Q2 2022 Hirequest Inc Earnings Call
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Good afternoon ladies and gentlemen.
And sorry, I do apologize
Something's gone wrong with my system here. Ah, here we go. Good afternoon, ladies and gentlemen, and welcome to the Higher Quest Incorporated second quarter 2022 earnings call.
At this time all participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Jennifer Belladoe. The floor is yours.
Thank you, operator. I would like to welcome everybody to the call. Hosting the call today are High Request CEO Rick Hermans and CFO David Burnett. I'll take a moment to read the Safe Harbor Statement. This conference call contains forward-looking statements as defined within Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 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. Those statements include statements regarding the intent, belief, or current expectations of higher requests and members of its management, as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guaranteed the future performance and involve risks and uncertainties, including those described in higher request periodic reports filed with the SEC, and that actual results may differ materially from those contemplated by such forward-looking statements.
Except as required by federal securities law, high request undertakes no obligation to update or revise forward looking statements to reflect change conditions. With that out of the way, I'll now turn the call over to the CEO of high request, Rick Herman. Go ahead, Rick.
Thank you for joining us for today's call. To begin with, I will provide an overview of financial and strategic highlights for the quarter and then David will share more details surrounding our second quarter results. This was a very strong quarter for us across the board. We continued to see revenue growth both from recent acquisitions and organically from our existing franchisees. Franchise royalties grew 32.5% to $7.2 million and organic franchise royalties grew 40.7% compared to the second quarter.
34.2% increase from the second quarter of 2021.
multiple factors drove our strong performance for the quarter. First, a number of the franchise locations that were open within the past 12 months are starting to hit their stride and contributed to our results.
A key component of our model is supporting our franchisees as they build their own businesses and the strength of this model for the staffing sector continues to be reinforced.
The economic recovery from the pandemic, as well as the addition of a strong commercial staffing offering with Snelling, provided expansion opportunities for franchisees.
Second, we are seeing the benefit of the strategic diversification of our geographic coverage and end markets.
The three acquisitions we consummated in Q1 significantly advanced this strategy. Just to remind everyone, the Staffing Division of D.M. Dickerson expanded our franchise base in West Texas and New Mexico.
The Dubin Group and Dubin Workforce Solutions marked our entry into Pennsylvania.
and northbound executive search adds New York to our map and expands our franchise offerings into higher margin executive placement vertical
With these acquisitions, we have substantially expanded our geographic and industry coverage and now have a foothold in a majority of the segments of the $168 billion staffing and recruiting marketplace.
Third, the current economic backdrop of rising wages and labor shortages is creating a favorable demand environment. By utilizing HireQuest, companies are reducing the cost of permanent hiring while gaining access to quality workers in a supply constrained environment.
Fourth, the team here has become quite adept at executing and integrating acquisitions, utilizing the experience of our management team and the asset-like platform we have in place.
Our processes enable us to very quickly integrate acquisitions and provide the support and tools that help both new and experienced franchisees succeed. With that, I'll pass it along to our CFO , David Burnett, for a closer look at our second quarter results. David? Thanks so much.
Thank you, Rick. And good afternoon, everyone. Thank you for joining us today.
As Rick mentioned, total revenues for the second quarter were $9.3 million compared to $5.7 million for the same quarter last year, an increase of 62.8%.
Our revenue is comprised of three components.
Franchise royalties, which is our primary source of revenue.
Service Revenue, which is generated from fees for various optional services and interest charged to our franchisees on overdue accounts.
And third is direct staffing revenue from owned locations.
Franchise royalties and service revenue are derived from our franchise base.
From time to time, we may have own location staffing revenue from acquired businesses that are not converted to franchises.
During Q2, owned revenue included the dental staffing operations acquired in December of 2021.
One of the two locations acquired as part of the Dubin transaction in February is also owned, but is reported as discontinued operations, while we continue to market it to prospective franchisees.
Franchise royalties for the quarter were $7.2 million compared to $5.5 million last year, an increase of 32.5%.
in addition to the contribution from acquired locations.
Royalties from our existing franchises saw a strong growth of 40.7% during the second quarter.
