Q1 2021 Hirequest Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the higher Quest, Inc. First quarter 2021 earnings event at this time all participants have been placed on a listen only mode and the floor will be opened for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Brett Maas with Hayden IR, Sir the floor is yours.
Thank you operator, I would like to welcome everybody of the call hosting the call today are <unk> CEO, Rick Hermanns and CFO Cory Smith, please be aware of that some of the comments made during our call. Today may include forward looking statements within the meaning of the federal Securities laws statements about our beliefs and 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 our future results that could cause higher and 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 it's filed with the SEC.
Including without limitation. The most recent annual report on form 10-K, and other periodic reports, which identify specific risk factors and they also also cause actual results or events to differ materially from.
And those described and the forward looking statements copies of the company's most recent reports on form 10-K, and 10-Q may be obtained on the company's website and higher qwest dot com or the SEC's website SEC Gov.
And does not undertake to publicly update or 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 may 31.
The replay on the website of the call was also provided and the earnings release and is available on the company's website at higher gross dotcom and <unk>.
And I'd like to turn the call of the CEO of higher Quest script Hermanns Rick.
Thank you for joining us as most of you know on March one we completed our acquisition of certain assets of Snelling and <unk>.
67 year old staffing company headquartered in Richardson, Texas on March 22nd we completed our acquisition of the franchise relationships and certain other assets of link of family owned and staffing company headquartered in Houston, Texas. These two acquisitions significantly increase our scale and accelerate our entrance into the tradition tradition.
Commute commercial staffing model, giving us and additional franchising model to sell and additional revenue streams, we were able to complete these acquisitions at favorable terms due to the challenge our industry is experiencing due to the pandemic and our unique position as the franchise or to be sure. These challenges have impacted us as well.
The resulting in lower system wide sales and lower royalty revenues.
It's been particularly challenging for our franchises the.
They have responded admirably, but our model is structured to minimize the risk of events like these and while it has been challenging others and our industry of fared much worse. As a result, we were able to take advantage of our balance sheet and our profitable business model and make these two highly strategic and accretive acquisitions.
Yeah.
Because of these were both completed late in the first quarter the impact on our revenue and net income was minimal however, $1.4 million and acts and acquisition related expenses of shown up and the first quarter and we expect additional impact and the second quarter on.
Our efforts since closing these two acquisitions have focused on integrating the new franchisees and taking steps to derisk the transactions and we have made significant progress on both fronts. At this point the operational integration of the new franchises is largely complete.
Our franchisees and the corporate team put in substantial time and effort to accomplish this and as a result, we don't have the financial or operational burden of running multiple systems and.
And our efforts to Derisk the transactions first we assign the California based franchise agreements of six linked franchises and one Snelling branch to a third party. This third party will serve as the franchise or and will pay higher quest of royalty of 9% of the gross profit of the offices and purpose.
<unk>. This royalty revenue represents yet another lucrative low risk revenue stream for US. We also sold the three remaining California smelling branches to the same third party. These branches will also be part of the same royalty agreement in perpetuity once the buyer receives regulatory approval the franchise the offices.
Finally, we sold four previously selling branches and one on site location to a different third party for consideration of approximately $1 million cash. This was the straight sale.
The result is that after normal consolidation and we have added a net 64 locations to our portfolio, including 36 Snelling branches and 2028 linked branches. The vast majority of these offices will operate is snowing on a go forward basis, we will see the full contribution of these branches and the SEC.
Second quarter, but our efforts continue to improve operations and efficiency of these acquired branches as I stated previously of the two models first on demand staffing, where we have historically excelled and second traditional commercial staffing, which is the historical model of link and snelling are complementary and they deliver several.
And of fits for US which include one the increase our national scale, making it easier to sell to national accounts, and making our various trade names more recognizable.
Two by adding commercial or weekly pay staffing models to our existing on demand staffing operation significantly diverged diversifies. Our approach three we were able to meaningfully grow our system wide sales at attractive valuations and taking advantage of the inherent leverage and our business model.
For as it relates to Snelling, we acquired a 67 year old brand name that is well regarded throughout the industry.
Five they enable us to efficiently leverage our corporate resources, and our workers' compensation efforts, creating incremental profitability.
