Q4 2020 Hirequest Inc Earnings Call
Thank you operator, I would like to welcome everybody to the call hosting the call today is <unk> CEO, Rick Hermanns and CFO Cory Smith. Please be aware. So other 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 and could cause.
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 as far as the SEC, including without limitation. The most recent annual report on form 10-K, and other periodic reports, which identify specific risk factors that may also cause actual results or events to differ materially from those described in the fourth.
And looking statements copies of the company's most recent reports on form 10-K, and 10-Q, maybe obtained on the company's website at <unk> dot com or the SEC's website, SEC Gov and company does not undertake to publicly update or revise any forward looking statements. After the call for date of this call I'd also like to remind everyone and this call will be available for replay through March 25th a link to the website re.
<unk> of the call was also provided in earnings release and is available and the company's website at higher gross dot com right now and turn the call for the hardware CEO, Rick Hermanns Rick.
Thank you for joining us this has certainly been and an eventful period for higher class over the last 120 days, we have taken advantage of our balance sheet, 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 higher quest direct franchises nationwide by adding traditional commercial staffing, which will be sold by franchisees of the well respected 70 year old Snelling staffing name. These.
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 our weekly pay staffing models to our existing on demand staffing operations significantly diversifies our approach.
Third we were able to meaningful growth meaningfully grow our system wide sales at attractive valuations taking advantage of the inherent leverage in our business model for us as it relates to snowing, we acquired a 70 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.
Bind our system wide sales should exceed $340 million, even without a return to pre COVID-19 and system wide sales levels. In addition, we have licensed our trademarks for 10 offices in California, which should produce at least another $20 million and system wide sales.
Higher Quest has built was built on a risk mitigated business model positioning us to deliver consistent profits even in challenging environments and.
Indeed, this was a challenging environment for on demand staff for the on demand staffing sector as we're likely to see and our lifetimes with the cancellation of sporting events concerts auto auctions and many other events, which provides 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 trends to Derisk. These two transactions, we expect to further reduce any risk involved in these acquisitions and the future.
First we acquired Sterling staffing purchasing 47 locations, which generated approximately $87 million of system wide sales in 2020, we determined that it was and our best strategic interest to sell certain France smelling locations.
To third parties and have done so as mentioned before for of these offices were transitioned to a third party and California, who will license the snelling trademark and pay us a royalty.
We have closed the acquisition of link staffing and acquiring 35 locations and nine states, adding incremental $57 million and 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.
<unk> to convert to the Snelling name as it is well known and 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.
And 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 and economic activity over the course of 2020, we demonstrated the value of our approach and remain profitable on.
Double digit declines and system wide sales and revenues.
Our franchise, our franchisees rose to the serious challenge.
Decline of adjusting staffing levels and expenses to align with the current economic conditions and a steep decline and system wide sales.
Looking ahead, we are encouraged by the increasing availability of vaccines and what appears to be a moderation and the number of COVID-19 cases over the last several weeks.
As a reminder, though as the economy as a whole showed 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 and a positive and meaningful way deploy.
Deploying a disciplined approach to M&A, we are focused on opportunities that provide an entre into new and attractive geographies strengthened the presence of our existing franchisees provide access to targeted national accounts or place us and 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 and 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 million of net income for 39 cents per diluted share. Despite the nearly 13% and system wide sales and significant reserves placed on and notes receivable and importantly, we generated positive cash flow of more than $9 million, adding to our cash reserves and.
<unk> us with the resources and flexibility to selectively pursue the two strategic transactions and 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 and 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 to our shareholders and the form of regular quarterly cash dividends beginning in the third quarter of 2020, we declared a cash dividend of five cents 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 and a quarterly basis based on our.
Business results and financial position at the discretion of the board our commitment to a regular cash dividends underscores our confidence and 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 results further it's Corey.
Thank you Rick and good afternoon, everyone. Thank you for joining us.