System-wide sales for the quarter were $120 million compared to $89.7 million for the same period in 2021.
an increase of 33.7%.
Organic system wide sales, which exclude the effect of acquisitions, grew 29.8% for the quarter.
Systemwide sales include sales at all offices, whether owned and operated by us or our franchisees.
Selling, general, and administrative expenses for the quarter were $3.5 million compared to $2 million in the same quarter last year.
Most core operating expenses remained relatively flat as a percentage of system-wide sales.
The increase in SDNA expenses is primarily related to higher compensation and headcount to keep pace with the immediate growth in system-wide sales stemming from recent acquisitions.
This includes the additional headcount we carry from own locations.
In connection with the Q1 acquisitions, we recorded a $1.3 million accounting benefit in the second quarter related to adjustments in the fair value allocation after we completed independent valuations.
In the first quarter of 2022, we had recorded a charge of $3.6 million related to the conversion of most of the assets acquired into franchise operations.
The subsequent valuation adjustments included a $1.3 million decrease to that amount and the recognition of $1.1 million in goodwill.
Converting acquisitions into franchises remains a cornerstone of our strategy, and these types of gains and losses should be affected following significant transactions.
Net income from continuing operations for the quarter was $4.8 million, or $0.35 per basic and diluted share, compared to net income from continuing operations of $2.7 million, or $0.20 per basic and diluted share in the second quarter last year.
Net income from discontinued operations, which is the available for sale franchise that we are currently operating, contributed another penny per share.
This quarter, we realized our second consecutive period of record-adjusted EBITDA, generating $5.9 million compared to $4.4 million in the second quarter of last year.
We believe adjusted EBITDA is a relevant metric for us due to the size of non-cash operating expenses running through our income statement.
Adjusted EBITDA is also exclusive of acquisition-related charges, including the $1.3 million benefit I mentioned a few moments ago.
A detailed reconciliation of adjusted EBITDA to gap net income is provided in our latest 10Q which will be filed this afternoon.
Moving on now to the balance sheet and cash flow.
Our current assets at June 30, 2022 were $50.8 million compared to $42 million at December 31, 2021.
Current assets at June 30 included $1.1 million of cash and $45.7 million of net accounts receivable.
while current assets of December 31, 2021 included $1.3 million of cash and $38.2 million of net accounts receivable.
Our current liabilities at June 30, 2022 were $28.7 million, resulting in networking capital of $22.2 million.
At December 31, 2021, current liabilities were $21.5 million.
We often provide financing to our franchisees for expansion or initial capital needs.
Our franchisee notes receivable balance net of reserves was $4 million at June 30, 2022 and $3.9 million at December 31, 2021.
At the end of the second quarter, we had approximately $27 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.
Since the facility was finalized in the second quarter of 2021, we have closed five acquisitions with aggregate consideration of $27.1 million.
and finish the second quarter with just a modest balance of $2.8 million on the credit facility and $1.3 million in seller financing.
We have paid a regular quarterly dividend since the third quarter of 2020. Continuing that pattern, we paid a six cent per common share dividend on June 15, 2022 to shareholders of record as of June 1.
We expect to continue to pay a dividend for each subsequent quarter in 2022, subject to our board of directors discretion.
With that, I will turn the call back over to Rick for some closing comments.
Thanks, David. Our solid second quarter was very telling of the strengths across the business and the success we've seen in acquiring companies that significantly broadened the scope of our offerings.
I would like to thank our team, our franchisees, and their workers for the continued excellence demonstrated throughout the quarter, especially given the challenging economic environment we are all currently facing.
We have a long established history and this is not the first time we've experienced economic uncertainty.
I am confident that we are well positioned to handle any challenges that may come. As always, we remain focused on providing unparalleled support to our dedicated team of franchisees. For more information on ww.wopen scanning soothing...
Now I'll open the line to questions. Thank you.
Ladies and Gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on your speakerphone to provide optimum sound quality.
Please hold while we pause for questions.
Thank you. Our first question is coming from Mike Baker, DA Davidson. Please post your question.
