was $176,000 compared to $476,000 in the fourth quarter of twenty nineteen, a decrease of 63%. This decrease is largely due to a decrease in miscellaneous fees charged for optional services. Selling, general and administrative expenses in the 2020 were down 31.5% to $2,200,000 compared to $3,100,000 in the fourth quarter of twenty nineteen. This $973,000 decrease was primarily due to a decrease in payroll costs and lower stock based compensation. Net income was $1,400,000 or $0.10 per diluted share in the 2020 compared to $3,500,000 or $0.26 per diluted share in the fourth quarter of twenty nineteen.

The 2019 included a loss from continuing operations of $315,000 or a negative $02 per diluted share. Beginning in the third quarter, our Board approved and the company paid its first quarterly dividend of $05 per common share to shareholders of record as of 09/01/2020. Subsequently, the Board approved a $05 cash dividend for payment in December and again in March. In 2020, we returned approximately $1,400,000 in cash to our shareholders in the form of dividends. We expect to continue this practice and pay a cash dividend each quarter at the Board's discretion.

Moving on to the balance sheet. We have grown our current assets to $39,000,000 at 12/31/2020 from $37,000,000 at December 3139. Current assets at 12/31/2020 included $13,700,000 of cash and $21,300,000 of accounts receivable, while current assets at December 3139 included $4,200,000 of cash and $28,200,000 of accounts receivable. Property and equipment increased by $1,300,000 since the 2019 to $3,200,000 at the 2020 as we continue the construction on a new building adjacent to our corporate headquarters, which will give us additional room for growth. We also began an IT project updating our front office software in 2020 that resulted in an intangible asset of $343,000 at 12/31/2020.

Our notes receivable balance, net of reserve, at 12/31/2020 was $5,900,000 During 2020, we collected approximately $2,100,000 in cash from these notes. And with that, I will turn the call back over to the operator for Q and A.

Speaker 0

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press one on your phone.

Your first question is coming from Aaron Edelheit. Your line is live.

Speaker 5

Hi, Rick. I wanted to ask you a question about the two acquisitions. When you even in the press release, and I think you alluded to it in your comments of them having a 133,000,000 or so in system wide sales. But when I look inside the eight k's that you provided, Snelling, which did 95,000,000 in 2020, actually did a 123,000,000 in 2019 and a hundred and thirty five million in 02/2018. And and LinkedIn, instead of 57,000,000 that they did last year, in 02/2019, they did 85, and the previous year, over a 100,000,000.

And when I I'm just thinking about, like, a post COVID kind of return to normal world. Is there any reason to think that these two companies couldn't get back to what they were doing previously? I've gotta think especially with your management and with really investing and paying attention that maybe you could even exceed those. But I'm just I'm curious if you could comment. I know you can't comment to the timing of when that may happen.

But assuming we went back to normal, is there any reason we couldn't go back? Because you're talking about 30 to potentially a 100% higher revenue rates for these companies you just acquired.

Speaker 3

Yes, Sharon. I appreciate the, appreciate the question. And I think that you're right. I mean, if your if your philosophy is that the economy in whether it's in 2022 or 2023 or the 2021 returns essentially to 2019, there's really no reason to believe that you know, there's nothing structurally. There's it's not like a bunch of offices have been closed so that those old results can't or shouldn't be achieved.

And so, you know, as an example, in '20 using just HireQuest numbers, we had our system wide sales in 2019 were nearly, when you include the first half of the year from command center, it was around $291,000,000, and we ended up at around, you know, basically 30% less, around $210,000,000. And again, it's not as though we closed multiple offices in multiple markets that we can never go back to that $291,000,000. And so, to answer your question, is no. As much as our system wide sales, even at twenty twenty levels, let's say assuming a full twelve months of Snelling and Link and HireQuest combined, know, should be in that 300 and you know, would be in that 350 to $360,000,000 range. You know, if if if you assume even a 25%, reversion back to 2019, you know, you're pushing somewhere in the $450,000,000, $460,000,000 range for total system

Speaker 5

sales, whenever

Speaker 3

the economy recovers. Of course, it may not, you know, I mean, there's a lot of reasons why it may not ever get back to that, but, that are outside of our control. But again, there's nothing structurally that would stop us.