Total revenue in 2020 was $13 8 million compared to $15 $9 million and 2019, a decrease of 13% and with <unk>.
Primarily due to the economic shutdown caused by COVID-19.
Total revenue total revenue consists of two components franchise royalties, which make up roughly 90% of total revenue and service revenue for.
Franchise royalties and 2020 were $12 8 million compared to $14 $7 million and 2019, a decrease of 12, 8%.
Service revenue, which is generated from interest charge to our franchisees on overdue accounts receivable and fees for various optional services was $1 million compared to $1 $2 million and 2019, a decrease of 15, 5%, which was largely due to a decrease and miscellaneous fees charged for optional services.
Selling general and administrative expenses, and 2000 and 'twenty, we're down 33, 7% to $8 $7 million compared to $13 $1 million and 2019.
This for $4 million decrease was primarily due to $5 $1 million and merger related expenses that were incurred in 2019, but not present in 2020.
This decrease was partially offset by an increase and stock based compensation and a reserve placed on our notes receivable that were issued to finance the sale of the offices acquired in 2019 merger.
This reserve was directly related to the negative impact of COVID-19 has had on the economy.
And the financial condition of our borrowers and the value of the underlying collateral.
Net income in 2000, and 'twenty was $5 $4 million or 39 cents per diluted share compared to a net loss from continuing operations of $505000 or negative five cents per diluted share in 2019.
Yeah.
Taking a look at the fourth quarter.
Total revenue and the fourth quarter of 2020 was $3 $4 million compared to $5 $9 million and the fourth quarter of 2019, a decrease of 42.
And 42% again related to the economic shutdown caused by COVID-19.
Franchise royalties and the fourth quarter of 2020 were $3 $2 million compared to $5 $4 million and the fourth quarter of 2019, a decrease of 42%.
Service revenue was $176000 compared to $476000 and the fourth quarter of 2019, a decrease of 63%.
This decrease is largely due to a decrease and miscellaneous fees charged for optional services.
Selling general and administrative expenses and the fourth quarter of 2000, and 'twenty, We're down 31, five per cent to $2 $2 million compared to $3 $1 million and the fourth quarter of 2019.
This $973000 decrease was primarily due to day, two a decrease and payroll costs and lower stock based compensation.
Net income was $1 $4 million or 10 cents per diluted share and the fourth quarter of 2020 compared to $3 $5 million or 26 cents per diluted share and the fourth quarter of 2019.
The fourth quarter of 2019 included a loss from continuing operations of $315000 or and negative two cents per diluted share.
Beginning in the third quarter, our board approved and the company paid its first quarterly dividend of five cents per common share to shareholders of record as of September for 2020.
Subsequently the board approved a five cent cash dividend for payment in December and again in March of 2021.
And 2020, we returned approximately $1 4 million and cash to our shareholders and the form of dividends. We expect to continue this practice and pay a cash dividend each quarter at the board's discretion.
Moving onto the balance sheet.
We have grown our current assets to $39 million at December 31, 2020 from $37 million at December 31, 2019.
Current assets at December 31, 2020 included $13 $7 million of cash and $21 $3 million of accounts receivable.
And while current assets at December 31, 2019 included $4 $2 million for cash and $28 $2 million of accounts receivable.
Property and equipment increased by $1.3 million since the end of 2019 to $3 $2 million at the end of 2000 and 'twenty 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 and I T project updating our front office software and 2020 that resulted in an intangible asset of $343000 at December 31 2020.
Our notes receivable balance net of reserves at December 31, 2020 was $5 $9 million.
During 2000, and 'twenty, we collected approximately $2 1 million and cash from these notes.
And with that I will turn the call back over to the operator for Q&A.
Certainly, ladies and gentlemen, and the floor is now open for questions. If you have any questions or comments. Please press star one on your phone and at this time, we do ask for a while posing your question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
And once again, if you have any questions or comments. Please press star one on your phone. Please hold while we poll for questions.