Okay, hi guys. This is a great quarter.
I guess you sort of addressed it in the press release and in their prepared remarks, but any more color you could provide on the current labor market.
It's tight, we know that. We see that in the numbers that came out last Friday. On the other hand, we're hearing about more and more layoffs or less hiring. So I wonder if you could just tell us a little bit about what you see in the labor markets from where you sit and then how that is impacting your business.
Thanks. Thank you, Mike. At this point,
We haven't really seen
much of a change for the better or for the worse as far as
sort of striking an equilibrium.
So what I'm getting at is basically we are
still more short of workers.
than we are orders.
That hasn't really changed.
That said, we probably aren't
as far behind in filling orders as what we were a quarter ago.
So it really this quarter I think and the fourth quarter will be very critical in determining
aggregate demand compared to what
the workforce is available. I was just reading though
fact today how there are nearly two times as many open jobs as there are
people who are unemployed seeking to fill them. So I think that it will take quite a few.
layoffs or cutbacks on planned.
on planned hirings.
before we get to a point that
our overall demand will be affected.
Okay. Makes sense.
The and then the the idea of the higher wages remind us how how that helps you because I presume you have to pay, you know people more but I suppose you pass that right through to your customers.
Yes. So... Okay.
Don't misunderstand me. I don't think that high wages
to the extent that they make us less competitive with
Mexico or China or Vietnam or whatever helps the overall economy and in the long run
will hurt demand for us. That said, in the short run, obviously to the extent that wages go up...
our aggregate billings go up.
and our royalties go up.
in the short run, it's certainly
Good for us when wages go up.
Okay, yeah, that's what I thought.
One more, last quarter you said something along the lines, the question is about M&A and understanding you're integrating a couple acquisitions right now, but I think there was some comment last quarter that if we see another quarter of negative GDP, people are going to be running for the exits and looking to sell and that's going to be good for you. Well, three months later we've seen another quarter of negative GDP, so wondering what you're seeing with respect to
you know potential M&A, people looking to sell, etc. and should we expect, what should we expect for deal making this year?
Thank you.
Great question. We have
a steady supply of deals that we're looking at.
That said, I wouldn't say that it's any more at this point yet.
than what
It's been for the last year or so.
Weet All
we are definitely though seeing a good supply, but we're maintaining a really...
tight
view as far as on what we're willing to spend, in part because of the uncertainty for ourselves, right? When we're looking at, we're using TTM.
results.
to the extent if we were to go, I'll say, deeper into a recession. I don't want to wade into whether two quarters of negative GDP growth constitutes a recession, but
classically it has, but it's still obviously with 3.6% unemployment, it's not like any other recession either. Oh, that's a long way of saying that.
We haven't necessarily seen a huge uptick in distressed companies looking to sell.
But that's still...
sort of jades how we look at things going forward as far as buying someone. We obviously just don't want to buy off of a off of a peak.
But we're going to continue to maintain our disciplined approach towards acquisitions.
but the supply is...
You know, is really is there.
You know looking at it. There are something like forty four thousand staffing companies in the United States Which means no matter what whether unemployment is at 2% or 20% There are always going to be plenty of acquisition opportunities It's just a question of whether they're priced properly and so my remarks from the last call which still hold is is that? the more difficult the economic environment
the more reasonable that people are willing to sell their
sell their businesses and the more apt we are to be able to actually close on a deal.
Fair enough. One more just related to that, so follow up to that same question. Does the fact that you've made, I think it's now if I count right, five acquisitions, right, since last first quarter, so in the last six quarters, is that in any way hindrance because you got to integrate them? Like you guys integrate things really quickly. I'm just wondering if, you know, we're being disciplined because
of the uncertainty of the economy and does the fact that you know you got a lot going on here, how does that impact the decision?
making process or are those all done, you know, acquired, integrated and not really an impact.
No, I would say not really at all. The acquisitions that have been completed in the last five acquisitions, frankly, are not put under a Dis dx agreement, nor will Fund Celtic
as integrated as their
pretty much ever going to be.
