Q1 2020 Earnings Call
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Good day, ladies and gentlemen, and welcome to the higher Quest first quarter 2020 earnings conference call. All lines have been placed on listen only mode and the floor. We opened for your questions and comments following the presentation.
At this time it is my pleasure to turn the floor, what's your host Mr., Brett Maas sort of Hayden IR, Sir the floor is yours. Thank you operator, I'd like to welcome everybody to the call hosting the call today are hard with CEO recurrence and CFO Corey Smith, please be aware that some of the comments made during our call may include forward looking statements within the meaning of the federal Securities laws.
It's about our beliefs and expectations containing words, such as me could would will should believe expect anticipate and similar expressions constitute forward looking statements. These statements involve risks and uncertainties regarding our operations and future results that could cause higher quest results to differ materially from management's current expectations. We encourage you to review the safe Harbor statements and risk factors contained a couple.
These earnings release, and its filings with the FCC, including without limitation. The most recent annual report on form 10-K. Most recent quarterly report on form 10-Q, and other periodic reports, which identify specific risk factors that also may cause actual results or events to differ materially from those described are forward looking statements copies of the company's most recent reports on form 10-K, and 10-Q may obtain.
May be obtained on the company's website at www, Carquest dot com or the Fccs web site at FCC Dot Gov comedy does not undertake to publicly update or revise any forward looking statements. After the call. We're date of this call I'd like also to remind everyone. This call will be available for replay through may 25th linked to the <unk> a website a replay of the call was also provide an earnings release.
And is available on the company's website higher quest dotcom, let's now turn the call over to CEO of higher quest requirements Rick.
Thank you for joining us.
We delivered solid results for the first quarter of 2020 against a backdrop as extreme changed in the labor market and increasing economic uncertainty brought about by the covert 19 pandemic the operating margin of our core business. Excluding a one time reserve we placed on notes receivable remained steady for the first quarter on higher revenue.
Yeah.
That was largely due to the recent merger.
Our proven franchise model generated nearly $5.5 million in cash from operations and we remain debt free with more than $10 million of cash on hand.
Total revenue increased $4.1 million, an income from continuing operations was six cents a share despite inclusion of the notes receivable reserve.
The successful integration of the it's the merger and improvements we made to our operating processes last year, resulting in a lean franchise operating model was significant scale that was instrumental in driving these results. While the covert 19 pandemic has shown signs of stabilizing across the country with certain states beginning.
I think procedures for example, the situation is constantly evolving Fortunately through diligent management of our balance sheet and capital structure and a business model that consistently generates operating cash flow, we're better equipped than a lot of our competitors to weather economic cycles with no debt to service and a lean cost structure.
We remain focused on serving our franchisees and protecting our business as volatility is expected to continue in the short term.
Our franchisees are facing challenging conditions as a result of the pandemic with certain regions in industries being more effective than others as I've said in the past our business is quite susceptible to economic fluctuations. This is proving true yet again today, our franchisees have closed or consolidated 13 offices it.
Leased in part due to the ongoing financial impact of covert 19.
Of these closures.
11 were in metropolitan areas, where our franchisees still maintain a presence to serve customers. The other two locations did not historically produce large volumes of sales.
We do not expect the closures in another themselves to have a significant impact on our revenues in general franchisees, whose businesses are oriented towards construction manufacturing logistics or waste services have been less impacted than those whose businesses are more oriented towards hospitality services and auto auctions Fortunately.
We do not have any branches operating in the northeastern United States are in California, two of the largest hot spots. However, due to the rapidly changing situation the impact of our operational and financial performance over the coming quarters is difficult to predict.
To the extent covert 19 has led to a recession is a near certainty that our system wide sales will decline in 2020.
We've already taken appropriate action to significantly reduce our fixed costs to account for the anticipated drop in revenues should the current situation continue to deteriorate into the summer more actions will be taken.