Our first question is coming from Aaron Edelheit. Your line is live.
Hi, Rick I wanted to ask you a question about the two acquisitions and.
When you and.
Even in the press release, and I think you alluded to it and your comments.
And then having a $133 million or so and system wide sales, but when I look inside the 8-K that you provided selling which did 95 million and a.
2020.
Actually did 123.002 million 19, and $135 million and 2018 and and link did instead of 57 million that they did last year and 2019, they did 85 and the previous year over 100 million on and when I I just thinking about.
Post COVID-19 and kind of returned 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 got to think especially with your management and 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 too the timing of when that may happen, but assuming we went back to normal is there any reason we couldnt.
Back because you are talking about 30 to potentially 100% higher revenue rates for these companies just acquired.
Yeah and I.
I appreciate that.
The question.
And I think debt.
Youre right I mean, if you're if your philosophy.
Is that.
The economy, and whether it's in 2020, two or 2023 or the second half of 'twenty 'twenty. One returns essentially to 2019, there's really no reason to believe.
That theres nothing.
<unk> and 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.
As an example in 'twenty and using just higher quest numbers, we had our system wide sales and 2019 were nearly.
When you include the first half of the year from command Center.
Was around 291 million and we ended up at <unk>.
Around basically 30% less.
And $210 million and.
And again there is it's not as though we closed multiple offices and multiple markets that we can never go back to that $291 million and so.
To answer your question is no I would say as much as our system wide sales, even at 2020 levels, let's say, assuming a full 12 months of Snelling and link and higher quest combined should.
It should be and that 300 and would be and that $350 million to $360 million range.
If if if you assume even at 25%.
A reversion back to 2019, you're pushing somewhere in the 450 million $460 million range.
For total sales Gotcha and hills.
Whenever the economy recovers and 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.
You know that are outside of our control, but again, there's nothing structurally that would stop us.
Got you and and and my hats off to you to really acquire these two companies if I understand correctly one of them was a subsidiary of a bankrupt or a troubled company and other but just for you to acquire these companies.
Before.
My opinion, the economy reopens and my hats off to you as a shareholder do you see more opportunity.
I have one other things I see you make these incredible acquisitions, even the warm and command center that brought higher quest.
Public and I'm just curious if you could talk to kind of the opportunity to continue to consolidate the industry and put them underneath your management and theirs.
The superior model that you have at higher costs.
Well.
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 and staffing industry over time, and frankly, it hasn't necessarily gone very well and.
Which fundamentally goes back to the point of our model literally turned that on its head and really our goal is to have local ownership right and so the it does put.
No it does put a little bit.
Sometimes it puts limits on it right because once we have a franchisee and a market.
It's harder to buy another one in it and so I wouldn't necessarily.
See us.
Hum.
We're not we're not out there just to buy.
New companies. It is not really what we're looking for that said, we now have an entirely.
Separate.
Platform from which to develop and I think that's one of the key parts of this.
These acquisitions is really that historically higher quest had a very very limited presence in the traditional commercial staffing market.
And.
While snelling and link obviously at much larger presence as 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 as more value and the network has more value.
<unk>, which makes it easier to grow and so you know.
We've already had.
Have more sort of commitments for people to open new offices in 2020 one than we did in 2020, 2020 and that was even let's say before COVID-19 hit and so.
You know one of the what I don't want people to overlook is the fact that these these acquisitions are really important for setting up organic growth as well.
And anyway, it's they're very important for setting up organic growth.
And but look we're always looking for additional and.
Additional opportunities and.
And.
The.
Think that now.
Become clear to a lot of people sort of you know.
And what the status of the market is and the market really froze and frankly in the end of 2020 and nobody wanted to sell nobody wanted to buy whereas now like I said opportunities have started to present themselves and again, we will continue to be active where the opportunities are appropriate.
And another question is just beyond staffing are there you know kind of a longer term vision. So there are other verticals or debt.