So it's really not holding us back and frankly we missed out and we just missed by a hair on a On what would have been a nice deal
You know, so it comes, you know, it'll come. That's not holding us back at all. It's just really finding, don't get me wrong, it's holding us back only from the perspective of we were obviously only closing the last of those deals in March. So you know, we kind of take our foot off the gas as we were looking for new deals, say April , May.
And a lot of these take a few months to really come to fruition. So I would say sure there's been a little bit of an impact.
as far as what would be available now, but like I said, there's no, there's nothing with respect to integration of old deals that is affecting what our possibilities are.
Yep, yep understood. Foot canal will be back on the gas I guess is the point if it weren't.
Yes, that's right.
Thank you.
Thanks, Mike.
Thank you. Our next question is coming from Aaron Edelheit of Mindset Capital. Please pose your question.
Hi, Rick. Great quarter again. I wanted to just confirm something that I'm fairly confident that I know. This is not your seasonally strongest quarter. Your seasonally strongest quarter is Q3. That's correct, right? That is correct.
Okay, and last quarter when we had our conference call, you mentioned that it was
full steam ahead or you made some comment that you know you were the business was chugging and everything was fine.
Do you?
Feel the same way you felt at the end in what I think the call was in May or is there any update in terms of how you see the business?
chugging along.
So.
Fair question.
If you look at it, we had almost $120 million of system-wide sales in the quarter. So just annualizing it puts you at a run rate of $480 million.
That's really pretty exceptional for us and
That's really exceptional for us.
and
Thus far I don't see anything
you know, anything stopping that momentum that we have. Now I always want to be a little cautious because
I can look at two quarters of negative GDP growth.
a new tax increase coming. All these are things that aren't good for the economy.
So, you know, we're not going in there without
appropriate level of caution.
That said...
business is really has been strong obviously as indicated by $120 million of system-wide sales in the second quarter.
And nothing so far into the current quarter.
You don't see any change to that.
No, but this quarter, and as I said earlier, this quarter and the fourth quarter I think will be really good gauges for us.
as to...
the status of the economy overall. Staffing companies are really great barometers of economic activity. And if we start weakening a bit...
Then...
You know to me that's like the surest indication of the overall economy is starting to starting to slip It's just really hard to make strong predictions when
you have this backlog of people wanting to buy something is
simple as a car. I'm not saying the manufacturer of a car is simple but when you think of how long cars have been manufactured in the United States you sit there say, golly there's a shortage of them.
How do you have a recession at the same time that you have a shortage of supply? And so it's just the weirdest…
that you have a shortage of supply. And so it's just the weirdest circumstance.
I've ever experienced in 33 years of running this company.
years of running this company.
or 31 years of running this company and it's
uh
You know, like I said, it's just really hard to figure that out.
But I guess right now, stiffs are really strong.
Okay, that was what, now another, and maybe this is kind of a rough way to think about it, but if I think about that Q3 is typically the strongest quarter.
followed by Q2 and then
Q1 and Q4 a week is a rough rule of thumb, assuming there was no change to the economy and labor. Q2 and Q5 a week is a rough rule of thumb, assuming there was no change to the economy
compared to what it is today, could you just
As a rule of thumb, annualize this quarter's numbers.
or how would you have investors
think about how would you have investors think about.
I guess annualized results. You just mentioned something on system-wide sales in terms of where the company sits versus this quarter.
So, and I'm going to caveat the living daylights out of this statement, right? It means no acquisitions, no weird charges, no special items, no big change in workers comp, et cetera, et cetera. Is that the way I would look at things would be to say,
Q2 and Q4 should be similar.
Q3 should be 10 to 15 percent better and Q1 should be 10 to 15 percent less.
That would be so, personally, I would just use as a sort of a metric, I would say well Q2 times 4 equals
you know, equals the annual result in a static environment.
Now, static environments almost never happens. So just again, I want to know that I understand. Try to understand, you know, just the rough runway.
Great quarter, keep up the great work. Thanks a lot.
Thank you.
Thank you. Our next question is coming from Kevin Steinke with Barrington Research. Please pose your question.
Good afternoon.