To the extent that our revenues it began to decline will mostly likely also experienced a decline in income.
The larger the decline in revenue the more difficult it will be to maintain our core operating margin, which approached 55% in the first quarter of 2020, when excluding the impact of the 1.4 million dollar onetime reserve on notes receivable.
The recently passed cares act, which provides loans and grants to small businesses is expected to provide some relief for our franchisees. Many of our franchisees have already receive funds or have been approved for funds under the paid paycheck protection program and we're optimistic that this program will help.
To circumvent some of the downward pressure on their business at least in the near term.
We have also advised our franchisees to be cautious in extending credit to their clients and we continue to monitor the quality of our accounts receivable.
During the first quarter. This year, we recorded a $1.4 million reserve against outstanding notes issued in conjunction with the sale of office locations acquired as part of the command Center merger.
This reserve is directly related to the negative impact covert 19 has had on the economy.
There was no impact to cash although it did negatively impact our net income.
Absent this reserve our net income would've been approximately $2.3 million, excluding any tax effect, 35.2% higher than the year ago period.
As the economic cycle ABS, there maybe opportunities for growth through acquisitions, we continue to search for and consider opportunities for growth through acquisitions that could add markets, where we currently lack presence strengthen the presence of our existing franchisees or perhaps provide access to certain national accounts as always we.
Taking a disciplined and prudent approach to any acquisitions with the ultimate goal of acquiring assets that can be transition to our franchise model as quickly as possible.
In many cases, we provide buyer financing unfortunately, our balance sheet affords us the flexibility to do just that.
Historically, we've been able to recoup much of the cost of most acquisitions by immediately reselling the location to a franchisee and that will be our intended model again should acquisition opportunities arise.
We remain optimistic about the long term prospects for our business our business model is proven profitable and generating positive cash flow our balance sheet remains healthy and provides us with the stability to navigate the current economic environment and the flexibility to selectively pursue a strategic transaction should we.
Identify an opportunity that is attractively valued.
We turn the call over now to Corey to discuss the fourth first quarter results Cory.
Thank you Rick and good afternoon, everyone.
Total revenue in the first quarter of 2020 was $4.1 million compared to $3.5 million in the first quarter of 2019, an increase of nearly 19%.
This increase is primarily due to our merger with demand center, which was completed in the third quarter of last year.
Breaking revenue revenue out a little further.
Ties royalty revenue in the first quarter of 2020 was $3.7 million compared to $3.2 million in the first quarter of 2019, an increase of 17, 17.4% with $783000 of this increase attributable to branches acquired in the merger.
Service revenue, which is generated from interest charge to our franchisees on overdue accounts receivable the fees for various optional services was up 31.3% to $450000 compared to $316000 in the first quarter of last year.
This increase was largely related to an increase in interest charges on outstanding accounts receivable.
Selling general and administrative expenses in the first quarter of 2020 were $3.3 million compared to $1.6 million in the first quarter of last year and the increase of $1.7 million.
This $1.7 million increase included a $1.4 million reserve placed on notes receivable that we issued to finance the sale of offices, we acquired in the merger.
This reserve is directly related to the negative impact covert 19 is having on the economy as Rick discussed earlier.
The remainder of this increases in expenses, primarily related to additional costs associated with being a public company, including stock based compensation, which we did not incur in 2019 as well as higher legal and attestation services that were.
Partially due to completing an initial public company on it as well as additional costs associated with finalizing the purchase accounting related to the merger.
These increases were partially offset by decrease in workers' compensation costs as we continue to promote incentivize our franchisees to provide our temporary employees with the safe work environment.
Inclusive of the $1.4 million reserve on notes receivable income from continuing operations with $835000 or six cents per diluted share in the first quarter of 2020 compared to $1.7 million or 17 cents per diluted share in the first quarter of 2019.
Moving onto the balance sheet.