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.
Deploying a disciplined approach to M&A, including taking steps to derisk transactions as we have with the snelling and linked transactions. We are focused on accretive opportunities that open to us new geographies and lines of business strength in the presence and our of our existing franchisees or provide.
Access to targeted national accounts before I turn over the call to Cory to discuss the financial results. Further I wanted to mention that the board of directors has decided to increase our regular quarterly dividend, we will pay of six cents per share dividend on June 15th to shareholders of record on June 1st our expectation is that we have.
We'll continue to pay of 6% dividend quarterly going forward with that I'll turn the call over to Corey Corey.
Thank you Rick and good afternoon, everyone. Thanks for joining us.
Our total revenue is made up of two components franchise royalties, which make up roughly 90% of total revenue and service revenue.
Total revenue for the first quarter of 2021 was $3 $4 million compared to $4 $1 million for the same quarter last year, the decrease of $17 four per cent.
Franchise royalties for the quarter were $3 $3 million compared to $3 $7 million last year, a decrease of 12%. This decrease was primarily due to the economic shutdown caused by COVID-19.
Service revenue, which is generated from interest charge to our franchisees on overdue accounts receivable and fees for various optional services was $144000 compared to $415000 last year. The decrease of 65, 3%.
This decrease was largely due to a decrease and miscellaneous fees charged for optional services.
Selling general and administrative expenses were $3 $8 million and the first quarter of 2021 compared to $3 $3 million and the first quarter of 2020.
This increase was primarily due to $1 $4 million and nonrecurring expenses related to our two acquisitions of relative decrease.
Excuse me increase and charges related to workers' compensation cost of approximately $892000 and an increase and computer related costs of approximately $89000.
These increases were partially offset by a decrease and professional fees of $130000 and the absence of the $1 $4 million note impairment and incurred last year.
As Rick mentioned, there will be additional transaction related expenses recognized in the second quarter.
Net income for the quarter was $3 $7 million or 27 cents per diluted share compared to net income of $875000 or six cents per diluted share last year net.
Net income this year included miscellaneous income of approximately $3 $9 million related to trends and the transaction surrounding the link and smelling acquisitions on.
Also included in net income was approximately $1 $4 million and nonrecurring acquisition related expenses.
Moving onto the balance sheet.
Our current asset at March 31, 2021, with $34 $5 million compared to $39 million of December 31, 2020.
Current assets at March 31, 2021 included $2 million of cash and $29 $7 million of accounts receivable. While current assets at December 31, 2020 included $13 $7 million of cash and $21 $3 million of accounts receivable.
Our notes receivable balance net of reserve at March 31, 2021 was $3 $3 million compared to $5 $9 million as of December 31, 2020.
We collected approximately $5 $5 million and cash from these notes during the first quarter, which included approximately $5 $3 million related to the sale of specific notes and payments of approximately $249000.
Beginning in the third quarter of 2020, Our board approved and the company paid its first quarterly dividend of five cents per common share.
Subsequently the board approved a 5% cash dividend for payments and December and again in March.
As Rick mentioned the board increased the dividend six cents per share, which we paid on June 15th to shareholders of record as of June 1st we expect to pay and this increased quarterly dividend each quarter and 2021 subject to our board's discretion.
And with that I will turn the call back over to the operator for Q&A.
Thank you ladies and gentlemen on the floor is now opened for questions. If you have any questions or comments. Please press star one on your phone at this time, we do ask and if you were listening by the Speaker phone you. Please pick up your handset from optimum sound quality.
And your question has been answered and you'll no longer wish to ask it you May press star two to be removed from the queue. Once again, if you have any questions or comments. Please press star one on your phone at this time.
And our first question today is coming from Erinn eight of height at mindset mindset capital. Your line is live.
Hi, I wanted to ask you.
What conditions, you're seeing when I think about the first quarter and I think about lots of lockdowns and the surges and.
We're in a very different place thanks to the vaccines.
Today.
And can you just describe what you're seeing of business condition wise.
And the demand for your services.
Now versus what was going on and the in the first quarter.
Sure and good to talk to you are in the air and so the.
Recognizing the you know the first quarter.
As the first quarter progressed demand.
Became progressively stronger and.
