Q1 2022 Hirequest Inc Earnings Call

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Good afternoon, everyone and thank you for participating in today's conference call to discuss higher questions financial results for the first quarter ended March 31 2022.

At this time all participants are in a listen only mode.

A question and answer session will follow the formal presentation.

Anyone should require operator assistance. During this conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.

Now I'd like to turn the conference over to Jennifer <unk> of IMS Investor Relations. Please go ahead.

Thank you operator, I would like to welcome everybody to the call hosting the call today are higher.

Rick Harman and CFO David S Burnett.

I would like to take a moment to read the Safe Harbor statement. This conference call contains forward looking statements as defined within section 27, a of the Securities Act of 933 as amended and section 21 E of the Securities Exchange Act of 934 as amended.

These forward looking statements in terms such as anticipate expect intend may will should or other comparable terms involve risks and uncertainties because they relate to events and depend on circumstances that will occur in the future, but its statements include statements regarding the intent belief or current expectations of higher quest and members of its management as well as the assumptions on which such statements are made.

Prospective investors are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties, including those described in higher periodic reports filed with the SEC and actual results may differ materially from those contemplated by such forward looking statements, except as required by federal Securities Law <unk> undertakes no obligation to update.

To revise forward looking statements to reflect changed conditions I would now like to turn the call over to CEO of higher Quest, Rick Hermann go ahead Ray.

Thank you for joining us for today's call to begin I will provide an overview of financial and strategic highlights for the quarter and then David will share more details surrounding first quarter results. This was a strong quarter for US we continued momentum with both our existing and acquired franchisees generating growth year over year.

Franchise royalties grew 102% to $6 6 million and organic franchise royalties group grew 30% compared to the first quarter of 2021 overall total revenues increased by 139% to $8 1 million compared to the prior year period. This revenue.

Growth in the operating leverage of our business model resulted in a record quarterly adjusted EBITDA of $5 3 million a 246% increase from the first quarter of 2021. Historically Q1 is often our lowest quarter as common as is common in the temporary and direct dispatch labor industry.

Our Q1 results.

The receding impacts of the pandemic.

As well as the contributions from the expanded offerings, we acquired in the past 12 months, some of which have less seasonality to their operations.

We added four new franchise locations. This past quarter. In addition to the locations. We acquired as many of you know we offer numerous incentives to our franchisees to alleviate financial and logistical obstacles that can limit their potential for growth.

Beyond the attractive economics provided by our franchise model, we support our franchisees in multiple ways, including payroll and accounts receivable financing backend operations and it support.

Access to affordable Workers' compensation insurance and access to national accounts, all of which helped to lower operating expenses and save managerial time.

Finally, we also support organic organic growth by financing expansion costs into new territories or through acquisitions and important value AD that is unique to our company.

And resources, we dedicate to making franchise expansion of reasonable endeavor differentiates us from our peers.

On the acquisition front through 2021 and into the first quarter of 2022, we strategically expanded our end markets and geographic footprint. We continue to remain active on the M&A front and we believe there is substantial opportunity for us to build out existing offerings as well as enter new service verticals beyond traditional staffing.

A cornerstone of our strategy is to convert acquisitions into franchises conversion activity may generate transaction related expenses and to that point, we saw a $3 $6 million of these costs in the first quarter. So while reported income net income was $603000 or <unk> a share.

Excluding the $3 $6 million charge and related tax effects net income for the first quarter would have been significantly higher.

We are pleased with the progress made and key developments achieved in the first quarter and we are energized to drive continued success as we move through 2022, we're optimistic about the opportunities were.

Seeing to continue the growth of our business and I look forward to sharing more details as our locations and service offerings grow with that I'll pass it along to our CFO , David Burnett for a closer look at our first quarter results David.

Thank you Rick and good afternoon, everybody. Thank you for joining us today.

We're kicking off 2022 with another solid quarter total revenue for the first quarter was $8 1 million compared to $3 4 million for the same quarter last year, an increase of 139, 4%. Our total revenue is comprised of three components franchise royalties, which is our primary source of revenue and typically.

For about 90% of our total revenue.

Service revenue, which is generated from interest charge to our franchisees on overdue accounts receivable and fees for various optional services.

And third as staffing revenue from owned locations franchise royalties and service revenues are derived from our franchise base.

From time to time, we may have owned locations staffing revenue as a result of the acquired businesses that are not converted the franchises during.

During the first quarter of 2022 owned revenue included the dental staffing operations acquired in December of 2021.

One of the two locations acquired as part of the Duke transaction. In February has also earned but is reported as discontinued operations. While we are actively seeking a franchisee.

Franchise royalties for the quarter were $6 6 million compared to $3 3 million last year, an increase of 101, 7%.