Speaker 5

Got you. And my hat's off to you to really acquire these two companies, I understand correctly. One of them was a subsidiary of a bankrupt or a troubled company and another. But just for you to acquire these companies right before a in my opinion, the economy reopens, I'm my hat's off to you as a shareholder. Do you see more opportunities?

You know, one of the things I I see you make these incredible acquisitions, even the one of command center that brought HireQuest public. And I'm just curious if you could talk to kind of the opportunity set to continue to consolidate, the industry and put them underneath your management and the the the superior model that you have at HireQuest.

Speaker 3

Well, it's it's a good question. And so part of it is, I will say, a lot of companies have tried to sort of quote unquote consolidate the staffing industry over time. And frankly, it it hasn't necessarily gone very well. And which fundamentally goes back to the point of our model literally turns that on its head. And really, our goal is, to have local ownership.

Right? And so the it does put, you know, it does put a little bit you know, sometimes it puts limits on it. Right? Because once we have a franchisee in a market, you know, it's harder to buy another one in it. And so I wouldn't necessarily, you know, see us you know, we're we're not we're not out there just to buy new companies.

It's not really what we're looking for. That said, we now have an entirely separate platform from which to develop. I think that's one of the key parts of these acquisitions, is really that historically HireQuest had a very, very limited presence in the traditional commercial staffing market. While Snelling and LINK obviously had much larger presences, they were still by national standards relatively small. But by putting them together, now we have more than 80 offices, which creates its own momentum because now the name has more value, and the network has more value, which makes it easier to grow.

And so, you know, we've already have more commitments for people to open new offices in 2021 than we did in 2020, and that was even, let's say, before COVID hit. You know, one of the what I don't want people to overlook is the fact that these acquisitions are really important for setting up organic growth as well. And anyway, it's it's they're very important for setting up organic growth. And, you know but look, we're always looking for additional additional opportunities. And the the I think that now it's just become clear to a lot of people sort of, you know, what the status of the market is.

And the market really froze, frankly, in the end of twenty twenty. Nobody wanted to sell. Nobody wanted to buy. Whereas now, like I said, opportunities have started to present themselves. And again, we'll continue to be active where the opportunity is appropriate.

Speaker 5

And and and another question is just beyond staffing. Are there, you know, kind of longer term visions? Are there other verticals or, that you could utilize HireQuest franchise models such as, like, security guards or trucking? Like, how far do you think you could take the model?

Speaker 3

Well, that's a critical you know, that's a critical question, and it's alluded to it was alluded to in my remarks talking about expanding into expanding into markets or industries that have similar employment dynamics, and security guards is a perfect example. Realistically, a security guard isn't significantly different, from a lot of employment characteristics as a traditional, you know, let's say as a welder who's working as a temporary employee. And as a result, there are numerous industries that are like that that we can absolutely go into. So that's why rather than chasing, you know, rather than chasing bad acquisitions or moving into, let's say, weak markets or getting involved in accounts with really low margins just to drive growth, frankly, more realistic option for growth is to go into heavy, basically fragmented industries, again, like the security guard business, where a it's hard for a person who they may be a great operator of a security guard company, but they don't have access to the cash, to finance that type of payroll or maybe not have the the requisite skills to employ 50 or 75 guards. And so, yes, there are a lot of opportunities for us to grow.

The the the the runway for us is frankly, it's it's almost unlimited, really.

Speaker 5

And then just the last question. I won't monopolize it more time, but when I look at, like, Live Nation, which owns Ticketmaster and runs concerts, they're at, like, all time highs. And I think about your business. And when we've talked before, you know, you do a lot of concerts and stadiums and sport events and thing things like that. And I look at the vaccine distribution schedule, pretty much every adult having access to vaccines by May, the latest, maybe June.

I gotta think that your q three, if concerts and I'm I'm not asking you to predict when it's gonna happen, if concerts and sports and we go back to normal, like, you're set up for a pretty strong third quarter in that in that scenario. Is is that is that a

Speaker 3

is that correct in your mind? There there's there's no question. So there's there's two main factors in that. And, undoubtedly, you know, as and if you, you know obviously, I'm a football fan. And, you know, you watch the Super Bowl was where I live here, you know, here in the Tampa Bay area.

