Q3 2022 Hirequest Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to today's higher Quest, Inc. Third quarter 2022 earnings Conference call.
At this time, all participants have been placed on a listen only mode.
And we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host John Nesbit of IMS Investor Relations John the floor is yours.
Thank you and good afternoon, I'd like to welcome everyone to the call hosting the call today are in her quest CDM retirements and Chief Financial Officer, David Burnett.
I'd like to take a moment to read the safe Harbor statement.
This conference call contains forward looking statements as defined in section 27, a of the Securities Act of 1933 as amended and section 21 E of the Securities Exchange Act of 19th 34 as amended these forward looking statements in terms such as anticipate expect intend may will should and other comparable terms involved.
Risks and uncertainties, because they relate to events.
And depend on circumstances that will occur in the future.
Those statements include statements regarding intent belief or current expectations of higher question 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 guarantees of future performance and involve risks uncertainties, including those described in higher quest periodic.
<unk> 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 higher Quest undertakes no obligation to update or revise forward looking statements to reflect changed conditions.
I would now like to turn the call over to CEO hire class requirements go ahead Rick.
Thank you for joining us for today's call to begin I will provide an overview of the financial and strategic highlights for the quarter.
David will share more details surrounding our third quarter results.
This was a very strong quarter for us in which we saw continued revenue growth franchise royalties increased 13, 7% to seven 4 million excluding acquisitions made in 2022 royalty growth was seven 3% staffing revenue from owned locations was $1 $5 million.
Gross profit increased 19, 7% to $8 2 million compared to $6 9 million in the prior year period, and we continued to drive very strong profitability in the business with net income from continuing operations, increasing 29, 9% to $4 $1 million.
<unk> 30 per diluted share we also reported adjusted EBITDA.
Of $6 $6 million up from $5 $3 million in the prior year period I'd also like to point out that for the first nine months of 2022, we've reported adjusted EBITDA of $17 $8 million up 86% from $9 $6 million for the first nine months.
2021, this growth really starts to demonstrate the magnitude and success of the growth strategy, we are executing multiple.
Multiple factors drove our strong performance for the quarter first our franchise locations continue to perform well a key component of our model is supporting our franchisees as they build out their own businesses. For example, our franchise expansion incentive program helps with startup costs by providing existing franchisee.
With credits on the royalty fees, they pay for existing offices, freeing franchises from financial constraints, and giving them access to growth capital empowers their organic growth. We also eliminated two of the highest cost barriers for franchisee franchise expansion capital and workers comp.
We continue to benefit we continue to see the benefit of the strategic diversification of our geographical coverage and end markets.
Three acquisitions, we consummated in Q1 significantly advance the strategy, we have substantially expanded our geographical and industry coverage and now have a foothold in a majority of all the segments of the 168 billion.
Staffing and recruiting marketplace.
Third the current economic backdrop of rising wages and labor shortages continues to be to be a favorable demand factor for our franchisees in contrast to the experience of some others in our industry have reported.
As we all know interest rates and inflation continued to rise by utilizing higher quest companies are reducing the costs.
A 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. Our recent happy faces deal at the end of the quarters. An excellent example of our strategy to add new franchisees and location and our flexibility to ensure the best and most aligned outcome for all parties by joining forces with our existing Atlanta.
Selling franchise happy faces happy faces in its owner benefit from the strength and support that higher quest brings to the selling franchise system, while remaining an independent provider of staffing services happy faces generated over $14 million in sales in 2021, and we're excited to help them in their <unk>.
Next stage of growth as the smelling franchisee.
With that I'll pass it on to our CFO , David Burnett for a closer look at our third quarter results David.
Thank you Rick and good afternoon, everyone and thanks for joining us today.
As Rick mentioned gross profit for the third quarter was $8 2 million compared to $6 9 million for the same quarter last year, an increase of 19, 7% or.
Our gross profit 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 charge to our franchisees on overdue accounts.
And third is growth staffing revenue from owned locations net of direct staffing costs for those locations.
Franchise royalties and service revenue are derived from our franchise base.
From time to time, we may have owned locations staffing revenue typically from acquired businesses that are not converted the franchises.
Franchise royalties for the quarter were $7 4 million compared to $6 5 million last year, an increase of 13, 7%.
In addition to the contribution from acquired locations royalties from our existing franchises saw strong growth of 15, 4% during the third quarter.