And the throughout the first quarter it really.
The especially once the Quechua about March.
Things definitely.
We're picking up and so we're at a point now where if you compared us to let's say the first quarter of 2019.
At least on up on sort of on the comparable store basis, we're probably getting close to being within 5% to 10% of what we were in 2019, so to sort of take a trip down memory Lane and the fourth quarter of last year, we were typically running.
18% to 20% behind and so we're now at a point, where like I said, we're running.
You know five 7% behind 2019 and that 'twenty 'twenty and we're way ahead of 2020.
But of course, you know.
April may of last year were the two worst months, so that's not surprising.
And as far as the vaccine is and there's no question and things have opened up although again you know as you can tell stadiums still are not full not everything is back to normal and so I would I would anticipate.
Further strengthening of revenues that being said the single biggest challenge we face right now is the lack of it.
As of lack of the ability to find workers is a real challenge for our franchisees and for US It's a the.
The basically that.
And on particularly that.
As you know we.
Our typical employee as you know around the nine to 13 dollar and our employee and those are people who in particular the.
The attraction of the $300.
Federal bonus for unemployment.
Puts of true disincentive on working because basically you make it really you're truly make more money staying on unemployment and you do working and so that's been a real real challenge, we probably our revenues could probably be.
I would say, 12% to 15% higher.
Were we able to find people.
I think last week or of the week before it came out that there are about $7 5 million.
Seven and a half million opening job job openings and the United States and I think we have $7 4 million of them I'm being facetious, where average ton of $7 4 million open jobs, but we have a lot and.
And that's really the biggest challenge we have right now it's not demand its demand and it's finding workers.
Gotcha and that you know.
And it's amazing how your company and the business model has performed and the last year considering all of these cros.
Cross wins and cross current from either of COVID-19 or you know the.
When you described disincentive and encouraging people to get out I wanted to go to another thing that's hitting all of the headlines which is deflation and if I understand correctly of your cost plus business.
How should I think about the impact of inflation or higher wages and more.
How should I think about it and how do you think about it.
And.
For hire question.
So that's a good question and and higher wages.
Frankly the.
The answer.
Defies a simple.
Explanation and other words.
The first of all of my own position is is that anytime you have to go to your and your client and ask for.
A price increase it's.
It's just an opportunity for them to potentially leave and so I would rather not have to have to do it so stability and wages is better and.
And that perspective that being and but it really depends on whether the client realizes that they're short of people that then they're willing to raise the the paid wage high enough to make recruiting.
Easier and so it's a double edged sword there are some clients that absolutely refused to raise the pay rate even if they end up getting short fill the orders every day and they just refuse to increase the pay rates others do because they recognize that the market is a lot of different than what it was of.
Year ago, and so it's really a mixed it's really a mixed bag the the.
The.
Largest clients. So typically you know again are paying.
The sort of on a on a markup basis and so to your point is is that it is somewhat of a cost plus the issue gets more to are they.
Sort of asleep at the switch when it comes to.
You know raising.
There's a temptation sometimes for them to say gosh, you can't get as people at 10 Bucks an hour anymore. We need to go look to see we need to go look find the new staffing company when in reality $10. An hour is probably $2 of beneath the going the going rate for that type of of Walker and that market. So I realize that's not a.
Typically a clear answer, but I would just say that it's it really and truly can create risks for losing clients and yet on the other hand, it create certain opportunities for us as well because it's even to the extent that it.
We have.
This is just more of a almost like a man. It was it's the math lesson and I'm sure. Most people don't really need but if we have a well just say of 45 per cent markup on of $10 pay rate if that pay rate goes up to $11 an hour.
Our franchisee will make more money.
At that constant mark up and so it can definitely be beneficial to the franchisee.
So long as so long as they can continue to retained and the retained the client despite the higher pay rate.
Yeah, so it sounds like there might be some short term.
Just issues and its the market the labor market kind of normalizes, but in the long run and that will all of it will all get settled out right.
Yeah, presumably I mean theres a fairly.
The there's a fairly defined.
Market.
Price for.
You know lets say warehouse labor in Indianapolis I mean, it it's really you know it.
It'll it'll it'll settle down.
To whatever it is you know it'll reaches equilibrium.