In addition to the contribution from the acquired Snelling and link locations royalties from our existing franchisees saw strong organic growth of 29, 9% during the first quarter.

System wide sales for the quarter were $101 million compared to $56 1 million for the same period in 2021.

An increase of 81% organic system wide sales grew 35% for existing franchisees.

System wide sales include sales at all offices, whether owned and operated by us or our franchisees.

Selling general and administrative expenses for the quarter were $2 8 million compared to $3 8 million last year.

Most core operating expenses remained relatively flat, reflecting the leverage in our business model with incremental revenue.

There were $1 4 million of acquisition related SG&A cost in 2021.

And our workers' compensation expense decreased by almost 800000 in the first quarter of 2022 compared to last year.

Workers compensation liabilities are difficult to predict and will generally be the most volatile expense in our SG&A.

Net income for the quarter was 603000 or <unk> <unk> per basic and diluted share.

Compared to net income of $3 7 million or <unk> 28 per basic share and 27 per diluted share in the first quarter last year.

As Rick mentioned, we realized expenses related to converting newly acquired businesses into franchises during the first quarter of 2022.

These expenses amounted to $3 6 million or $3 million after tax.

Adjusted EBITDA in the first quarter was $5 3 million compared to $1 5 million in the first quarter of last year.

We believe adjusted EBITDA is a relative relevant.

Relevant metric for us due to the size of acquisition related charges and noncash operating expenses running through our P&L.

Reconciliation of adjusted EBITDA to GAAP net income is provided in our latest 10-Q, which will be filed this afternoon.

Moving on now to the balance sheet and cash flow. Our current assets at March 31, 2022 were $47 2 million compared to $42 million at December 31, 2021.

Current assets at March 31 included $1 $8 million of cash and $41 3 million of accounts receivable. While current assets at December 31, 2021 included $1 3 million of cash and $38 $2 million of accounts receivable.

Our current liabilities at March 31 were $28 3 million, resulting in net working capital of $18 9 million at.

At December 31, 2021 current liabilities were $21 4 million.

As Rick highlighted we often provide financing to our franchisees for expansion or initial capital needs. Our franchisee notes receivable balance net of reserves as of March 31 was $4 3 million compared to $4 8 million at December 31, 2021.

At March 31, we had approximately $19 2 million in availability under our credit facility, even after the three acquisitions completed in the first quarter.

We believe that this facility combined with our existing cash flow from operations provides us with the flexibility and room for both organic growth as well as the capacity to capitalize on potential future acquisitions.

Facility was finalized in the second quarter of 2021, we have closed five acquisitions with aggregate consideration of $26 9 million and finished the first quarter with a modest balance of $5 $5 million on the credit facility and $1 $5 million in seller financing.

Beginning in the third quarter of 2020, our board approved and the company paid its first dividend.

Since then we have paid a regular quarterly dividend continuing that pattern, we paid a <unk> <unk> per common share dividend on March 15th 2022.

Lord of Directors recently declared a quarterly cash dividend of <unk> <unk> per share of common stock to be paid on June 15, 2022 to shareholders of record as of June <unk> 2022.

We expect to continue to pay a dividend for each subsequent quarter subject to the board's discretion.

With that I will turn the call back over to Rick for closing comments.

Thanks, David as I mentioned at the start of this call Q1 was a strong first quarter and we're looking forward to continuing this momentum through the year I would like to thank our team our franchisees their workers for their for the continued excellent demonstrated throughout the quarter, especially given the global challenges we are.

All currently facing.

Markwest is rapidly filling the market we saw it to capture when we started this business and I look forward to growing with our new and existing franchisees to support this vision.

I also want to thank our investors for their continued support and we look forward to reporting our progress to you at our annual shareholders meeting on June 15th 2022 at two PM Eastern time.

To enable stockholders to participate remotely.

We are pleased to provide stockholders the opportunity to attend the meeting virtually via live audio webcast and telephone dialing you may attend vote submit questions. During the annual meeting via the Internet. We encourage you to vote prior to the annual meeting the proxy card. If you are unable to attend now I will open.

The line to questions. Thank you.

Ladies and gentlemen, 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 ask that while posing your question you. Please pick up your handset if listening on speaker phone to provide optimal sound quality. Please hold while we poll for questions.

Okay.

Thank you our first question.

2022.

Well thanks, Mike for the question the labor market is still incredibly tight.

Tight.

And we just had a meeting in Charleston, and in fact have a lot of our franchisees and one of the I posed the question to the group, which probably contained.

Probably franchisees that represented 150 to 175 of our franchise locations and pretty much to a person everybody raised their hands as far as still having a hard time finding.