And that you could utilize higher quests franchise models, such as like security Guards and trucking like how far do you think you could take.
And the model.
Well, that's a critical and that's a critical question and it's alluded to it was alluded to in my remarks talking about expanding into.
Ah.
Expanding into.
Markets or industries that have similar employment dynamics and security Guards is a perfect example.
Realistically.
Security guard isn't significantly different.
From a lot of employment characteristics as a traditional.
And let's say as a welder, who who was working as a temporary employee and.
And as a result, there are numerous industries that are like that that we can absolutely go into so that's why rather than rather than chasing.
Rather than chasing bad acquisitions, or moving into let's say weak markets or getting involved and accounts with really low margins just to drive growth.
Frankly, the moral and the more realistic option for growth is to go into <unk>.
<unk> heavy basically fragmented industries again like the security guard business, where it's hard for us.
And 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.
To finance that type of payroll or maybe not have the requisite skills to employ 50 or 75 guards and so yes. There are a lot of opportunities for us to growth.
And the runway for US is frankly, it's almost unlimited really.
And then just last question and I won't monopolize more time, but when I look at like live nation, which owns Ticketmaster and runs concerts, they're at 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 things things like that and I look at the vaccine distribution schedule and he pretty much every adult having access to vaccines.
By May and the latest maybe June.
I've got a things that your Q3, if concerts and and I'm not asking you to predict when it's going to happen, but if concerts and sports and we go back to normal like you're set up for a pretty strong third quarter in that and that scenario is that is that and is that correct and near mine.
There's no question and so there's there's two main factors in that and undoubtedly.
Uh huh.
As and if you've.
Obviously, I'm a football fan and.
And you watch the Super Bowl was where I live here, you know here and the Tampa Bay area and.
And you know, there's like 15000 people and the stadium and as a result, the amount of business that we would've 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.
And if there are people in the stands and.
Let's say for let's say for college football this fall and that will be very very good for us and it will because that is a big and that is a big component of our business I will say, but.
But what I do need a tamper or temper. 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 and the United States right now and so I think that is as basically people's tax refunds get spent and is there.
Stimulus checks get spent and as the 300 dollar a week extra supplemental unemployment benefits.
Go away.
We will actually also see a <unk>.
Real improvement in our system wide sales as well as people return to the work force that right now have the liquidity to not work.
Got you. Thank you so much and I appreciate it thank you erinn.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone at this time.
Your next question is coming from Peter of over your line is live.
Hey, Rick.
Congratulations on the acquisition so.
And the job. So I was wondering if you could maybe update us on how the sort of changes your industrial and geographic mix for them, you know year and 2020.
That's a good question Peter and good to talk to you.
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.
For our Florida, and Texas, which are two of the most dynamic states and the country. So we're very happy with that.
The characteristic of the employees, obviously changed significantly now is probably.
70.
And not 70, but probably about 40% of our business now represents people, who you would typically think of as.
They are blue collar, but whereas the on demand staffing with 10 and trend more towards construction and recycling facilities and cleanup book stadiums has now transitioned to where we're significantly heavier in.
Manufacturing and logistics, which again to be as attractive, especially logistics as.
You know one of the things that pandemic I believe the pandemic will leave sort of and permanent mark on retailing and.
And it'll go more towards online, which will increase the need for logistics.
Companies and that will actually suit.
Well really that.
That shift will help our new found a product line.
<unk>.
Uh huh.
So anyway, so that takes us where again, we're pretty much a lot more and the traditional commercial staffing and the other part is as Snelling and particular day.
Did a lot or does a lot of <unk>.
Executive search and one of the one of our play and 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 to grow that segment and the same is true with medical Sterling had a kind of a and emerging.
And.
Medical.
<unk> unit and so we will also spend the resources to properly <unk>.
Really develop that as well so we're excited that it's created a number of new.
Avenues for growth for us.
