Q3 2021 Hirequest Inc Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the third.

Third quarter 2021 earnings call.

At this time, all participants have been placed on a listen only mode and the soon to be opened for questions and comments after the presentation.

It's now my pleasure to turn the floor over to your host Brett Sir the floor is yours.

Thank you operator, I would like to welcome our bodies the call hosting the call today are hard quest CEO, Rick Hermanns and CFO Cory Smith, please be aware that some of the comments made during our call may contain and include forward looking statements within the meaning of federal securities laws statements about our beliefs and expectations containing words, such as May could would will should believe expect anticipate and similar.

<unk> constitute forward looking statements. These statements involve risks and uncertainties regarding our operations and our future results and could cause actual question I'm, sorry cause actual 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 with the earnings release and its filings with SEC, including without limitation, most recently <unk>.

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 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 at <unk> dot com or the SEC website at SEC Dot Gov company does not undertake to publicly update or revise any.

We're looking at things 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 25th a link to the website replay of the call is also provided in earnings release is available on our company's website at <unk> Dot com.

Now I'll turn the call over to CEO hire question, Rick Hermanns Rick.

Thank you for joining us this past quarter marked a milestone milestone for us with weekly sales from our legacy higher quest direct franchisees pulling even with 2019 numbers for the first time since the beginning of the pandemic over the course of the quarter weekly sales week.

Weekly sales results improved from trailing 2019 comps.

10% to 15% in early July to pulling even by the end of September given the continued uncertainty and headwinds from the pandemic. We're excited by their momentum going into the end of the year.

Q3 system wide sales of $99 $6 million and total revenue of $6 $9 million. Both represent record results for higher quest and were driven by a combination of organic growth and the contributions from our Snelling and link acquisitions. We also had record adjusted EBITDA.

Of $5 $3 million. This is especially notable given that given we recently completed two large acquisitions at the end of the first quarter, our ability to integrate both snelling enlink and within two quarters see the results from the increased scale highlights the benefits and potential operating leverage with the.

Franchise or model.

Adjusting for the extraordinary noncash compensation and the nonrecurring no charge in the quarter. We comfortably achieved our stated net income target of three and a half to four 5% of system wide sales.

Subsequent to the end of the quarter, we announced two acquisitions first our acquisition of recruit media at the beginning of October accelerates, our development efforts and will provide new tools for our franchisees to better serve their clients and workforce.

We announced that we entered into a definitive agreement to acquire dental power staffing for dental powered staffing division of dental power and we expect to close this transaction before the end of the year as we've said in the past we believe that our franchise model can be applied across a broad range of staffing verticals and service industries.

And we continue to evaluate the best Avenue to enter these verticals internal development acquisitions or a combination of.

Smaller transactions such as dental power gives us a platform to build to build on both organically and through add on acquisitions.

I turn it over the call to Cory to discuss the financial results further I wanted to mention that the board of directors has declared a regular quarterly dividend, we will pay a six cent per share dividend on December 15th to shareholders of record on December 1st or.

Our expectation is that we will continue to pay a 6% dividend quarterly going forward with that I'll turn the call over to Corey Corey.

Thank you Rick and good afternoon, everyone. Thank you for joining US total revenue for the third quarter of 2021 was $6 $9 million compared to $3 $4 million for the same quarter last year, an increase of 103%.

Our total revenue was made up of two components franchise royalties, our primary source of revenue, which typically accounts for about 95% of our total revenue and service revenue.

Franchise royalties for the quarter were $6 $5 million compared to $3 $2 million last year, an increase of 103%.

The addition of selling and link locations contributed to this growth we experienced organic growth of 52% during the third quarter. We also achieved a milestone this quarter with system wide sales matching 2019 levels levels, we have not seen since the pandemic began in early 2020.

Service revenue, which is generated from interest charge to our franchisees on overdue accounts receivable and fees for various optional services was $341000 compared to $164000 last year.

Selling general and administrative expenses for the quarter were $3 million compared to $1 $4 million last year.

This increase was partially due to additional expenses to support the snelling and link acquisitions, but also included an additional $460000 and noncash compensation costs as well as a nonrecurring charge of $307000 dollars related to an increase in the reserve placed on notes receivable related to the two.

And in 19 sale of locations in the state of California.

Net income for the quarter was $3 $2 million or 23 cents per diluted share compared to net income of $2 million or 15 cents per diluted share last year.

Adjusted EBITDA in the third quarter of 2021 was $5 $3 million compared to $2 $9 million in the third quarter of last year.

We believe adjusted EBITDA is a relevant metric for us going forward due to the size of noncash operating expenses running through our P&L a detailed reconciliation of adjusted EBITDA to net income is provided in our 10-Q.

Moving onto the balance sheet, our current assets at September 32021 were $46 $7 million compared to $39 million at December 31, 2020.

Current assets at September 30th included $4 $8 million of cash and $38 $4 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 reserves at September 30th was $4 $3 million compared to $8 $1 million in September December 31, 2020.

During the second quarter, we closed on a new $63 $2 million credit facility comprised of a $60 million revolving credit facility and a $3 $2 million term loan.

We believe that this new facility provides us with flexibility and room for both organic growth as well as the capacity to capitalize on a potential future acquisitions.