As of March 31st 2020, we had current assets of $40.6 million, which included cash of $10 million and accounts receivable of $24.4 million at the end of 2019 current assets were $37 million, which included cash of $4.2 million and accounts receivable of.
28.
Point $2 million.
While the future is uncertain in its current unprecedented economic environment, our cash balance is sufficient to fund operations for no less than the next 18 months and we're pleased to see the economy moving towards a safe scaled reopening.
With that I'll turn the call back over to Jeff or operator for Q and <unk>.
Thank you ladies and gentlemen, if you have a question or comment it as star one on your touched on keep had on your phone again star one for any questions or comments at this time.
Well go first to Peter Rabover at Artko capital.
Hey, Rick or how you made a nice quarter nice cash flow generation just the I guess a couple of questions. One is it fair to say that exclusive of the 1.4.
No reserved but you. Please that the as June a run rate is about $2 million kind of going forward. The what should we look forward or I guess to see if it changes or if it's a different number.
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That.
That sounds about I mean that sounds about right it should actually be a little bit lower actually then that going forward because.
We were we were pretty heavy on.
Audit expense in the first quarter, so I would think it'd be a little bit less to be honest with you.
And with our call up as well.
What's that.
And the stock comp as well as though.
First quarter thing.
No I think Cory that's amortized over the entire period of the grant is it not.
It is but it's weighted a little bit more heavily at the beginning of the grants, which were which were granted recently so it should taper off unless we have future grants.
So I'd say, there's going to this but not as quite not not quite as heavy.
Okay.
And then maybe if you know then are you a few weeks of last call, but maybe you can up share some thoughts on what you're seeing in the economy.
I'm sure you have some places that I've been opening up a couple of weeks I'm, just saying what the response or.
Oh for temporary workers.
But.
Yeah. That's a that's a good question the is it so.
No I would say that we bottomed out we bottomed out right probably about the.
First week or two of April was the bottom and we've sort of.
Slowly and when I say slowly I mean slowly you know.
Ticked up a little bit sense that point.
Frankly, the you know the reopening will be more.
Robust I think theres, they're just certain markets in particular, where it's still completely basically completely shut down and so you know as much as its nice <unk> personal standpoint, maybe you'd be able to sit in a restaurant. That's not really you know so far it really hasn't had a great.
<unk> impact on us the biggest probably the biggest impacts will be once I would say for example, once auto auctions are running again that will that we'll have a more appreciable effect on our business. When you know again certain states allow construction and manufacturing again that.
We will have a big impact.
You know, but right now it's all just been in dribbles and drops the there it's really been remarkably stable frankly sense since probably like March 25th.
So you know unfortunately, like I said was having a little more personal freedom at least in Florida, where I live there's great.
It hasn't necessarily had a huge impact on business yet.
But again you know the to the extent that you start seeing large manufacturers such as let's say the auto industry going again, there's a lot of down you know downline a supply firms that you know will start picking up and then we'll get closer to closer to normal.
Do you.
Thank you.
You usually have a big like summer hospitality surge that you're probably not going to you. This year or is that you know how should we think about that piece of the business.
Yeah. So what I would say is I would look at frankly, I would look at hospitality as a complete as a complete wipe out for the year I can't listen if you start seeing if you start seeing.
People in the stands at baseball games on football Games, then, yes, you'll know that we've probably gotten a piece of that business, but so long as stadium stay empty and arenas stay empty and convention center stay empty.
You know that that will be a wash out as far as the seasonality of it that's actually.
Each you know we do basketball you know, we do basketball arenas, we do baseball stadiums, we do football stadium, so it's really pretty well.
Scattered throughout the year. So it's not that's not really a seasonal.
There's not much of a seasonal effect on that.
Okay, and then I guess could you just when we talk about the help your franchise.
You know I'm sure some of them are probably don't comedy business, maybe some of them are hospitality Oreo, whether you supported <unk> loans with better or.
We've gone from.
