Q3 2020 Hirequest Inc Earnings Call
Good day, ladies and gentlemen, and welcome to your higher Quest Inc. third quarter 2020 earnings call all lines have been placed on.
On a 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.
This time that it's my pleasure to turn the floor over to your host Brett Maas of Hayden IR, Sir the floor is yours. Thank.
Thank you operator, I would like to welcome everybody to the.
The call hosting the call today are higher quest CEO, Rick Hermans and CFO Cory Smith, please be aware some of the comments made during our call me include forward looking statements within the media 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.
Steve.
Involve risks and uncertainties regarding our operations and our 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 in the company's earnings release and its filings with the SEC, 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 identifies specific risk factors that may also cause actual results or events to differ materially from those described in the forward looking statements copies of the Companys. Most recent reports on forms 10-K, and 10-Q may be obtained on the company's website at higher quest dotcom or at the Fccs website FCC Dot Gov Committee does not undertake to publicly update.
Day to revise any forward looking statements after the call or date of this call I would also like to remind everyone that this call will be available for replay through November 26, a link to the website replay of the call was also provided in the earnings release and is available on the company's website at higher course, dotcom and now like to turn the call over to CEO Markwest requirements Rick.
Thank you for joining.
Yes.
For the third quarter, we experienced a modest stabilizing the temporary employment market against the backdrop of continued uncertainty driven almost entirely by the global pandemic by design, we created our franchising business model with the distinct purpose to be able to weather economic cycles and over the last two quarters.
And is proven to withstand the fallout from a once in a generation pandemic make no mistake. This is a serious challenge to the operations of our franchises as construction retail concerts sporting events and many other areas of the broader economy, which drove temporary staffing opportunities have significantly decreased.
Have stopped altogether, but our franchisees have moved quickly and judiciously to adjust staffing levels and associated expenses to help navigate these unprecedented times. The PPP loans were a key to this effort and for higher cost itself. While we have been challenged we again delivered profitability in.
Cash flow in the third quarter, our balance sheet remains strong we initiated a quarterly dividend and we are increasingly confident that the worst is behind us.
Collectively our third quarter franchisees system wide sales were down 25% over the same period last year. However, the decline slowed for the third.
During the third quarter and we are encouraged by the franchisees resiliency and the Swift actions that they are taking to adjust their cost structures with the realities of the current economic climate.
To date all of our franchises remain operational and we have had no business failures.
Hi.
Our third quarter is typically our strongest quarter and this year is no different with revenue of $3.4 million up marginally compared to $3.3 million in the year ago quarter and $2.9 million in the prior quarter, despite challenging economic conditions, while we believe the industry sectors are Frank G.I.Z. serve our stabilized.
Third thing, we don't expect a more robust recovery until leisure hospitality and construction returned to more normalized levels.
The recent encouraging news from Pfizer regarding their vaccine candidates gives us increased optimism that we could see full stadiums again in the next year for the third quarter, we reported net income from Cowen.
Attenuating operations of 15 cents per diluted share and have generated nearly $6.7 million and operating cash flow from continuing operations through the first nine months of 2020, our balance sheet remains healthy and with no debt to service and positive cash flow generation.
We have insulated our biz.
Interest from earnings volatility that can arise when there is even a minimal level of financial leverage I can't emphasize enough. How important this is to the predictability of our near term results as well as the flexibility it gives us to be able to opportunistically make a strategic move at our discretion.
As for.
Strategic transactions, we continue to consider acquisition targets undoubtedly the current economic environment shines, a brighter spotlight on distressed businesses and increases the number of potential targets. However, we remain disciplined in our approach and mindful of the disruption a less than highly qualified de.
There's no could have on profitability, our balance sheet and the overall value of our business, having said that we continue to screen for opportunities that could give us a presence in new geographies strengthen the presence of our existing franchisees or provide access to certain targeted national accounts, our strong balance sheet provides.
Leads us with the resources and access to additional capital as needed. Yes, let me assure you that any transaction, we accept will need to be able to be absorbed quickly into our franchise model and provide a positive economic contribution in a short amount of time.
During the third quarter, the board declared and the company paid.
A quarterly cash dividend to five cents, a share which at recent stock prices represents a yield of nearly 2.4% given the cash flow generating profile of our business and barring any unforeseen challenges, we expect to pay quarterly dividends at similar levels going forward. This decision should underscore the board.
Boards confidence and the resilience of our business even during a once in a lifetime pandemic, let me turn the call over now to Cory to discuss the third quarter results further Cory.