And, you know, there's what, like 15,000 people in the stadium. And as a result, the the amount of business that we would have otherwise had basically, we got no business out of the Super Bowl, whereas in a normal year, we would have gotten a large amount of business. And so, you know, obviously, if there are people in the stands in, let's say, for let's say, for college football this this fall, then that will be very, very good for us. And it will you know, because that is a big that is a big component of our business. I will say, I but what I do need to tamper tamper this with is right now is there is a bit of a there is a challenge finding employees.

All of our franchisees almost all of our franchisees are struggling to find employees right now, and, and I suspect that's true of almost every of every company in The United States right now. And, you know, so I think that as as basically people's tax refunds get spent and as their stimulus checks get spent and as the $300 a week extra supplemental unemployment benefits go away, we'll actually also see a real improvement in our system wide sales as well as people return to the workforce that right now have the liquidity to not work.

Speaker 5

Gotcha. Thank you so much, and appreciate it.

Speaker 3

Thank you, Aaron.

Speaker 0

Thank you. Your next question is coming from Peter Rebover. Your line is live.

Speaker 2

Hey, Rick. So congratulations on the acquisitions. Great job. So I was wondering if you could maybe update us on how that sort of changes your industrial and geographic mix from, you know, year end 2020?

Speaker 3

That's a good question, Peter, and good to talk to you. The obviously, from a geographical standpoint, we're probably the acquisitions, especially LINK, puts us far heavier in Texas than what we used to be, which, to be honest with you, is one of the was one of the attractions of LINK, was to be heavier in Texas. And so now our two largest states by far are Florida and Texas, which are two of the most dynamic states in the country, so we're very happy with that. The characteristic of the employee has obviously changed significantly now, is probably 70 not 70, but probably about 40% of our business now represents people who you would typically think of as, you know, they're blue collar, but whereas the on demand staffing would tend and trend more towards construction and recycling facilities and cleanup of stadiums, has now we transitioned to where we're significantly heavier in manufacturing and logistics, which again, to me is attractive, especially logistics, you know, one of the things the pandemic I believe the pandemic will leave sort of a permanent mark on retailing, and it'll go more towards online, which will increase the need for logistics, companies, and that will actually suit, you know, will really that shift will help our newfound product line.

That takes us where, again, we're pretty much a lot more in the traditional commercial staffing. The other part is that Snelling in particular did a lot or does a lot of executive search, and one of the one of our plan you know, one of our plans is to develop that further. And so we certainly will hope to see a lot more perm placement fee income by our franchisees moving forward as we make more investments to grow that to segment. The same is true with medical. Stelling had a kind of an emerging medical staffing unit, and so we will also spend the resources to properly properly develop that as well.

So we're excited that it it it's created a number of new avenues for growth for us. And yet, again, it positioned us, again, geographically stronger in a couple of the most dynamic markets. Again, I think it'll put us stronger into logistics, which will have very positive effects on our bottom line in the long run.

Speaker 2

Okay. Great. Thanks so much for the color. I guess, second question would be, you know, there's been a big push toward, you know, minimum wage increase. And, as you said, more of a blue collar workers, which tend to whose wages tend to increase off of minimum wage.

So I'm curious whether that's a, you know, a tailwind to your, you know, to the system wide sales. Like, do you get to charge more and get to take a higher percentage and and so on?

Speaker 3

Yeah. That's a that's a great question. And I think that the the funny part about it is is really one of the when you look at companies, our competitors, let's say, like, Manpower, Adecco, Funny thing about it is is that their largest markets are Europe. And so if you think of rigid labor laws and high costs, it's Europe. And so to the extent that if that becomes the future of The United States, you know, it it doesn't necessarily hurt temporary staffing that way.

I mean, personally, I mean, I I think that I think that higher way you know, higher wages may in the long run, know, depress manufacturing activity in the country, and, you know, that's not necessarily a good thing. So I I I would just say that it's I think it's hit or miss in some respects to the extent that it forces more automation. Obviously, that's not good unemployment at all, which is bad for us. But, so, candidly, I think it's a mixed bag.

Speaker 2

Okay. Okay. A couple of, kinda housekeeping questions. You had, I think last year, your blended kind of royalty rate was, you know, I think 12.8 on 210,000,000, which is about 6%. And is that on the three forty that you were discussing, is that something that we can kind of expect as well, 6%, or is there a different dynamic or something else that we should look for?