The franchise fees, just just so I guess thinking more through you know are you guys are you going to come out with the same number franchisees have you heard a year you know all else equal on lots you acquire more well they would be able to make up those here.
The so there's a sort of a multipart question, what I would say to you is is that number one and whats probably the single most important.
Effect at this point is the the P.P.P. loans the fast majority of our franchisees have either been approved or have already been funded for.
TPP loans and that's a that's a big deal and Fortunately one of the things you're reading about as how spur some companies some companies if not even applied form because payroll represents a relatively small portion of their you know there.
Expenses, whereas rent or certain other ones or any other lot heavier on that so the good news for us is that our franchisees typical franchisee probably 75% to 80% of their costs is there palm permanent personnel and therefore these PPP loans are.
Really really effective and therefore.
It was we modeled it out they probably.
The the P.P.P. loan probably.
Accounts for a good.
Even though they are designed to last for eight weeks, they really probably blunt any negative effect of any negative effect on income from a drop of sales for probably four to five months. So the good news is there's a fair bit at time for for them to.
Recover from that.
The other part is that.
And I.
Not.
Sure if I said in the last conference call, but I'll say it now one of the one of the.
Obviously every recessions a little bit different.
Good thing about this.
Sort of covert 19 induced recession is that you can't Miss it Oh, you're just around the TV and you know that it was there whereas.
If you go back to the 2008 2009 recession was far more difficult really to know when we sort of when we got into it because obviously construction already started getting really toppy in 2007, and so we kept a lot more let's say branches access and we're losing money in this respect we know what we're dealing with.
And therefore, you know the.
Worried about franchisees have been able to adjust their staffing costs too you know to account for the volume now you know as far as.
Well they survived the ended the year and stuff like that the you know I I mean it.
You are you.
You could argue.
And then so the answer is perhaps not right theres, probably but that's true in almost any year because there's there's a lot of local factors that that have a part of it but.
I I guess, it's just to say that no I would expect certain ones I would expect certain certain ones to fail, but but like I said, if you ask me on January onest of any year I would expect certain ones to fail.
Oh, Hey, thank you so much for the color I really appreciate it I hope you guys all hanging in there, but thank you. Thank you.
Once again, ladies and gentlemen for any questions or comments in a star one on your telephone at this time star one for any question.
And I currently do not have any other questions signaled I'll turn the conference back to management for any additional are closing comments.
Hi, thank everybody for joining us on the call actually have one Dave Levine, just cued up if you want to take him sure absolutely David Levine and Trickle research. Your line is open.
David you may want to check your mute button. Your line is open.
Oh, sorry about that are a little.
Well in the drop and then I have you done so.
You kind of alluded to this a little bit, but I'm kind of curious what you're sort of your general thoughts are about.
How all of this may impact.
Your industry in your business in general because I'm sort of looking at the landscape when I'm thinking that maybe.
And this rolls out and you sort of get started.
Maybe slowly and build up I I think you can make a case that this might be ultimately.
Something that might be really good for your business is employers are trying to sort of fine there flooding and decide you know how many people they need here or there are wherever it's not not a reasonable assessment or I'm, just trying to get your kind of high level of sort of how you see the industry and in the context of all of them.
Well that's it that's a it's a good question and so I would I would answer to a few different ways is that.
I I am.
And economic contraction is unambiguously.
Bad for sales volumes and therefore, it's bad for income in the short term I can't put it any other way, it's really not a positive thing however.
We are uniquely I think place to to benefit from it and there's so there's a couple of benefits that you know again from sort of a high level that I think that we've one that we've already experienced and then the other part that I think we'll experience going forward. Then one is is that it was with three and a.
5% unemployment it was extremely difficult to find.
Qualified.
Staff in the branch and I'm not talking this really for the for the temporary staff, but but really even for managers and sales reps.
And you know in so in many respects there were a lot of.