Thank you Rick and good afternoon, everyone. Thank for joining us.
Total revenue in the third quarter of 2020 with 3.4 million.
Dollars compared to $3.3 million in the third quarter of 2019, an increase of 2.7%, which was primarily due to higher franchisee royalties.
Our total revenue is made up of two components franchise royalties, which make up roughly 90% of total revenue and service revenue.
Franchise royalties.
The third quarter of 2020 were $3.2 million compared to $3.1 million in the third quarter of 2019, an increase of 2.5%. This increase may seem counterintuitive given the negative impact COVID-19 has had on our system wide sales. The reason we saw this increase in franchise royalties is due to the handful of low.
Nations that we're still company owned after the merger and the <unk> in the third quarter of last year, which are currently reported in discontinued operations.
All of these company owned locations with the exception of the California based locations, which were sold or subset subsequently converted to franchisees at the very beginning of the fourth quarter fourth.
Quarter of 2019.
Approximately $681000 of our royalty revenue was attributable to branches acquired in the merger that had already became franchisees.
Service revenue, which has generated from interest charge to our franchisees on overdue accounts receivable in fees for various optional services.
<unk> was up 6.7% to $164000 compared to $154000 in the third quarter of last year.
This increase was primarily related to an increase in the fees charged for optional services.
Selling general and administrative expenses in the third quarter of 2020, we are down to.
$1.4 million compared to $7.4 million in the third quarter of last year, a decrease of $6 million. This $6 million decrease was primarily due to $4.7 million and merger related expenses that were included in the third quarter of 2019 not present in the current period. In addition.
Second we saw relative decrease related to our workers compensation costs and a decrease in bad debt as we have moved away from the off from operating company owned locations.
Net income from continuing operations was $2.0 million or 15 cents per diluted share in the third quarter of 2020 compared to a net.
Net loss from continuing operations of $8.5 million or negative 65 cents per diluted share in the third quarter of 2019.
During the third quarter, our board approved and the company paid its first quarterly dividend dividend of five cents per common share to shareholders of record as of September Onest 2020.
As Rick previously mentioned barring any currently unforeseen circumstances, we expect to continue this practice and pay a dividend each quarter and we recently announced that we will pay a dividend in our fourth quarter.
Moving on to the balance sheet.
We have been able to grow our current assets to $39.6 million at September Thirtyth two.
2020 from $37.0 million at December 30, Onest 2019.
Current assets at September Thirtyth 2020 included that included $10.3 million of cash and $24 million of accounts receivable, while current assets at December 31, 2019 included four point.
$2 million of cash and $28.2 million of accounts receivable.
Property and equipment increased by $1.1 million to $3.0 million as we continue the construction on a new building adjacent to our corporate headquarters.
We have also begun an IP project that resulted in intangible asset with a balance.
We have $187000 at September 32020.
Our notes receivable balance net of reserve at September Thirtyth was $10.1 million and we have collected approximately $1.3 million in cash from these notes during 2020.
And with that I will turn the call or call back over to the operator for Q and a.
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 are using a speaker phone we asked that while 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.
Your telephone keypad at this time.
We'll take our first question from Aaron Edelheit with mindset capital. Please go ahead.
Hi, Thanks, and great quarter I have two questions.
The first question was can if we get a vaccine.
Like the Pfizer vaccine and its effective and things kind of go back to normal could you talk about.
Like how much of your business do you think would come back up because I I'm I'm guessing most of your stadium like clean up and hospitality business is running.
Running pretty close to zero I would imagine that you'd have a pretty sharp snap back. That's my first question. My second question is was there anything your operating margins, which are normally quite high seem really high in this quarter and I'm, just wondering where there any special factors that you're operating.
Margin was so high.
This quarter. Thanks.
Yes, Thank you and the <unk>. So the to answer. The first question is is realistically throughout the quarter our.
Our revenues as you know as discussed on the last.
Earnings call.
We were running around and that basically about 27% to 30% behind the comp period of the prior year by the end of this quarter, we were down to about low twentys, So 21, 22% less than the prior year.
Probably.
Almost 100% of that.
Is due to leisure hospitality in similar businesses. So to your point is.
Provided the Pfizer or the similar vaccines become widely available and as effective as reported.
I would I would expect that we would go back to similar revenues or system wide sales of 2019.
There's we are as you said and your assumption is correct, we're running at extraordinarily low levels.
As far as.
Auto auctions and.
Arenas and stadiums and those are fairly significant contributors for us and again those are virtually non existent right now. So that's a good question and again once once you see and I said this in the last quarter once you.