Speaker 3

Yeah. I I I I would simply say to you is that the the tricky part and I I I can't really give you a good answer on that other than it'll change quite a bit because Snelling, in particular, has probably half of the Snelling franchisees have a completely different, royalty model than what than what LINK and HireQuest did. And so the numbers are gonna the numbers are gonna look a little bit screwy. So I I I wish I could tell you that you can look at that and know whether it's good or bad, but but it's gonna be it's gonna be jacked because of that. I would say to you though, as a general rule, is it will probably drift down a little bit because light industrial staffing tends to have lower lower markups, and therefore, our royalty our royalty is not as high.

And in order for our franchisees to be competitive, our royalty is lower on low low margin accounts. And so I would actually anticipate it to drift downwards a bit, notwithstanding even the, like I said, the the set of franchisees that have a that have franchise agreements that are completely nonstandard.

Speaker 2

Okay. Would would that affect the, like, the other, the other revenue? Will that be, like, less accounts receivable financing and all that stuff or more? Just general question, I think.

Speaker 3

Yes. Yeah. Yeah. So there are a certain number of offices, again, using the Snelling ones, where they're you know, they literally their their royalty is, in essence, to utilize the the Snelling network and the the Snelling name. It they don't they don't receive workers' comp.

They don't receive all of the back office support. They don't receive the cash. And so it's a it is a truly you know, so it'll it'll alter everything. That's what I'm trying to say. It's kinda like Yeah.

Yeah. Yeah. It's gonna muddle things that way. It's gonna muddle things that way. But

Speaker 2

But in theory,

Speaker 3

that would sort of We're we're still targeting the same net margin as what we always have.

Speaker 2

In theory, that would sort of derisk the balance sheet a little bit with less workers' comp liability. Does that is that what the other thing that I heard you say?

Speaker 3

I mean, that's that's true. But I I I mean, I will have to say as much as it it might do that, be honest with you, one of the one of the biggest advantages that we offer as a franchisor is access to to a rated workers' comp. It's a big deal because it's one of the hardest things to get is if you're a small staffing company, is to get workers' comp at all other than through the, you know, other than through the state pools, which are generally catastrophic in the long run to run your business. And so while it is certainly less risky for us, right, we can lose money on providing workers' comp to a franchisee. On the flip side of it is, know, it it really is one of the primary reasons why I myself would sit there and say, this is why our product is so darn good is because of the access to workers' comp, you know, the access to workers' comp at a very attractive rate.

Speaker 2

Got it. And then maybe moving down the bottom line, I think you guys had, about 2,200,000.0 in s g and a per your press release. Was cash? Is that a good run rate to think about it? Or is there with these acquisitions, will there be addition to that?

Just kind of curious and all that.

Speaker 3

Oh, there's no question. We're gonna have, you know, we're gonna have actually, I wanna step back from that for a second.

Speaker 2

Yeah. Yeah.

Speaker 3

My senior management team did an amazing job with both these acquisitions of minimizing the amount of outside, you know, of outside costs. We didn't we didn't spend heavily on, you know, all sorts of outside advisers or anything like that. We worked, We did the work ourselves, mostly. As a result, thinking of the fact that we made acquisitions that totaled almost 60% of our existing system wide sales, you would expect huge amounts of transaction costs. Fortunately, again, due to the efforts of the management team, we were able to keep those costs at a minimum, and even in both instances, they were both asset purchases, and as a result, have far less lingering costs to absorb, you know, to absorb these acquisitions.

And to give you an idea, like when we merged with Command Center, I mean, we were still paying rent, you know, six months later on their corporate headquarters. We have none of that in either of these deals. That said, first quarter is going to contain a boatload of deal expenses. No,

Speaker 2

I understand that. Guess I'm just thinking more of a run rate part to think about, like, right, so just kind of to for modeling purposes. Right? Like, off the system wide sales, like, what's your cost base? What's your cash cost base going forward?

And I was just curious whether the fourth quarter was a good good number or not.

Speaker 3

No. Fourth quarter is not a good number simply because, obviously, we've increased our size by 60%. So, you know, that alone requires, you know what I'm saying, additional, you know, additional, SG and A to handle it. Now I do think, and one of the one of the most important parts of these acquisitions again was also to restore a lot of the operating leverage we lost during the pandemic. I mean, we lost a ton of operating leverage.

