Q2 2020 Hirequest Inc Earnings Call
Good day, ladies and gentlemen, and welcome to your higher Quest incorporated second quarter 2020 earnings call. All lines have been placed on to listen only mode and the floor will be open for your questions and comments. Following the presentation. If you should require assistance throughout the conference. Please press star zero to reach a live operator at this time it is my pleasure.
Her to turn the floor over to your hostess bread most 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 higher quest CEO, Rick Hermine 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 federal Securities laws seems about our beliefs expectations contain words, such as May could would will should believe expect anticipate.
And similar expressions constitute forward looking statements. These statements involve risks and uncertainties regarding our operations and future results that could cause higher quest results to differ materially from management's current expectations.
We encourage you to review the Safe Harbor statement and risk factors contained in the company's earnings release and its filings with the FCC, including without limitation. Most recent annual report on form 10-K. The most recent quarterly report on form 10-Q, and other periodic reports, which identifies specific risk factors and also may cause actual results or <unk> or events to differ materially from those described before that.
Statements copies of the company's most recent reports on forms 10-K, and 10-Q, maybe obtained on the company's website and higher quest dotcom, where the Fccs website at <unk> Dot Gov, Nobody does not undertake to publicly update or revise any forward looking statements. After the call or do you have this call I'd also like to remind everyone that this call will be available for replay through August 25th.
Hey linked to the website replay of the call was also provided an earnings release and is available on the company's website at higher quest Dot com.
I'll now turn the call <unk> CEO of higher Quest, Rick Herman's Rick.
Thank you for joining us.
Yes, we completed our combination with command center and became a public company. We've been speaking about the benefits, our franchising model, which significantly mitigates the risks involved in the staffing industry and positions us for sustainable profitability.
These benefits were clearly on display in the second quarter as our industry experienced severe disruptions due to the covidien back and the resulting economic shutdowns.
Despite the significant challenges I request remain profitable and we continue to maintain a strong balance sheet to be sure. This quarter was particularly challenging for our franchises one of the benefits of our model is that each unit is independently out. This enables our franchise owners to move quickly based on local conditions.
We provided strong guidance to our franchises as this situation began to unfold and I'm proud of the way that they moved quickly to mitigate the impact cutting costs communicating the key accounts and taking other actions to help weathered the storm.
Many of our franchises were able to secure P.P.P. loans to help them through the crisis and these loans were important and effective achieving exactly what they were intended to do.
Results were also impacted as system wide sales decreased by 15.2% compared to the second quarter last year and with it royalty revenue declined 11.5%. Nevertheless, we generated nine cents per share of earnings and $4 million of free cash flow from operations during.
In the quarter, a testament to our business model.
As the economy begins to reopen we expect that we are well positioned with a national footprint.
We can provide temporary staffing to customers rapidly and reliably often times oftentimes faster than their HR teams can move to ramp up permanent staffing early in the or is this pandemic began to unfold. Some of our franchise owners made the decision to close or consolidate certain branches and we made significant cuts that are.
Headquarters to better position us for sustainability.
What was an uncertain environment those cost reduction efforts were helpful. Unless the economy significantly worsens from here, we do not anticipate additional cuts.
As I've said in the past our business is quite susceptible to economic fluctuations. This is proving truly yet again.
However, we are better equipped than a lot of our competitors to weather economic cycles and this too is being proven yet again with no debt disservice 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.
We continue to identify and evaluate M&A candidates, specifically, we're looking for opportunities for growth through acquisitions that would add markets, where we currently like presence strengthen the presence of our existing franchisees or perhaps provide access to certain national accounts, the economic crisis and its impact on our industry.
<unk> increases the number of potential targets, our strong balance sheet makes us a strong acquire that said we continue to follow a disciplined and prudent approach to any acquisitions and that is especially true in a challenging economic environment.
Ultimate goal is to acquire assets that can be transition to our franchise model as quickly as possible in.
In many cases, we provide buyer financing, which is possible due to our strong balance sheet. Historically, we've been able to recruit much of the cost of most acquisitions by immediately reselling the location to a franchisee and that will be are intended model again should the acquisition opportunities arise.