System wide sales for the quarter were $123 2 million compared to $101 9 million for the same period in 2021.
An increase of 21%.
Excluding acquisitions made in 2000 to system wide sales increased 13, 1%.
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 4 million or one 9% of system wide sales.
Compared to $3 million or 3% of system wide sales in the same quarter last year.
The decrease in SG&A was driven by a $982000 third quarter benefit and Networkers compensation expense.
During this quarter, we reduced our reserves based on recent claims resolution and experience.
Of this benefit relates to the smelling workers' compensation reserves.
Soon that the kind of acquisition that are now in runoff mode.
This decrease was offset by a net increase in compensation expense of $557000, which includes additional head count to keep pace with growth in system wide sales.
Income tax expense for the quarter was approximately 946000.
An effective tax rate of 18, 6%.
This was over double the effective tax rate for the third quarter of 2021, which was nine 2%.
Income tax expenses generally calculated by forecasting our full year effective tax rate and applying that rate to year to date ordinary income.
The lower rate for last year was a result of the large non taxable bargain purchase gain recognized in 2021 after the Sterling acquisition.
Our normal effective tax rate is expected to be in the 15% to 20% range and will fluctuate based on significant permanent items like the work opportunity tax credit.
Net income from continuing operations for the quarter was $4 1 million or <unk> 30 per basic and diluted share compared to net income from continuing operations of $3 2 million in the third quarter last year or 24 per basic share and <unk> per diluted share.
Net income from discontinued operations, which is the available for sale franchise that we are currently operating contributed another penny per share in the quarter.
This quarter, we generated adjusted EBITDA of $6 6 million.
Compared with $5 3 million in the third quarter of last year.
We believe adjusted EBITDA is irrelevant metric for us due to the size of noncash operating expenses running through our income statement.
Adjusted EBITDA is also exclusive of acquisition related charges.
A detailed reconciliation of adjusted EBITDA to GAAP net income.
As provided.
Pardon me is provided in our latest 10-Q, which we plan on filing later this evening.
Moving on now to the balance sheet and cash flow.
Our current assets at September 32022 were $50 9 million compared to $42 million at December 31, 2021.
Current assets at September 30 included $1 5 million of cash and $45 7 million of net accounts receivable.
While current assets at December 31, 2021 included $1 3 million of cash and $38 2 million of net accounts receivable.
Our current liabilities at September 32022.
Or $25 6 million, resulting in net working capital of $25 3 million.
At December 31, 2021, net working capital was $25 million.
At the end of the third quarter, we had approximately $26 1 million in availability under our credit facility. Even after the three acquisitions completed earlier this year and the growth since then.
We believe that this facility combined with our existing cash flow from operations continues to provide 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.
<unk> finished the third quarter with a modest balance of $2 $2 million on the credit facility and $1 $2 million in seller financing.
We have paid a regular quarterly dividend since the third quarter of 2020.
Continuing that pattern, we paid a <unk> <unk> per common share dividend on September 15, 2022 to shareholders of record as of September one.
We expect to continue to pay a dividend, including the fourth quarter.
I've talked to the board's discretion.
With that I will turn the call back over to Rick for some closing comments.
Yeah.
Thanks, David our solid third quarter was very telling of the strengths across our 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.
Unusual economic environment, we are all currently facing.
We have a long established history and this is not the first time, we have experienced economic uncertainty I am confident we are well positioned to handle any challenges that may come.
As always we remain focused on providing unparalleled support for our dedicated team of franchisees.
With that I'll now open the line to questions. Thank you.
Thank you ladies and gentlemen.
<unk> is now open for questions. If you would like to ask a question at this time. Please press star one on your telephone keypad to enter the queue. We.
We do ask with listening on speakerphone today that you pick up your handset while asking your question to provide optimal sound quality once again, ladies and gentlemen, that'll be star one on your telephone keypad at this time to enter the queue to ask a question. Please hold a moment, while we poll for questions.
And your first question today is coming from Mike Baker from da Davidson, Mike. Your line is live. Please go ahead.
Okay. So a couple of questions one I just.
How would you characterize your results sales gross profit EBITDA relative to your internal expectations.
I'm getting at is there are estimates out there my estimates the only one with estimates I do my best job to project.
My numbers were a little bit higher than yours.
<unk>.