These stadiums full again that will have a significant.
Increase you should significantly increase our revenues as far as.
The second question.
The.
You know and I'm the lead us to Corey to correct me, if I'm wrong, but.
My guess is the main reason for the increase in the operating margin is due to the workers comp.
Which is a sort of our base here the performance of our workers comp book the as time goes on we expect that to.
We expect that to improve as our.
Workers comp experience becomes more.
Seasoned and the <unk>.
I'll give a little more color to that is basically.
When we did the merger there was we we did not pick up any of the old experience from higher quest and as a real.
Donald our results for the last 15 months have basically only included sort.
Sort of new workers comp claims a new workers comp claims tend to be more heavily reserved but as time moves on.
We would expect some relaxation.
<unk> of that and I think that that's part of what you saw probably in the that's what we saw in the third in the third quarter.
And the improvement also was partially a the second quarter still contained home.
A lot of also contained <unk> first a lower sales and.
And also we still had it.
You know some of the major cuts that we made were in were as late as in the end of April and so they really didnt fully flesh out until the third quarter.
Okay, well, great I mean, I'm, just looking at close to a 60% operate.
Operating margin in its pretty phenomenal. So thank you for the explanation.
Thank you.
As a reminder, ladies and gentlemen, if youd like to ask a question or have a comment you May press star one on your telephone keypad at this time again that star one to enter the queue.
Well take our next.
Next question from David Levine with Trickle Research. Please go ahead.
Oh, I didn't offend hi, all done a fantastic job. This is a really good quarter I mean, all things considered.
So can you.
Can you give us some sense of sort of along the lines of the last question, but can you give us some sense.
So what.
Maybe normalized EPS DNA will look like going forward, though because I think you know that the operating margin was really a function of that im just sort of trying to get my arms around.
I don't know, it's not some kind of a range or something to expect spend sort all over the place. So.
Yes, David.
If you for the question, so what I would say.
Is more and this is.
On our.
Sort of investor deck on our website, but.
In.
In the longer term.
Our target is more from I would say from a net margin standpoint as it relate.
Relates to system wide sales is to fall somewhere between 3.75 and 4.25% of.
System wide sales.
And you know again workers' comp can swing and things like that in the you know the difficulty is the margin seem.
Like they swing more.
When they are shown as a percentage of revenues, which of course the revenue is mostly just represent royalties.
When you compare them to system wide sales those SGN ace expenses and other operating expenses are lot more stable.
You know the because the problem is.
Seem you only have $3.4 million worth of revenues in a quarter view of the $200000 swing in a workers and workers comp it seems like a really big deal, but when you take that $200000 compared to you know 60, you know $55 million worth of system wide sales the two.
So when a thousand dollars is nothing and that so I would encourage you even as you look at it to really look at it more as a percentage of system wide sales and it gives you a better sense of of really it because actually the beauty of our model is we really are very stable not on stable and so it you know.
And again to get that sense, you really have to look at the system wide sales I don't know if that answers your question, but I.
I would I would really advise that.
Yeah that answers my question it doesn't make it it doesn't make the modeling any easier, but [laughter] Oh, that's good I appreciate it thanks.
But.
Sure.
Once more ladies and gentlemen, if you do have a question or comment you May press star one on your telephone keypad at this time again Thats star one on your telephone keypad to ask your question.
And there appear to be no further questions at this time.
Great well I, thank everybody for joining us today I. Thank you for your continued support of the company I think there are a lot of really good things happening again, the as the markets have reacted over the last week with the Pfizer vaccine I am you know.
Very hopeful that a.
You know in more confident that there's at least now of bright light at the end of the at the end of the tunnel and.
I would also just reiterate that its.
It's a really.
Good news you know its really good.
News as well that all of our franchisees has made it through this this period and.
Which really sets us up for the future as.
As leisure and hospitality as that business snaps back that we're in a great position to.
New Hampshire back a business that was lost due to the cold at 19, we're in a great spot for it and then I would also say that as we put a little bit more distance behind us from the typically from March.
They were starting to see more.
[noise] acquisition opportunities because I think it's become more.
Clear sort of where where the economy is.
Likely to end and were and are at least settle in at the election uncertainty is over.
Mostly over.
I guess the.
And that's that's all helpful as well as far as.
Getting sellers to come to realistic prices and so we're hopeful that you know again that sizable acquisitions will be.
You know will.
I'll be available to us.
In the near future and so again. Thank you for thank you for joining us and have a good day.
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.
Mm Hmm.
Mm.
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