Let me turn the call now over to Corey to discuss the second quarter results Laurie.
Thank you Rick and good afternoon, everyone.
Revenue in the second quarter of 2020 was $2.9 million compared to $3.2 million in the second quarter 2019, a decrease of 10.5%.
Our total revenues made up of two components franchise royalties, which make up roughly 90% of total revenue in service revenue.
This year or are.
This year over year decrease year over year decrease we saw in total revenue. This quarter was overwhelmingly due to lower royalty revenue, which was down 11.5% to $2.6 million from $3.0 million in 2000 [noise].
2019.
This decrease in royalty revenue was a reflection of lower system wide sales directly related to the ongoing covert pandemic and associated economic shutdowns.
It's important to note franchise revenue attributable to the branches acquired in the merger was approximately $570000.
Service revenue, which has generated from interest charge to our franchisees on overdue accounts receivable in fees for various optional services. We provide was up slightly to $262000 in second quarter of 2020 compared to $257000 last year.
Selling general and administrative expenses in the second quarter of 2020 were $1.9 million compared to $871000 in second quarter of 2019, an increase of approximately $1.1 million.
This increase included an additional $151000 added to the reserve placed on promissory notes, we issued to finance the sale of offices, we acquired in the merger with command Center.
This reserve is directly related to the negative impact the code pandemic is having on the economy.
The remainder of this increase in S. you name was related to additional cost associated with being a public company.
Inclusive of stock based compensation board fees of $293000, which we did not incur in 2019.
Higher computer related service and consulting cost of $116000 and a relative increase in our workers compensation costs of $495000 related to a reduction in accruals that was recorded last year prior to the merger.
Net income in the second quarter of 2020 was $1.2 million or nine cents per diluted share compared to $2.3 million or 23 cents per diluted share in the second quarter of last year.
Moving onto the balance sheet.
We were able to continue to strengthen our balance sheet on the heels of another profitable quarter current assets on June Thirtyth were $38.6 million, which included cash of $13.7 million and accounts receivable of $19.6 million.
At the end of 2019 current assets were $37 million and included cash of $4.2 million and accounts receivable of $28.2 million.
Property and equipment increased by approximately $890000 to $2.8 million at June Thirtyth as we continue construction on a newbuilding adjacent to our corporate headquarters.
Our current cash balance, which has increased by $9.6 million and 2020 is sufficient to continue to fund our ongoing operations for the foreseeable future while still funding other imports are important initiatives.
And with that I'll turn the call back over to our operator for today.
Thank you ladies and gentlemen, the floor is now open for questions. If you do have a question. Please press star one on your telephone keypad at this time, if you're using a speaker phone, we ask that well posing your question you pick up your handset to provide the best sound quality again, ladies and gentlemen, if you do have a question or comment please press.
Star one on your telephone keypad at this time.
Well take our first question from Peter Rabbit over with Artko capital. Please go ahead.
Hey, guys nice way to Paris Kb batteries, such a terrible economic scenario and he wanted to ask you about you know your.
I guess opportunities or the cash you announced a stock buyback at both.
Looking at distressed assets in general So just curious how you're thinking about the allocation then I guess, how you're thinking about executing the buyback. Thanks.
Thank you Peter so.
As was announced Weve filed a tenbfive plan to begin sort of purchasing shares and we have begun purchasing shares under the you know under the terms of the buyback so far.
So the amount to share purchases has been relatively small, but we are committed to continue to buy them back.
So long as the the price stays at.
At a level that we consider to be well below the intrinsic value of the company.
The you know, but as laid out as well is we are on the hunt for.
Acquisitions and opportunities and it's kind of funny right before the call in fact, my VP of operations Techs me. The fact that Dave you know one of our competitors just went out of business and so well obviously.
<unk>.
I don't wish that upon any of my competitors, you know any of our competitors per se.
It indicates that opportunities are probably starting to well start to present themselves and so.
I would pretty much argue that that would be probably the biggest area in which the funds will be deployed but you know, but we do still have to its really important.