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While it's hard to exactly pin down do we have less open orders more open orders.

At the end of the day.

We're still at a point where.

We're not.

We're struggling to fill every order we have a lot more demand than we do people and I haven't candidly really seen much of a slackening of that as you can tell from our numbers clearly, we're filling more orders and were focusing really hard on various.

Avenues of recruiting but too.

Five months four five months into the year.

I would still say that we are.

We're not that much different than what we were let's say in last October November at kind of when I was reading the GDP drop one 4% in the first quarter I'm thinking gosh, that's like the best.

The best downward trajectory in the GDP that ive ever experienced so.

I don't know for US it's still all systems go at this point.

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A reminder, that if you would like to join the queue for questions. Please press star one at this time.

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Our next question comes from Aaron Edelheit.

Hey, Rick Thanks, so much for just that.

The color I wanted to just make sure that I.

I really like what you said about all systems go this is.

Q1 is normally your seasonally weakest quarter.

So.

We should assume that I'm just curious if you could talk about the momentum in your business going into your strongest quarters, which are Q2 and Q3 is there.

Any reason that you see that things would slow down.

Aaron Good afternoon and.

Thanks for the questions.

I do not see.

Anything.

Shouldn't say that we've got a war going on in Europe , we have oil prices through the roof, we have inflation going at 40 year highs what could go wrong right I mean so.

In <unk>.

Light of all of that of course, there are of course, there are macroeconomic risks that.

Are clearly present right nobody can say they were there they'd be shocked if if.

The fed raised interest rates high enough to that it killed the economy all of that set aside so let's just say that there is not a really major change in the.

Overall economy.

There is no there is nothing that we have internally.

Seen or are seeing.

That would indicate any let up from what historically, what we would do.

And so I would point out that for example, we exceeded $100 million in system wide sales in the first quarter, which as you noted and as we've said in the past is our weakest is our weakest quarter.

So.

And that Didnt include.

A lot of our the acquisitions we made.

So we are very very well set up for the.

Really the rest of the year.

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In the last earnings call obviously.

I clarified that there was going to be some noise in the first quarter and $3 6 million bucks of pre tax charges.

Certainly.

A lot of noise.

There is.

Theres nothing that Ive seen thus far that would that would represent anything close to that of noise for the next couple of quarters. So I am hopeful that the next really for the next two quarters. The next three quarters.

We'll really.

Start to show the earnings power of this company and part of what we've developed over the last.

Three years, three and a half years.

Got you and speaking of the noise I actually don't mind that noise because it means that you are.

Prior and companies and then converting them to franchisees and you made some comments on the call and I'm just curious what you're seeing in your potential backlog.

Or your pipeline should I say of potential acquisitions.

Could you made some comments on what Youre seeing.

Potential deals and with the weakness in the stock market or the week all the troublesome headlines out there do you see an increase in activity and in terms of maybe some of these smaller companies looking to sell.

I Wouldnt say theres really been much.

Much of the change my.

Guess would be.

This is just speculation.

Is that.

Were we to have another quarter of negative growth in GDP things were to slow down a bit I believe that then as is typical there will be more of our competitors headed to the exits which for us creates more opportunities, but I would say that it's <unk>.

Pretty stable the deal flow that we're seeing and so we.

Generally.

The only thing the only problem is we're sort of like a like a let's.

Say like a python right and we just swallowed some we just swallowed something and so sometimes what happens is when we had like in the first quarter, where we had three deals being worked on simultaneously plus really we had finished dental power in December .

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We're going to be intentionally slowing down our deal flow and it takes a little while to get it back going again, but again the opportunities that present ourselves has been fairly stable for probably a year now.

Which is just a long way of saying.

There are still plenty of opportunities out there that are reasonably that are reasonably priced obviously as we've grown.

Some deals become more difficult to achieve because we already have franchisees in that area and therefore, where we don't we don't look to those are those deals are harder to.

Harder to consummate.

Got it well congrats to you on the team and just.

Great job. Thanks, Thank you.

Our next question here is Kevin Steinke from Barrington Research.

Okay.

Hey, good afternoon.

Okay.

So you mentioned the.

For new organic.

Franchise office openings in the first quarter it seems like a pretty good start to the year.

Are you hearing.

From the franchisee base more.

Incentive to open offices this year now that.

Hopefully the panda stomach is starting to recede a bit or.

Maybe the labor market tightness, giving them some pause.

Any thoughts on kind of the.

Pace of organic office openings do you anticipate this year.

Is it good question in.

As much as we are obviously not afraid to do acquisitions, we really love organic growth.

The.

Tightness in the labor market is actually more creates more of.

An opportunity to grow.

The difficulty is frankly, finding the appropriate permanent staff to.