Now we're back up to where we get our operating leverage back. And, you know, so that was very, you know, that was very important. But, again, to to for us to be able to hold that fourth quarter, no. You know, there's no. There's no.

But I would say that it would be proportional. You know, the the increase in s g and a would be proportional, not, you know what I'm saying? So it would fit within it and, you know, it would fit within, you know, a 60% increase in sales.

Speaker 2

Got it. I understand. And then, I guess the last question, just maybe I know you've you have been kinda low to talk about, but what you did some detail in your building in South Carolina. I I know you're adding stuff to it. Is it you know, how big the building, etcetera.

So just kinda curious. So is it more valuable now? Can you borrow against it for to make more acquisitions and all that stuff? So

Speaker 3

The the so the the look. The building's not gonna be the white knight that's gonna, you know, that's gonna put me you know, that's gonna allow us to buy acquisitions or, you know, to buy other companies. We have the the the building is nearly complete. We have, I don't know. It is we have a we have a really slow builder.

I I'll I'll tell you. We have a really slow builder. The we expect it to be done relatively soon. The the building, you know, it's it it because of commercial real estate being what it is and, you know, it's it it it I would say that there's there's no big hidden equity in it. I'll just say that.

It's not like we we built it for 4,000,000 and it's worth 8 or anything like that. It's it's proportionate to what we paid for, but it's nearly complete. It's about I think the total total building buildings, once they're done, will be, 25,000 square feet of office space. But we have leases in part of it to outside parties as well, and we won't occupy the whole thing. We don't we don't have enough need for all of it.

So we have room to grow within it. And if you wanna rent some office space in Goose Creek, South Carolina, call me afterwards, and we'll get you set up with a lease.

Speaker 2

Got it. Well, that's great. I really appreciate all the call you're giving us today, and congratulations on growing the company so much.

Speaker 3

Thank you.

Speaker 0

Thank you. Your next question is coming from Bill Chen. Your line is live. Bill Chen, your line is live.

Speaker 1

Hi.

Speaker 6

I was wondering if you could comment on the cadence of that organic growth after the acquisition. How do you think about it? Do you think about it from X number of locations that you can open? You think about it, in terms of, x percent of incremental, products, that you could offer, you know, services that you could offer? So any commentary on that would be helpful.

Speaker 3

Sure. So I mean, I guess the way I just so you know, the way I view it is sort of how many new offices we, you know, sell franchises for. And, you know, frankly, after that, I look at it as, you know, our typical, you know, we we we our typical franchisee will hopefully be doing 2 to $3,000,000 worth of revenue, you know, two, three years down the road. And that's how I look at it. It's of course, it never works.

You know, it doesn't always work that way because someone will someone will do four and one will do 1,000,000 of revenue. But that's how I look at it, is the number of units that we sell. And and so I expect there to be a pickup in units. That being said, it might be a little bit slow because everybody will be focused on transitioning to a new sort of the new system. And so I do think by the third or fourth quarter, though, there will hopefully and I expect there to be people who let's say right now they're running a HireQuest Direct, and then they say, gosh, I'd like to run a Snelling as well in my market.

Or I've run a Snelling, and there's a lot of opportunity in the direct dispatch business. And so I do I do expect and hope, you know, that we will go back to a, you know, go to a faster organic growth rate. The again, pan as I said before, the pandemic really hurt us rightfully so in 2020 as far as, new office openings. But I would expect that to increase pretty significantly in 2021 and the beginning of 2022. I do want to point out is that one of the things that we do that makes us fairly unique as a franchisor is frequently we will actually offer incentives for our franchisees to open new offices.

And so rather than, you know, rather than spending a bunch of money trying to find people to that are sort of outside of the industry to open offices, we offer cash incentives to our franchisees typically to go out and expand. And so with sort of with the vaccination rates going up and with, again, a little bit more of an impetus for for people to open, let's say, again, a Snelling office if they already have a HireQuest Direct, we do think that it will pick up. It's a long answer for saying, Yes, I do think that it will pick up. It's a very important aspect to our growth plan, is just organic growth. What

Speaker 6

is kind of the upfront cost to you and also working capital needs to get a new office started?