If we take a disciplined approach to it as well a bad acquisitions worth is worse than no acquisition at all and but like I said I I fully expect the problem is yet a lot of people who.
You know are still wishing for.
You know wishing for a price that was based on 2019 performance and of course, we're in a completely different world here in August of 2020 than what we were in August 2019, and so part of that it'll take some reality to set in as well I hope that answers your question.
Yeah, no that does that was great couple of other caution.
And maybe comment on your where you're seeing pockets of strength.
And weaknesses in you know the economies. The geography is it your serves just so maybe something to keep track of performance a little better.
And I'll follow up with another one of your specs.
The good question, obviously, we're struggling most in areas that the locked down is.
Being sort of kept at a higher level, so like the state of Washington.
Is it, particularly in Oregon, or two particularly difficult jurisdictions, others are others are a bit better. So I mean, our comparisons are a bit a bit worse.
In places you know in places like that at the end of the day, it's not so much. It's it's still there's kind of goes back to what I said after the first quarter call.
Is that.
Realistically until you start seeing people at baseball games at basketball games at football games, it's going to have a negative impact.
And so it really goes down to it's not always necessarily.
You know GE Saint Louis is you know Saint Louis is way off because Saint Louis is off it may well be because prior prior it historically has been more.
Geared towards <unk>.
Hospitality and so hospitality is still.
Really way off and again until and until people are clear to go back into stadiums you know.
Yes, we're just not going to recover that as far as relative strength, Florida, you know really the southeast is still trending pretty strong probably you know is probably the single strongest area.
You know again, because commercial commercial construction remains relatively strong.
Great and then maybe a.
Follow up question.
Yeah, I think you guys generated something like 8.3 million on free cash flow. So far this year and obviously, that's a result, Oh saum working capital release, and so I. Just curious you know how much cash you anticipate using it you know us or a good way to think about it it's probably better way.
That's a for you know I.
As your same store sales start.
Franchise, they'll start going up.
What's the percentage of a our should we think about as I guess your franchise fees et cetera.
Yes so.
Yes, you're correct in pointing out obviously, the the bulk of the cash balance increase.
Or at least on its kind of funny, it's almost uncanny how the amount of.
Lets say the decline in the a are almost equals the cash balance increase I was not quite that simple either because a number of our accruals and let's say amount due to our franchisees has also declined meeting obviously, we paid more so you know I would suggest to you that.
You know it is just not quite that simple. We also had a fairly large deferred tax liability that we we paid down as well. So you know realistically if our sales in the way I Kinda look at it is we pretty much advance about 71st if we have it 20% increase in sales.
It's pretty much means our a our will go up by about 70% of that absolute dollar increase in.
Sales that makes any sense. So if our sales go up.
5 million amongst saying, let's say, let's just say a cure is found tomorrow and things go back to normal on our sales go up $5 million a month.
All right. They are will go up our net cash.
We'll go down by about 70% of that 5 million dollar per month increase.
For about really about a month and a half typically our.
Our a our runs around 49 days outstanding.
So you know you could expect somewhere in the neighborhood as like a 5 million dollar increase.
Net working capital needs.
Okay, great. Thank you so much I I appreciate the color.
Sure.
That's a reminder, ladies and gentlemen, if you do have a question. Please press star one on your telephone keypad at this time again, that's the star one if you'd like to ask a question well take our next question from Paul <unk> Private Investor. Please go ahead.
Right.
I know.
Noticed it sounds like early needs the balance sheet, but what would you just mentioned that the the find an accounts receivable Oh correlate pretty closely with the increase in cash [laughter] on a year.
It is the accounts receivable generally rising.
Sorry.
This is we're in a code you ever generally with our a RV increasing at this time of year.
The answer so yes. The answer that question is yes, these new accounts receivable even.
Even as we speak there there, they're increasing which which of course is a good thing right because it means our say our sales are up which is which is seasonal.
And so.
They absolutely are they actually are up so and I would expect that and so I would not you know it would not surprise me.
If our cash balance goes down during the third quarter.
All right.
The other point was that.
This will be funding additional payroll that the 13.7 million as possible, but that would be declining or may already be.