And yet again, it positioned us again geographically stronger and a couple of the most dynamic markets and.
And and again I think it'll put us stronger into logistics, which is which will have very positive effects on our bottom line and the long run.
Okay, great. Thanks, so much for the color.
I guess the second question would be you know theres been a big push toward a minimum wage increase and as.
As you said more of a blue collar workers, and 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.
And the system wide sales like you get to charge more and get and take a higher percentage and so on.
Yeah, that's a that's a great question and I.
I think that the funny part about it is really one of the when you look at companies or competitors, let's say like manpower adecco.
The funny thing about it is is that their largest markets are Europe and so if you think of rigid labor laws and high costs.
And as 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 think that.
That higher weighted higher wages may and the long run.
<unk> manufacturing activity and the country and that's not necessarily a good thing. So 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 and obviously that's not good unemployment at all which is bad for us but.
So candidly I think it's a mixed bag.
Okay.
Okay. A couple of other kind of housekeeping questions. You had I think last year. Your blended kind of royalty rate was I think $12 eight at $210 million, which is about 6% and is that on the 340 that you were discussing is that pump and that we can kind of expect as well six per cent or is there a different day.
And car or something else and we should look for.
Yeah, I would simply say to you is that the tricky part and and I can't really give you a good answer on that other than it'll change quite a bit because.
Nothing in particular has.
Probably half of the Sterling franchisees.
Have a completely different.
Royalty model than what.
And what link and higher quest did and so the numbers are going to the numbers are going to look a little bit screwy.
So I wish I could tell you that you can look at that know, whether it's good or bad, but it's going to be it's going to be jacked because of that I would say to you, though as a general rule is it will probably drift down a little bit.
Cause 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 do.
<unk> downwards, a bit notwithstanding even though like I said, the the set of franchisees that have a franchise that have franchise agreements that are completely non standard.
Okay, and what would that affect the like the other.
The other revenue will that'd be like less accounts receivable financing and all that stuff are more just general question, but yes, yeah. Yeah. So there are a certain number of offices again using the smelling once we're there.
They literally there their royalty is in essence to utilize the.
The Snelling network and smelling 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 so it'll it'll alter everything that's why I'm trying to say, it's kind of like yeah, It's gonna muddle things that way it is.
And the model things that way, but.
And the theory, though and it sort of shelf, where we're still targeting the same net margin is.
And that's what we always have.
And in theory that would sort of derisk the balance sheet, a little bit with less workers' comp liabilities and is that is that what the other thing that I heard you say.
I mean, that's that's true, but and I may not I will have to say as much as it might do that to be honest with you one of the one of the biggest.
Advantages that we offer as a franchise or is access to.
Two a rated workers' comp is a big deal because it's one of the hardest things to get.
And if you're a small staffing company.
Just to get workers comp at all other than that.
For the other than through the state pools, which are generally catastrophic and the long run to run your business and so while it is certainly less risky for US right. We can we can lose money on providing workers' comp to a franchisee and.
The flip side of it is.
It really.
It really is one of the primary reasons why I myself would sit there and say this is why our product and so darn. Good is because of the access to workers comp and the access to wear off competent very attractive rate.
Got it.
And then maybe moving down the bottom line I think you guys had about $2 2 million and SG&A per your press releases, but that cash is that a good run rate to think about it is there with these acquisitions. We'll there'll be addition to that just kind of curious and all that.
Oh, there's no question. We're gonna have you know we're gonna have.
Actually I want to step back for that for a second yeah yeah.
And my senior management team did an amazing job with both these acquisitions of minimizing the amount of <unk>.
Outside of outside costs, we didn't we didn't spend heavily on all sorts of outside advisors or anything like that we worked we did the work ourselves mostly and as a result given.
Thinking of the fact that we made acquisitions debt.
Total to almost 60% of our.
Other than our existing system wide sales you would expect huge amounts of transaction costs. Fortunately.
And again due to the efforts of the management team, we were able to keep those costs at a minimum and.