But what's more important I think is how the results were relative to your own internal expectations rather than my estimates.
So I appreciate the question, Mike So I would say a couple of things is one.
The sales really were.
Not significantly different than what.
Then really than what I would've expected.
And I realize.
Historically.
We.
Offer and we kind of look at.
A bit more of an increase in sales in the third quarter.
Does have the prominence of HQ D higher quest direct that division tends to be more seasonal than our Sterling Division and also now with north bound.
And so part of that your.
Your expectations weren't necessarily.
Probably is wrong based on history as much as we're just more influence now bye bye snelling, but if you look at the billings by sort of individual week.
They were definitely well within well within our.
Well within our expectations and as far as EBITDA I would also say that they were pretty much within our.
Within our expectations.
Frankly every quarter has.
<unk> always has a number of sort of.
<unk> both positive in both positive and negative and I would say that this was one of those quarters, where it was probably kind of balance there were a few things that.
Maybe I wasn't expecting and there were a couple of both ways and so I would say that it was a fairly a fairly indicative.
Quarter. The one thing I will admit that took me by surprise and is it just may not being tax accounting.
Is the was the increase in the effective tax rate otherwise, we would have probably had almost exactly where I would've expected.
Okay.
That makes sense I appreciate that I wanted to ask you I always like to ask you on it.
Very confusing employment situation.
I think you know.
Everyone keeps expecting.
Employment to go down, but the unemployment rate is still very low and it looks like everyone's still hire people. Yes. We're hearing about all these lay offs and freezes you're already unique position I think to help us understand what's going on in the labor market in general. So if you could give us your insights into labor in general and then if we do go into recession.
What do you expect to happen and how does that impact your business.
So those are a lot of good questions and I'll do my best answer.
All of them hopefully.
It's interesting that.
Different this was true of the pandemic and its true throughout guests.
Yes, basically throughout the history throughout history is.
States each region tends to have a different different effect so.
Some areas in the country do better then do better than others in a recession I found it interesting for example, our probably our closest competitor would be.
True Blues people ready Division and I was interested in seeing that for example for their Q3.
There are people ready division was down 4%, whereas even excluding our.
Acquisitions from the past year, we were actually up seven 3% seven 3%. It was reported that maybe it was 9% anyway. So we did significantly better than people are ready.
Now idle.
I'd like to say that that's partially because of the.
Validation of our franchise model, but theyre also heavier in certain other markets I would say so.
With that caveat that we really haven't seen.
Certainly not in the third quarter.
Any real.
Slowdown to speak of in any market.
For us it's even the last unemployment numbers are still holding at three 5%. So it's a very strong.
A very strong employment market as far as.
Our customers are I would say that part of that might be and why we haven't maybe experienced.
The slowdown that's being spoken of is.
We really don't do a lot of business with.
Say certain large e-commerce companies that youre seeing some of the larger layoffs with as an example, and so.
I think that we've I mean, even let's say, a fedex or something like that like we're not.
We're really not very heavily exposed certainly not directly to those companies. So maybe some of the companies that were who's.
As at least for US I would say that we're obviously almost no or at least more than a third of the way through the quarter and I would simply say that at this point, we've still been our numbers have been holding up.
Our numbers have been holding up well.
So we're not really seeing it again part of it and I might just be to the mix of our numbers.
That said.
A decrease in.
A.
A significant pullback in the economy is not helpful to us and I'm not going to you know I'm certainly not going to pretend that I've always said that a recession is bad for our business. It's bad for our franchisees, it's bad for our clients and thus it's bad for us.
However.
With that said.
I do believe it's sort of interesting you know the old saying where.
People, who are ignorant of history are doomed to repeat it.
Sort of comes into this where.
And I personally have led my company through four different recessions already and frankly, each one as you know each one's a little bit different.
And I think that.
For the longer term sort of longer term I mean, whether we're in a recession a year from now six months from now or.
Five years from now is this that I think that the company the company the country.
It is undergoing a fundamental shift in demographics that will.
Significantly impact the staffing industry overall and by that I mean that when.
When you look at labor participation rates, they've dropped significantly which is part of the reason why we were I believe we'd maintain such a low unemployment rate is simply the number of people who are just no longer working basically people who took.
Early retirement, there was also an AD in the earn that article in the Wall Street Journal.
Maybe a month ago and discussed how theirs.