Yeah, I mean, I would I would expect it obviously is as as they are goes up and that's the whole thing as a our goes up.
You know certainly our cash our cash will go down but look if you strip away even just the changes in working capital I think the most important part as is.
We're still profitable we're still earning.
We're not only did we earned.
More than $2 million in the first half of the year. We're also collecting on the notes related to the command.
Sale as well so we are generating strong underlying cash flow as well never mind, the changes in cash and and in it. It is true we are very seasonal we're in.
<unk> or a bit of a challenging business from the perspective, not only are we seasonal but we are cyclical and so something like Cove. It obviously impacts are operations and then on top of it you have the seasonality, but that's just an ongoing that's always occurring again the key is not to lose sight of the most important part.
Which is we continue to earn you know we continue to earn real money and and the generally speaking to the the notes are performing you know are performing well Oh, we just reserving for that one group.
The California.
Is there.
<unk>.
So the answer to that question is no. That's not just one that's just not one it's a fairly.
<unk>.
We were required to take a comprehensive look at all of the notes.
Yeah. So it's just one is just one part of it.
Okay.
One other question looking at the consolidated statements of income.
Looking at the three months ended up in the six month ended compared comparing this year with last year are those were those are age you.
Numbers alone or were those HQ because the there weren't franchise royalties from event center prior to you.
Prior to July rider for 2009, that's right. So those HQ. So those were HQ alone so what you'll see in the third quarter because the because the merger took place on July 15th.
Third quarter will be.
Truly you know sort of the combined results of command and higher quest compared to the.
Company now I was thinking it's really hard to get a picture of what.
What was <unk>.
What was added from command center since they weren't on the franchise.
They weren't.
They had no franchise revenue at that time, but in the next quarter, we will see [noise].
What's been added them, where we were a year ago that's correct.
Okay of course, the third quarter will also conclude the comparisons of all of the of all of the merger related costs and all of the sort of the onetime tax issues that took place in the third quarter. So.
The why did the deferred tax liability decreased so much in one year, where are we doing a four year spreads.
Uh huh.
<unk> I believe that question for Corey.
The deferred tax liability we.
It's made up.
Primarily <unk>, our workers compensation reserves as well as that spread the reason, though the Friday when it was just okay. Yeah <unk>.
Okay.
Good.
Again, ladies and gentlemen, if you do have a question or comment. Please press star one in your telephone keypad at this time that's star one on your telephone keypad well take our next question from Aaron Edelheit with mindset capital. Please go ahead.
Hey, Thanks for taking my question I had a question for how things are trending I'm, assuming that April was a real low and things have been trending back then but I was wondering if you could just give some color commentary on how you how you see the business trending.
Now that we're a month and a half and could oh right into the next quarter and just give some overall views of how you things are.
That's a good question is there going so at the at the beginning.
<unk> around the end around.
Around the end of March.
Our year to year comparisons were off nearly well in some cases more than 40% well just at roughly 40%.
The.
We're seeing a lot of improvements, but part of those are based on seasonal factors July August September October are always are for best months. So part of the improvements we've seen in absolute dollars. Since March are just related to normal seasonal factors.
However, the year over year comparisons have improved to the point, where we're off typical week were off somewhere between.
26, and 28%, 29% from the prior year.
Thanks.
Once more ladies and gentlemen, if you do have a question or comment. Please press star one on your telephone keypad at this time.
There appear to see no further questions at this time, we'll turn the floor back to Mr. Herman for closing remarks. Please go ahead.
Thank you everybody for participating in the call again, hopefully what you can discern from both the.
Earnings release and from the comments is the company is well positioned to grow in the future.
Due to the strong balance sheet and.
Again, an important part as viewing your holdings in the company is to recognize that the that we have really good protection against.
Against a decline in the economy, and you know again that uniquely positions us to to to take advantage of the situation going forward and and still.
Make meaningful investments in our business going forward and we're not just in a preservation mode. So again I. Thank you for for a joining us and Oh look forward to a good third quarter. Thanks a lot.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation you may disconnect. Your lines at this time and have a great day.
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