All right, jumped out a little late, so I apologize if this has been covered, but can you just, you commented how the economic backdrop of rising wages and labor shortages is creating a favorable demand environment. Can you speak to just labor shortages and...
any constraints that's causing on your ability to fulfill demand? Is that loosened up at all? Or have you seen more workers coming off the sidelines? Or what's the current status there?
Hey Kevin, so what I would say is that
Demand has remained very strong and frankly beyond our capacity to fill it. I would say that it's...
Our abilities to fill orders are improving somewhat.
and but not but again not enough to offset the gap between what our orders are and what our supply is. And I think that the further you go up the skill chain.
the more difficult the fill is. Now that's always pretty much true in the staffing business.
someone who a position that requires 12 different specific skills is always harder to fill than a general warehouse worker who just has to unload a truck. That said, we're still...
Like I said, we're still
We could probably place.
you know, significantly more people if we had them. And so would I say they're coming off the sideline like you asked? No, I still wouldn't. I still would not say that.
But as some of these other companies cut back on their hiring plans and as some people, you know start laying off workers, I would expect that we would start seeing more traffic and more of an ability to...
to fill the unfilled orders that we have now.
Okay, understood.
You know, what are you seeing from your franchisee base in terms of Appetite for opening new locations and you know leveraging the commercial staffing platform and And just some of the other
kind of specialties that you're providing for your franchisee base to grow their businesses.
So I love that question. I wish.
we could always
sell more and open new more, you know, more new offices than what we did.
But we've definitely started to see
More openings?
Obviously, it took a while for our franchise base to clear through.
the pandemic experience. Obviously that left a scar in the conscience of everybody who.
really anybody who runs any business.
Other than, you know, unless you were like an online retailer or something.
Obviously, you were cautious going forward. We've had a pretty good...
expansion of offices.
I think that we can do better.
I wouldn't say, gosh, it's great. We're opening a new one every week. It's not bad at all. We've opened in the last 12 months in a couple of very significant markets that I do believe that in time will really help.
Put some tailwinds behind us as well. I just use as an example like opening, you know We just had a Snelling open in the Boston area recently and not too too long ago in Chicago Well, those are probably two of the seven or eight largest metro areas in the United States So those could become really large markets for us
and both franchisees have experience in those markets. So we're hopeful.
that and really not just hopeful but really are.
focused on organic growth as well. The other part that I would bring up...
Unfortunately, it's still going to take a while yet, but...
Part of what we experienced in the past was
Beep.
willingness to open new branches and expand.
is
frequently and necessarily tied to the amount of cash flow that the franchisee has available from existing
and necessarily tied to the amount of cash flow that the franchisee has available from existing operations.
And one of the things that's coming in the next couple of years is the vast majority of our franchisees
that came from the Command Center merger three years ago will have
that came from the command center merger three years ago will have paid off their acquisition debt.
And I certainly hope that there are some people out there who have been paying
a fairly significant amount of money for what their original office cost them that will then have the ability to either
to devote more money to sales in their existing market or
more money to sales in their existing market or then say
that, you know, then think that with their new cash flow that they want to expand. And so I'm feeling very good about...
our
opportunities and likelihood of
expanding our number of units in the next two to three years.
That's helpful. That's an interesting dynamic that you brought up there. I guess the emphasis is still on obviously having existing franchisees open new locations, but has there been any change in your efforts to...
maybe bring in
franchisees do from, you know, outside the current network to grow that location count.
Yes, funny, I'm glad you asked that question.
I really didn't want to say it because it's.
So new, but we did actually this quarter higher. Well, this quarter, meaning the 3rd quarter. Hired a person who is going to work at least part time. On the 1stkilter in the numerator.
selling franchises.
franchises and
to basically to people from the outside. So we are starting to expand.
those efforts as well.
All right, great. Thanks for taking questions. Congratulations on the good results here.
Thank you.
Once again, if there are any remaining questions or comments, please press star 1 on your phone at this time.
Okay.
As there are no
questions in the queue. This concludes our Q&A session today.
We want to thank you for your interest and participation in the conference and you may disconnect your lines at this time.