Normally high number of 20 to 35 year old Young man, who aren't working at all they're living in there they're living with their parents and theyre not working and so.
That will create probably a bit of an environment that we're not used to in a recession hopefully that might be wishful thinking, but I just know that there is a.
Real shortage still out there of quality workers and I think that therefore demand for our services will remain higher than what they otherwise were not back in the 19 eighties of the 19 nineties. When there were huge numbers of baby Boomer.
Others that were in there sort of prime working years things have changed the world is a different the world is a different world and like I said for the staffing industry I think so long as we retain our focus on candidate quality is that we will be able to.
<unk>.
We will be able to do better than maybe historically, what the <unk>.
Economic performance of the economy is I don't know if that answers all your questions, but that would be that's my view.
Yeah, no that's fascinating.
Really really great color on how it all works and I appreciate it thanks.
I'll pass it on to someone else.
Thank you. The next question is coming from Kevin <unk> from Barrington Research Kevin. Your line is live. Please go ahead.
Thanks, Good afternoon.
Richard I wanted to make sure I heard I heard correctly in your comments did you say.
You're now ill touch all segments of the $168 billion U S staffing industry.
Well I would say a majority a majority of it would be the better way of saying it if it was okay. It wasn't anything differently. We do that said, obviously, we are not nearly as heavy.
We have room to grow let's say for example in health care, but we do have we do have a presence in healthcare now as an example.
Right Okay.
Yes.
Yes.
Given that you're touching most or a large majority of the.
The industry or just kind of wanted to focus on.
Really the long term organic growth engine here.
Still massive opportunity to gain share in the market through.
New office openings.
Sure.
Rolling out new.
Service offerings to your franchisees.
Et cetera.
So maybe just any thoughts on.
That in terms of what Youre seeing in.
In terms of.
New franchisee openings or willingness of franchisees to launch new offices.
And kind of a pipeline of maybe some of the.
Our new services, Youre thinking about or planning to rollout I know, you're still working on the dental offering but.
Just maybe touch on some of those key long term organic growth drivers as they are developing now.
And Kevin I'm really glad you asked that question actually the.
So.
One of the.
One of them.
Sweet spots, we need to try to hit is.
Creating there's sort of like two different ways. We can go about this one is we want to hit that sweet spot, where we have enough of a name recognition that.
Selling franchises becomes easier.
Obviously, it's far more difficult if we were to just sort of hang a shingle out and say.
Higher Quest technical services, and we're doing engineers, but we only have one office, it's hard to sell that franchise right because youre not getting nearly as much.
Youre not getting nearly as much named power.
And Knowhow and so for example, buying snelling was important that way and yet obviously.
Although our snelling.
Division is <unk>.
Regionally large we have a long ways that we can continue to develop to develop that and so.
And we will continue to do that probably in other areas as well so far.
Example, one hour.
The other hand, our health care for example is miniscule really what we offer is minuscule and and therefore.
You know without forecasting it, but we to going out and buying let's say for example in health care staffing company is reasonable if only to put up bigger.
To have a bigger presence to improve our ability to sell more units and so I would say this year going back to your question is is that we've been able to open I can't I'll have to get back with you on the actual number of openings. We've had this year, but I would say that it's it's been a fairly.
A fairly good number of offices this year given the.
Given the uncertainty.
The overall economy, so I'm not displeased at all with that on the other hand, one of the things that we are.
Always seeking to do as well is look for.
You know niches with in the industry, where we might be able to add.
To add value. So for example, using the dental as an example, with dental is never going to drive the company but.
A typical dentist office or a dental service organization isn't going to want to go too.
<unk>.
Staffing company to try to find dental hygienist, and so I do see us moving in the future is consistently seeking those.
Specialty markets as well because even within our existing.
Office network, we have they have a lot of very very talented franchisees some that have very.
Unique experiences and so to the extent that we can utilize that and.
Create that.
Sort of specialty offering I do see that as part of our future now again that doesn't mean that that's going to drive everything but again our goal is to.
Be able to be.
You know to have a credible offering to our clients as well and so like I said going to it.
DSO a dental service organization, we have a lot more credibility going in.
With.
With our.
Hi.
With our current offering than what we would've been able to do before we bought it so I hope that answers your question.
No it doesn't mean.
Yes, you have to kind of build up that.
That.
Brand recognition of that.
That you can.