And yes, you know I do foresee that that equilibrium rate will be certainly higher than what it was.
In say 2019, which was already significantly higher than what it was in say 2017, there has been in this country a pretty.
Strong increase in wages.
At the you know the blue collar level, if there really has been a strong real increase in wages, which is good for the American public and I think it's a it's a good thing it's good for our workers and it's.
For our workers and you know to the extent that.
And you know again to the extent that our clients allow us to offer market.
Pay to our employees it it makes it easier for our franchisees to recruit as well.
No the great. That's very helpful. When I think about this upcoming quarter and and your seasonally strongest quarter of which is normally Q3.
And I think about that last year, obviously of the full effects of COVID-19.
And you're you know have added these two acquisition.
Can you talk to what.
One two weeks.
I don't even know how to phrase this the right way, but what do you expect or what do you expect to see and the the next two quarters in terms of is it going to be a slow ramp up or do you still fixing and you know.
Now waiting or is there stuff and you have to do or are we just kind of feel like.
And the full impact and.
It feels like it's going to be pretty dramatic when you report and I guess in August and then for Q3 would be later in the year.
I think that.
There won't be.
You know I think that as.
And he is basically the GDP grows.
And so will you know so will our revenues I'm not necessarily.
On the going back to one of your questions you embedded in your question and as far as.
Let's say.
Quote unquote fixing snowing.
First of all of their all franchised and so.
It's not necessarily.
The the pieces are all in place, it's really more a question of.
Do you know does the economy fully recover let's say by the third quarter and I'll give the good example, we have one particular office of I won't say what it is.
And out loud, but basically I have one in mind that they were and still are heavily heavily hospitality oriented and they're still running 70% below last year. So.
To the extent that I would see anything dramatic.
I believe it would still be.
Merrily confined to those markets that are still dramatically behind last year and there are pockets of those we have you know we have a number of offices that fit that category the.
The rest of them, though I would just simply say.
The you know that incrementally they will continue to improve.
The.
Schools and universities, if they're fully opened in fall and again that will be helpful.
And do convention start occurring again all of those are really important.
Pretty important aspects of although I have to say that the the.
Hopefully it's paired with.
And.
A number of states of moved too.
You know become stricter on.
Sort of job seeking and.
Activities prior to getting continued unemployment benefits and other words, even if every stadium every auto auction every convention center of every hotel was at 100% capacity and August.
If we can't find people.
We're still not going to see what we could have seen.
And I realize that's a little more yeah no no no. That's really helpful and that's that's really helpful and just understanding what the short term and look at last question on monopolized the.
Todd.
The last conference call you talked about organic growth, we talked about new verticals and expansion.
Just wondering if there if you have any additional thoughts or.
Just either on what Youre seeing for organic store growth to new verticals, we're expanding on verticals.
Yeah, and I would say not to not the not the quote me because its not sure you know, it's not necessarily set yet and I don't have the exact number and my head is what I'm, saying, but we have opened per.
<unk>.
Already maybe.
Five or six new offices, and we have commitments from people to open probably another eight or nine more so I would like to think that we should be and somewhere in the 10 to 15, new organic office openings through this year, which is which considering it's still a pandemic.
And particularly given how the you know we're almost halfway through the year and so we're still not like the hundred per cent out of the woods.
That's really a nice.
You know that that's represents probably a six to seven per cent increase and our number of <unk> and our number of units and <unk>.
So that and I'm pleased with that we can you know we continue to seek.
Accretive acquisitions and accretive acquisitions don't necessarily.
Just mean and the traditional staffing environment or the on demand staffing. The you know they they do include potentially branching out and so we're still looking.
We continue to to look for those.
Those opportunities, but again, we're not going to chase, where I've got chase something that doesn't make economic sense either.
Got you and thank you so much and congrats to you and the team for navigating this and.
Just thanks for the good stewardship. Thank.
Thank you.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your phone at this time.
We have no further questions in the queue at this time.
Yeah.
Alright, well I want to thank everybody of two for having joined US and I think that as you watch over the next couple of quarters you of that.
You are as excited as we are to see what the future will be with the the new Snelling and link additions to the to the company and.
And again I. Thank you for your continued support.
Have a good day.
Okay.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.