And even like in both instances they were both asset purchases and as a result.
We'll have far less lingering costs too.
Too far.
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.
And we were still paying rent six months later on their corporate headquarters, we have none of that and either of these deals.
That said first quarter you know.
First quarter is going to contain.
A boatload of about.
You know a boatload of deal expenses.
Oh, no I understand that I mean, I guess I'm, just thinking more of a run rate for do you think about like right. So.
And just kind of a demand for modeling purposes, right like Austin and 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 wasn't good good number and I know fourth quarter is not a good number simply because obviously, we've increased our size by 60%.
No.
That alone requires what I'm, saying additional.
Additional SG&A.
SG&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 and when we lost a ton of operating leverage now we're back up to where we get our operating leverage back and.
So that was very and that was very important but again to for us to be able to hold at fourth quarter.
So there is no, but I would say that it would be proportional.
You know that.
The increase in SG&A would be proportional not.
And I'm, saying it so it would fit within it and you know.
It would fit within.
Ah 60 per cent increase and sales.
Got it and I understand and then I guess the last question and just maybe I know you have been kind of low to talk about but what can you give some detail on and you're building in South Carolina, and I know, you're adding stuff to it and that you know how big the Bill day et cetera. So just kind of curious is it more valuable now.
And you borrow against that put to make more acquisitions and all that stuff. So.
So the look the building is not going to be the white Knight, that's going to that's going to book it is going to allow us to buy acquisitions or to buy other companies.
We have the.
For the building is nearly complete we have.
I don't know if we have ever really slow builder.
We have slowed down for the.
<unk>.
We expect it to be done relatively soon.
For the building it's.
And because of the commercial real estate being what it is and.
It is I would say that there's there's no big hidden equity and it and I'll just say that it's not like we built it for $4 million and its worth eight or anything like that it's disproportionate to what we paid for it but it's nearly complete it's about I think the total.
Total building buildings once they're done we'll be like 25000 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 and if you want to rent and some office space and Goose Creek, South Carolina call Me Afterwards, and we'll get you set up with elite got it.
Well, that's great I really appreciate all the color you are giving us a day and congratulations on growing the company so much. Thank.
Thank you.
Thank you and your next question is coming from Bill Chen Your line is live.
Okay.
Bill Chen your line is live.
Alright, alright.
I was wondering if you could comment on the cadence of that organic growth and for the acquisition how.
How do you think about what do you think about it from X number of locations that you can open do you think about it in terms of.
X percent of incremental products that you could offer services that you can offer so any commentary on that would be helpful.
Sure. So I mean, I guess the way I've just for you know the way I view it as sort of.
How many new offices we.
Sell franchises for and you know frankly after that and I look at it as.
You know our typical for you.
We have our typical franchisee will hopefully be doing $2 million to $3 million worth of revenue.
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 somebody and someone will do for and one will do $1 million of revenue, but that's how I look at is the number of units that we sell.
And.
And so I expect there to be.
A pick up in units that being said.
And it might be a little bit slow because.
Everybody, you'll be focused on transitioning to a new sort of a 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 theyre running a higher quest direct.
And then they say gosh I'd like to run a snelling as well and my market or I've run a snelling and there's a lot of opportunity and the direct dispatch business and so I do I do expect and hope that we will go back to a.
Go to a faster organic growth rate to again, the pans out as I said before the pandemic really hurt us rightfully so in 2020 as far as.
New office openings, but I would expect that and to increase.
Pretty significantly in 2021, and the beginning of 2020, two and I do want to point out and is that one of the things that we do that makes us fairly unique as a franchise or is frequently.
And we will actually offer incentives for our franchisees to open new offices, and so rather than rather than spending a bunch of money trying to find people.
Two 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.
And again, a little bit more of an impetus for for people to open let's say again and styling office if they already have a higher quest Iraq. We do think that will pick up so it's a long answer for saying, yes, I do think that it'll that'll pick up and it's it's a very important.