There were a lot of our offices that we're struggling in part simply because it was hard to find good managers and you know obviously, we mitigate a lot of that because of art, our franchisees tend to be the ones running the offices, but in cases, where the franchisee at multiple offices. It was a very difficult operating environment.
And you know by having a bit of a retrenchment a lot of people, who you know a lot more people are now.
Salable for higher and then it and that's going to have I think a positive impact for us in the next beyond the next few months.
The but the other part is is that.
We have a number of competitors that are highly let you know that are highly overleveraged and you know big drop of say you know big drop in sales combined with high debt is a really bad position to be in and of course, you know as highlighted in the presentation, we're sitting on $10 million, a cash and no debt.
And so we're in a great.
Yeah, we're in a great position too.
To pick up where other people are going to be forced to close a you know to close offices and so I think that in that respect to alleviate it'll be a it'll be good office the other or a good it you know.
We'll have a good result from it the other thing that I would say is is that.
Yeah, you know that coming people are gonna be reluctant to had permanent staff.
In the next let's say six to 12 months and so I do think that there will be a bit more of a reliance on staffing.
In the next six to 12 months that might not otherwise exist that being said do I think that will be enough to offset.
You know, let's say that the pretty much washout of hospitality staffing.
No I don't I don't think it's gonna be enough to to pick that up but the but again. The single biggest thing is gonna be and this has been true. The last three recessions that that I've led to company through is that you know failures in our competition failure and financial failures. Among our competition is what's going to open.
The biggest amount of opportunities for us in our franchisees.
That's a that's good color I appreciate that I mean, I. So so the one thing that I was.
Let me just kind of ask it this way.
Yes, it's one of the harder environments, where youre industry. When you do have kind of where we've come from and you just under two together to pretty good quarter. So we came from this environment I think but it seems to me.
Some of the harder environments, you might operate in were that sort of low unemployment.
Our defined workers kind of environment is that.
That's the case or my just not getting that part right no. It had.
You know what it is the the environment from which lets say we operated in from 2000, especially 2017 18 and 19.
Which was obviously low unemployment, but a lot of demand.
It has a lot of challenges right because of finding qualified workers and.
And it tends to then draw more competition, which makes the the sort of the fight for qualified workers even more acute.
And so it does have its own challenges that being said if you ask me could I live perpetually what I, rather perpetually you know run a staffing company in a recession important at time of low unemployment I pick low unemployment every time right. So you know I is so I mean, I'm not kidding I'm not going to I'm not going to sit there and then sort of paint a fake picture that.
That I'd, rather be in a recession than in other than another.
He but booming economy, but.
You know the funny thing is is the absolute worst.
The absolute worst segment or you know sort of economic cycle for us.
He is when the market is declining.
And yet you don't really know with yet because you're kind of holding on to hope and I'll use as an example, we had back and back in early late 2000 really was more like early 2008, we had a couple of offices in a state we don't operate in anymore.
And.
Our franchisee there was losing a fortune.
And yet there was always hope, but you know they had lost a couple of accounts that it because they had lost their accounts and they lost a lot of money.
And it ended up you know basically causing them.
No but to lose half their business later on.
Because they didn't realize we were really already at the leading edge of a recession and that was one of the things I said before as the good news with all of this is this came on like a hurricane and there's there's there's no. You know there are there are none of our franchisees were under any illusions that we are in anything other than a recession.
And once you're in a recession you know like I said, you can adjust your costs to almost any revenue level, if you're willing to put in the effort and you know and so.
It's a long answer just saying.
This is workable, it's it's it's not as in its not enjoyable.
But its workable.
That's great. Thank you.
Hello.
And I'll turn it back to management I have no other questions holding.
Terrific alright, well, thank you everybody for joining us and we look forward to coming back with.
What are hopefully be reasonable results for the second quarter. Thank you and have a good day.
Ladies and gentlemen that will conclude today's call me. Thank you for your participation you may disconnect at this time and have a great Dane.
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