Speaker 3

So let me say categorically that I can't really say anything from the standpoint of because it's that would be deemed as like selling a franchise, right? So I would give you a range that, you know, that would be almost meaningless. But as far as workers' let's say, for example, working capital, that's one of the primary benefits of our model is is that we provide we're the employer of record for our franchisees, so we provide all of the working cap the vast majority of the working capital. The main thing that a franchisee, let's say a new franchisee, is responsible for is they have to hire and develop their own staff. They pay the occupancy costs of their office, and they pay the lights, the communications, Internet, etcetera, And that's what they're responsible for.

And so, you know, the startup costs are actually pretty low. So when we give a Mhmm. You know, when we give a $50,000 incentive for somebody to open in, Oglala, Nebraska, that 50,000 goes a long ways towards opening that branch. Is

Speaker 6

there a typical square foot for the office, And is there I'm assuming a lot of them are located in fairly low rent locations? I'm just kind of like thinking from a like a retail box perspective, what that dynamic is like.

Speaker 3

So that's a fair question. There's a there's a difference between a commercial traditional commercial staffing office like Snelling or Link versus HireQuest Direct. HireQuest Direct is definitely tends to be in more trans you know, transitory, neighborhoods. And, you know but size wise, I mean, it's pretty typical for an office to be between 902,000 square feet. The again, a direct dispatch office would tend to be in a more, you know, again, in a more downscale neighborhood than a than a Snelling office would.

But Mhmm. You know, that I guess that that I don't know if that answers your question, but that would be you know, but there's there are certain Snelling offices, for example, that are in really nice you know, they're in nice areas. Kind of it depends on what the it also depends on even within, let's say, Snelling or LINK, there are you know, each each office, you know, the each franchisee has their own sweet spot. And so for one person, they might they might focus on I'm thinking of one now where, you know, their their largest their largest client is a big cheese plant, and they're in a relatively downscale neighborhood, but it's a tremendous office. On the other hand, you have some that they mostly all they send out is administrative people or medical oriented people.

And of course, that's gonna be in a much nicer neighborhood. So there's no clean-cut answer except for the Hire Quest Directs. Those are pretty standard.

Speaker 6

And I guess the follow-up question would be culturally, the the consent of high quest, that's a very blue collar industrial kind of, you know, staffing solution. With Snelling and Link, is there any challenges, having, being the franchisor of both, light industrial and more of the admin medical? Are there, you know, with my limited understanding of staffing business, it seems like it's a different kind of franchisee who's going to be handling that office. As a franchisor, culturally, are there different challenges, that we face, with Snelling and LINK?

Speaker 3

That's a good question. The answer is, I would say in most of the LINC and Snelling offices, there's certainly a difference between what I'd say is a typical commercial staffing business and, let's say, a direct dispatch office. That being said, the people who run them are pretty really frankly, similar. Now, again, there are certain, let's say Snelling and LINK franchisees that definitely focus on more of the administrative or medical side, and those people There would be a bit of a cultural difference. And, again, obviously, we only closed link on Monday, so we're still we're still, you know, we're still sorting through things.

But, you know, we're in the process of, you know, developing a management team. The management team for them will be separate as well. It's not I mean, supplying money and workers' comp and back office support, frankly, there's no difference between there's really no difference between, you know, Linc, Snelling, HireQuest Direct. I mean, an unemployment claim is an unemployment claim. On the other hand, the sort of supporting, recruiting is a lot different for a link or a Snelling than it is for HireQuest Direct.

And, therefore, the management, you know, the management teams for those divisions will be separate to account for what you're saying.

Speaker 2

Got you. Got you.

Speaker 6

And then my last thank you. That's that's great color. My last question would be, could you talk a little bit about software or the technology aspect of that you provide to these franchisees? Are there anything that's kind of custom built in house? Do we need to kind of have different systems for the more light industrial versus the Snelling and the Link?

Speaker 3

There are some There's no question. There are certain differences. African tracking systems tend to be a far more not 10. They are far more important for traditional commercial staffing than what they are for direct dispatch staffing. But the but our the our core software works for either.

And so we are we had already been we you know, as and I know Corey put it in his remarks, was we've already focused or we've we had already embarked on a sort of a rewrite of our in house software. We started it probably about the third you know, the the middle of well, actually, we started at the beginning of last year, and it started picking up more towards the end of last year. And so, we're always revising. Obviously, technology is changing, and, so we continue to do it. The the the point is is that one, you know, we it doesn't really require anything significantly different.