Aspect to our growth plan is just organic growth.
And how what is cut off the upfront cost to and and also working capital needs to get a new office started.
So let me say.
Say categorically that I can't really I can't really say anything from the standpoint of it because that would be deemed as like selling a franchise right. So I would give you a range that debt would be almost meaningless, but as far as workers, Let's say for example, working capital and that's one of the primary.
Benefits of our model is is that we provide the pay we're the employer of record for our franchisees. So we provide all of the working cap and the vast majority of the working capital. The main thing that that aid our franchisee, let's say a new franchisee is responsible for is they have to hire and develop there.
Our own staff they pay the occupancy costs of their office.
And they pay the lights.
It's the <unk>.
Communications Internet et cetera.
And that's what they are responsible for and so you know the startup costs are actually pretty low. So when we give a you know when we give a $50000 incentive for somebody to open and.
He'll go out and Nebraska that 50000 goes a long ways towards opening that branch.
Mhm mhm.
Is there a typical score for for the office and is there.
Assuming a lot of them are located and fairly low rent locations and so I'm just kind of like thinking from a.
Like a retail box perspective.
What that dynamic is like.
So.
And that's a fair question and if there's a there's a difference between our commercial and traditional commercial staffing office.
Smelling or link versus a higher quest direct hire quest direct is definitely tends to be and more trans transitory.
Neighborhoods, and but size wise I mean, it's pretty typical for and office to be between 902000 square feet.
The again, a direct dispatch office would tend to be and a more.
You know again and a more downscale neighborhood than are than a sterling office wood, but.
You know that I guess that I don't know if that answers your question, but that would be but there is there are certain styling offices. For example that are and really nice nice areas kind of it depends on what the it.
It also depends on even within let's say smelling or link their R.
Each.
Each office.
The each franchisee has their own sweet spot and so for one person they might they might focus on.
And I'm thinking of one now we're playing out there their largest their largest client is a.
Is it big cheese plant and there and a relatively.
You know a relatively down.
Downscale neighborhood.
But it is a tremendous office and.
And the other hand, you have some that they've they mostly all day send out his administrative people were medical oriented people and of course that is gonna be and a much nicer and the mice.
And much nicer neighborhood.
And so theres no theres, no clean cut and clear cut answer except for the higher questar ex those are two pretty standard.
Mhm.
And I you know I guess the follow up question would be.
Culturally.
The gross at Ohio class.
Barry will call for industrial kind of.
Staffing.
Staffing solution with Snelling and link.
Any challenges.
Having.
B and the franchise or both.
And while industrial and more of the M and medical are there.
You know with my limited understanding of the staffing business.
It seems like it's it's a different kind of.
Franchisee who's gotta be handling that.
And that office, so so as a franchise won't culturally are there different challenges our debt.
And that that we face with snowing and link.
There's that's a that's a good question and the answer is.
I would say in most of the link and smelling offices.
There is certainly 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 pretty similar now again there are certain.
Let's.
Let's say snelling and link franchisees that definitely focus on more of the administrative or medical side and those those people.
And would be a bit of a cultural.
Cultural difference.
And again, obviously, we only closed link on Monday, So we're still we're still.
We're still sorting through things, but.
We're in the process of day.
Developing a management team and 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.
And there's no difference between there's really no difference between.
Link Snelling higher quest direct and unemployment claims and unemployment claim on the other hand.
The sort of supporting.
Recruiting is a lot different for <unk>.
A link or snelling and it is for higher quest erect and therefore the management the management teams for those divisions will be separate.
To account for what you are saying.
Gotcha.
And my boss and thank you that's that's that's great color.
My last question would be could you talk a little bit about the.
The sulfur or the technology aspect of it.
That you provide to us for.
Franchisees.
Are there anything that's kind of accustomed and built in house.
Or do we need to cut all have.