Beginning in the third quarter of 2020, our board approved and the company paid its first quarterly dividend of five cents per common share.

Since then we have paid a regular quarterly dividend and the June 2021 our board approved an increase in our quarterly dividend from five to six cents per common share.

As Rick mentioned, we will pay the six cent dividend on December 15th to shareholders of record as of December one and we expect to continue to pay this increased dividend each quarter in 2022 subject to the board's discretion.

And with that I will turn the call back over to the operator for question and answer.

Okay.

Please submit your questions at this time.

Yeah.

We.

Do have a question from Aaron Edelheit.

Yeah.

As a reminder, the floor is now open for general questions. If you have a question or comment. Please press star one on your phone.

Well, yes, well posing your question. Please pickup your handset listening on speaker phone to provide optimal sound quality. Please hold on while we poll for additional questions.

Yeah.

Evan the floor is yours.

Yes, Rick can you hear me.

Can.

Okay, great congratulations on the great results.

Otherwise.

Really surprised happily on the operating leverage.

And wanted to ask you.

Is there some step change or how should we think about this quarter when I look at your adjusted EBITA margin.

That was much higher than I expected.

Very happy with it.

Going forward was this was.

Was this an anomaly or how should I think about this.

Thank you and I appreciate the question I would say that.

No it's not an anomaly really at all it's just hitting pretty much right about exactly where we should be.

You know the prior periods, obviously, we're affected by the pandemic. So when you go back to 2020.

We were even though we did a lot of expense cutting in the beginning of the pandemic.

You can only still cut so far.

So really the operating Leverages come back significantly with the with the sort of bit of the re leasing of the pandemic grip on the economy and of course, the acquisitions of Snelling and link having boosted it having boosted our operating leverage as well so.

No I wouldn't look at it as an anomaly as well.

At all.

Okay now we've been obviously you open the newspaper and you talk to anyone in business and there are shortages of labor I have to assume a higher class is experiencing similar thing do you have any idea. If there were bottlenecks for you to provide labor to your customers.

Can you give me any metrics of what you could be doing if they're works.

Either shortages of labor or if there are bottlenecks could you give me any thoughts on.

How much better you could have done even though I'm really happy with these results.

Yeah. So.

That's it's a double edged sword. So let me first state that I do think that the ending of the supplemental 300 dollar a week unemployment benefits.

Really helped.

We're filling of orders towards the end of the quarter and as I stated earlier is we went from running 10% to 15% behind 2019 numbers to basically even by the end of the quarter.

Lot of that had to do with the return is.

Sort of like return of the Jedi well. This was like return of the worker and so the ending of that $300 supplemental.

Supplemental pay for not working.

Really brought a fair number of people back into the workforce.

Now as far as bottlenecks and stuff like that.

Certainly.

Have more unfilled orders now than we've ever had in the company's history.

However.

So sure we could probably be 10% to 15% higher if we could fill every order.

But I want to be careful when overstating that because the shortage of workers also leads to more orders and so it probably balances it probably balances itself.

That makes any Scott, yes, yes, no it makes sense.

Last question about kind of new verticals.

I remember on the last call I asked a question about trucking you announced your first foray into health care with the dental.

The staffing business.

When I look long term and I think about the opportunities of this vertical how big do you think.

It could credential be like a billion dollar system.

System sales business or you had mentioned last quarter that you thought that that trucking could be enormous I'm. Just wondering how you think about in the long term I'm not looking for next quarter of next year, but just how big could some of the verticals or specifically the dental opportune.

DB.

Right so.

Obviously with trucking when you have it pretty much widely acknowledged that there is a shortage of 500000.

Truckers right now, it's easy to see where.

It becomes literally.

And nine to 10 figure.

Opportunity.

On the other hand, you know dental is not dental is not that and it's not really our strategy necessarily to.

To be necessarily it doesn't have to be a huge.

It doesn't have to be a huge segment and part of going into dental what's helpful about going into dental as ware and yet in a limited way to start with is for us to develop our own system. So that we can grow from there. So I would say medical more broadly is.

Obviously.

Huge opportunity dental is not a small opportunity, but but really should be viewed more as an entre into that more.

It is probably more into the more skilled and professional.

Areas.

Got you so it's kind of like dipping your toe into the medical field and we should maybe this isn't the last announcement, we're going to see in that thanks.

Thanks that theres anything now.

We truly.

There's a lot of Credentialing and.

Medical is significantly different than.

Person working on an assembly line and so we want to make sure that we do that you know that we do a good job with it now that being said that's why we bought up more than 40 year old company to get 40 years of experience within that industry or ARPA I'm, sorry, we are contracted to buy it.

Hum.

That's.

Part of the reason for buying a company with that much experiences is that like I said it'll help us develop our systems.

Got you. Thank you so much sure thing.

As a reminder to our participants simply press star one on your phone at this time to be added to the Q&A for questions.

Yeah.

We do not currently have any participant in the Q&A feel that at this time.

Alright, well, then I'd like to thank everybody, who joined us too.

Thank you for.

Joining us and we.

We look forward to seeing what the fourth quarter brings.

And again, we thank you and have a good day.

Okay.