Grow and I believe that if we had.

More.

More of a backlog of trained managers or assistant managers is that our franchisees would be able to grow.

More rapidly but.

It's hard.

To maintain a qualified good staff and so.

I think.

That so the lack of.

The lack of.

The ability to.

To recruit permanent staff is kind of holding down organic growth.

Yet.

The sheer volume of client requirements.

Is acting as an accelerant and put the and Youre in kind of a neutral state I don't know if that makes any sense. You have got one very positive factor you have one fairly negative factor and in the end you're in probably a pretty average.

A pretty average spot.

Do think all of that being said what I'm hopeful of is it's now been around a year since we did the Sterling and link acquisitions and obviously there was a lot of learning to be done a lot of re.

We had to start all our franchisees had to learn new software and new systems and new ways of.

Sort of reporting accidents et cetera, and I think that hopefully as well as now as they've settled in is that that will also act as.

Sort of an accelerant towards future growth.

But I would say that.

I would say for new offices.

Pretty good.

I'd always like to do more but for certainly not bad.

Okay great.

Helpful color I appreciate the comments.

When we.

Think about the rest of the year in terms of SG&A are there any.

Adams, we should think about in terms of incentive compensation or anything else.

That would affect that.

Kind of $2 8 million run rate you had or is that maybe a kind of a fair.

Run rate.

Maybe with some increases built in.

Throughout the year.

So that's that's a great question and what I would say is.

And I'm glad I'm actually glad you asked it because I can kind of highlight something as we all know our fourth quarter was hit by sort of a change in how we account for.

Management bonuses.

And.

All of the 2021 bonuses instead of being accrued in the first quarter were accrued last year.

But now we've changed to where we are accruing for what we anticipate the bonuses to be.

In 'twenty.

In 2022.

So the SG&A number.

Excluding the workers comp.

Impact is a fairly solid number we have we have.

Nothing.

There is nothing thats anticipated that we'll either make it a lot better and make it a lot worse I would say that the workers comp is probably a bit.

Lighter this quarter than what maybe it would normally be.

So you could if you're forecasting.

Might be able to go you might it might well be.

Reasonable to go a little heavier on SG&A simply because the workers' comp might not perform as well, but as far as the core SG&A.

I think it is a very solid number.

Alright, great Thats helpful commentary.

And just circling back to what you saw throughout the first quarter.

Again, hopefully this is kind of.

Fading into the rearview mirror, but.

Do you think there is any noticeable impact.

Demand for Mohamad crime.

Or is it just kind of too hard to tell.

That would affect it.

Would've affected labor availability, I know thats still tight but.

Or anything that maybe you saw earlier in the quarter that your franchisees called out.

No I would it's actually if you look at sort of week by week sales frankly, they performed almost exactly what you would expect.

So meaning.

<unk> really didnt have any appreciable impact on.

On our first quarter results so the.

Our January weekly sales were about what they should have been relative to our March.

Weekly sales just based on 20 plus years of history with it.

It's kind of interesting obviously, we get weather impacts and holiday impacts are really a lot bigger than anything that army granted.

Alright, Thanks, and then.

I mean any thoughts on.

This timing of.

Maybe converting.

Low power.

To the franchise or rolling out that franchise dental offering.

Also maybe any insight on when the dubin location could cause.

To franchise as well.

Fair questions, so with dental power, we're still targeting towards the end of this year we've.

Done a number of operational steps in it.

That we think are going to improve the margins significantly.

And that will therefore.

Make it a more attractive franchise, which will make it obviously are more of them.

More attractive price for us to sell it to the franchisee yet so we just want to.

We want to continue and finalize implementing those steps.

And.

And then being able to pretty much record those financially and then sell them as far as the Dubin group I mean.

We just haven't had anybody.

It was a fairly significant acquisition and.

The larger they are sometimes unless it's the manager who's buying at those tend to be a little bit harder.

Those tend to be a little bit harder to sell because they are bigger they're a bigger.

Commitment on behalf of our franchise buyer and so it's one of those things where I could sit there and say to you like there's nobody right now it's.

Just a factual statement, we have no potential buyer right now, but that could change literally tomorrow.

And we could have it sold in 45 days I mean, it's performing fine it's not it's not a problem. It's just.

It's just one of those things sometimes where.

It's just taken a little bit longer than we expected.

Yeah.

Alright Thats fair.

I appreciate the comments.

Thanks for taking the questions congratulations on the good start to the year. Thank you.

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If there will be any final questions or comments. Please indicate so now by pressing star one please.

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Okay. Thank you ladies and gentlemen, this does conclude today's conference call.

May disconnect your phone lines at this time and have a wonderful day.

Thank you for your participation.

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