Different systems for the the more light industrial versus the selling and the link.
So there are some there's no question there are certain differences African tracking systems tend to be a far more at 10 and 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.
And I know Cory put it in his remarks was we've already focused.
Already and embarked on a sort of a rewrite of our in house software. We started it probably about a third.
The middle of flow actually we started the beginning of last year and it started picking up more towards the end of last year.
And so.
We're always revising and obviously technology is changing and.
And so.
So we continue to do it the point is is that.
One it.
It doesn't really require and.
Anything.
Significantly different.
And I don't want to say that Theres, a lot of nuances and if you were in the business. You would you would say you know there there are definitely differences, but not of a you know not of a and order of magnitude either their.
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 youre doing more.
Your vetting process before placing a person you are far more upfront vetting for that employee then what you do on a on a direct dispatch and therefore, you know again, the sofas and the software requires more robust.
And.
And more robust ability to to sort through employees I don't know if that answers your question.
No that's helpful.
And and I have no further question and thank you very much for your for your feedback.
Thank you and your next question is coming from Aaron Edelheit. Your line is live.
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 and when I. Then you know my my first.
Question was just about what would system wide revenue b and a more normalized world.
And for all the.
Cross currents.
For it and et cetera, and you know when I think about 450 million or maybe $500 million of systemwide revenue on a normalized basis when things return to normal.
And based on past conversations we had this is before your acquisition.
And thinking about like a 4% net margin and and I'm getting numbers that would indicate to me that higher quests had earnings power.
Dollar 30 day, possibly $1 50 per share.
And.
And I just want to make sure just based on one of the other caller's question is that the right framework to think about.
Just in terms for the earnings did the new our underlying earnings power of the business when things go back to normal.
Well I don't I don't if you exclude let's say the pandemic itself and again it destroyed or operating leverage I think you should think of net earnings between three and a half to four and 5% that hasnt stopped that hasnt changed.
And that Hasnt changed once we get to and and and that's not even having to get to.
450 $500 million of revenues, that's errors of system wide sales day.
<unk>.
Just.
Just adding the acquisitions and gets us back to more to where we should be mean.
Meaning in that three and a half to four five per cent range.
Yeah, so basically but even though the you know there in terms of the the when you think about these new businesses, especially in the commercial side is that when things get back. They are just doing that calculation of where higher cost could be.
The same and what we've discussed before is that right yeah.
Yeah, I would I mean, I would like and that's certainly what we hope and I mean, I guess, that's what I'd say that was certainly what we would hope the you know like I said the margins might be a little bit on the you know it might be a little bit on the lower side because of lower.
And the lower side and again, we'll have more scale and so we hopefully can squeeze a little bit more.
How does it from an operating you know I mean, they don't you only have to pay me once so that gets spread over a much bigger base, that's obviously going to help some but.
But gotcha and in terms of their acquisitions.
How should I think about the integration of these two acquisitions here.
You mentioned and it's like 60% of existing revenue.
How long have you been able to do the work already how long COVID-19.
And just take for you to guidance yet.
Your system in place.
Well again due to the efforts of to the efforts of the franchisees and to my.
And my management team to be honest with you a lot of the.
A lot of it.
Dawn 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.
Well me very limited amount of hair, but we've been terra and our hair out to to get set up and so a lot of the a lot of the immediate.
Integrating other sort of the hard parts a lot of them are a lot of them are done and now there's still a long ways to go there's a lot of things to go but the.
You know for frankly, the most the most difficult things are done its more now just settling in and settling in and.
You know again refining refining thing so, we're we're well well well along the way on integrating everything.
Great phenomenal job. Thanks, so much sure thing.
Thank you there are no further questions in the queue at this time.
Okay.
Okay, well I want to thank everybody for joining us on this call and I Hope you are.
Cited as I am about the future of the company and I appreciate the thoughtful questions.
And I appreciate you joining us thank you and have a good day.
Okay.
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 participation.