I mean, I I I don't wanna say that. There's a lot of nuances, if you were in the business, you you would, you know, you would say you know, there there are definitely differences, but not of a, you know, not of of an order of magnitude either. Most software is at their core. Again, it requires that you pay the worker, that you keep track of their information, that you gather all the applicant information. Again, traditional staffing requires certainly more applicant tracking because you're doing more your vetting process before placing a person, you have far more upfront vetting for that employee than what you do on a on a direct dispatch.

And therefore, you know, again, the software requires more robust more robust ability to sort through employees. I don't know if that answers your question.

Speaker 6

No, that's helpful. And I have no further questions. Thank you very much for your feedback.

Speaker 0

Thank you. Your next question is coming from Aaron Edelheim. Your line is live.

Speaker 5

Hi, Rick. I just have two follow-up questions. One is just speaking on margins. And when I think about your business, I think about kind of normalized earnings power.

Speaker 2

And when I the

Speaker 5

you know, my my first question was just about what would system wide revenue be in a more normalized world for all the, you know, cross currents from COVID and etcetera? And, you know, when I think about 450,000,000 or maybe 500,000,000 of system wide revenue on a normalized basis when things return to normal, you know, based on past conversations we had, this is before your acquisitions, we're thinking about, like, a 4% net margin, and and I'm getting numbers that would indicate to me that HireQuest had, you know, earnings power of a dollar 30 to possibly a dollar 50 per share. Is I just wanna make sure just based on one of the other caller's questions. Is that the right framework to think about just in terms of the earning the the new or underlying earnings power of the business when things go back to normal?

Speaker 3

Well, I don't I don't if if you exclude, let's say, the pandemic itself, and, again, it destroyed our operating leverage, I think that if you think of net earnings between three and a half to four and a half percent, that hasn't, you know, that hasn't changed. The that hasn't changed. Once we get to and and and that's not even having to get to, you know, $455,100,000,000 of revenues, that's errors of of system wide sales. The you know, just just adding the acquisitions gets us back to more to where we should be, meaning in that three and a half to four and a half percent range.

Speaker 5

Yeah. So, basically but even though the, you know, they're in terms of the the when you think about these new businesses, especially in the commercial side, is that when things get back, they're just doing that calculation of where higher cost could be, it's it's the same of what we've discussed before. Is that right?

Speaker 3

Yeah. I would I I mean, I would Okay. That that's certainly what we hope. I mean, I I guess that's what I said. That was certainly what we would hope.

The you know, like I said, the margins might be a little bit on the, you know, might be a little bit on the lower side because the lower you know, a little bit on the lower side, then again, we'll have more scale. And, you know, so we we hopefully can squeeze a little bit more, you know, out of it from an operating you know, I mean, I they only you only had to pay me once. So if that gets spread over a much bigger base, that's obviously gonna help some. But but let's Gotcha.

Speaker 5

In in terms of your acquisitions, you know, how should I think about the integration of these two acquisitions here? As you mentioned, it's, like, 60% of existing revenue. How long you know, have you been able to do work already? How long could this take for you to get a get your system in place? Well,

Speaker 3

again, due to the efforts of due to the efforts of the franchisees and to, my management team, to be honest with you, a lot of the a lot of it's done. I mean, basically, everybody as of this week is operating on our software as an example. And so for the last six weeks, we've been tearing our you know, well, me, very limited amount of hair, but we've been tearing our hair out to to to to get set up. And so a lot of the a lot of the immediate integrate you know, the sort of the hard parts, a lot of them are a lot of them are done. Now there's still a long ways to go.

There's a lot of things to to go, but the you know, for frankly, the most the most difficult things are done. It's more now just settling in and, you know, settling in and, you know, again, refining refining things. So we're we're well, well, well along the way on integrating everything.

Speaker 5

Great. Phenomenal job. Thanks so much.

Speaker 3

Sure thing.

Speaker 0

Thank you. There are no further questions in the queue at this time.

Speaker 3

Okay. Well, I want to thank everybody for joining us on this call. I hope you are as excited as I am about the future of the the company. And I appreciate the thoughtful questions, and, appreciate you joining us. Thank you, and have a good day.

Speaker 0

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