We were able to provide that capability and I mean, I guess that might.
You know until perhaps more acquisitions in the future or do you feel like.
You can develop some things organically as well what it what is that.
Mix look like.
We can do it without acquiring.
No.
If we can do it without acquiring someone with much.
I'd rather do that.
The and I think there are certain.
There are certain product lines that that's easier to do within what we already have.
But sometimes it just depends on what type of traction what type of traction we get I don't kind of want it [laughter].
Tip the cards, but there is something we have in the you know that we have in the offering as far as sort of a new sort of a new product line I'll call, it well, whether or not we buy anything in that.
It really depends on how well it's received by our franchisees and if it takes off we're not really going to.
Wouldn't do an acquisition to build on to it. So I don't know if that answers the question, but but ultimately you have to have enough scale to.
You need that certain amount of scale before.
The franchise itself has value to a prospective franchisee if that makes any sense.
Yeah understood. Thank you.
Yes, I wanted to circle back on the.
It's the labor market as well and.
You've talked about the last couple of quarters here that.
Demand has been good if demand has been strong but.
Maybe a bit of a gating factor has just been a wave.
Labor supply.
I guess the numbers being reported on the labor market wouldn't indicate it but has there been any loosening or has there been any.
Improvement in your ability to find supply.
And to what extent.
Is that a factor now that.
You think is playing into your growth.
Yeah, I don't think there's any question that.
In certain markets. There have been you know there's been a bit of a slackening.
Of <unk>.
Demand.
And perhaps even.
Somewhat of an increase in supply, which would be completely consistent obviously with a slowing economy and with <unk>.
Interest rates going up et cetera, how.
However, there such a pent up demand.
And there is such.
A large number of openings.
That.
I'm at least.
In the clients we're <unk>.
Servicing we're just not getting to that point, where.
You know, where where where like looking around at each other and saying gosh, we need to go out and find new clients is still more we need to find more people to fill the orders we already have and literally had a conversation with one of my franchisees today and we were just talking about it because we have a reservoir.
Of potential clients.
That were sitting there and we've intentionally not even engaged because we don't want to stimulate orders that we can't properly Phil So I would still.
And now that's just one segment one that's just one segment within all of that we serve so I'm not suggesting that that's.
Throughout our network, but I'm, just saying that.
You know.
There is still more of a struggle.
Find good people than there is to find good clients.
Okay. Yeah. That's helpful color I appreciate it and.
I'll turn it over thanks for taking the questions.
Sure.
Thank you. Your next question is coming from Mike Albany's from EFI, Mike. Your line is live. Please go ahead.
Yeah, Hey, Rick David.
Hope you guys are doing well thanks for you know.
Taking my questions here and congratulations on a really strong quarter.
That with some really nice contact you gave.
Regarding the macro outlook and what your organic growth there and I just wanted to build on that just a little bit.
First in regards to kind of the macro environment and this will just say under supply.
Temp workers that are you seeing an improvement.
And pricing power.
And at the franchisee level.
I would say that.
That improvement in pricing power.
Was way stronger, let's say at the beginning of this year and at the end of last year than it is now a lot of that has somewhat.
Deteriorated.
That said.
Margins are generally are.
Our definitely generally better.
The.
But part of the issue or part of the.
Benefit is more for and this is why I'm still kind of bullish on our demand as most of our franchisees have taken the rational position us well.
Well, Okay, I only have X number of workers.
And.
I'm going to focus on clients that.
Are willing to pay a better wage and a better rate and properly value the service.
Whereas in let's say.
Four years ago, it would've been more.
The buyer had more purchasing power and could lay down a bunch of conditions, which were very unfavorable for staffing companies.
And frankly, our franchisees are able to walk away from a lot more business.
Now at some point they may want to bring it back and it's always that fine line of of let's say, allowing our clients to work.
But right now if again you have a fairly limited pool of workers. There is no point in killing yourself trying to fill an order for a client that.
Really doesn't value your service as you know.
As much as another.
Client does so you go to who could who values you the most.
Got it no that makes a lot of sense and then just to kind of touch back on organic growth and I think that's like all in line with what you were just talking about but.
Saw really strong organic growth, obviously part of that was due to a weaker 2021.
But what's kind of the sentiment you're seeing from your franchisees regarding organic growth and the ability to open new locations. I know you mentioned that you didn't have the number off top of your head but.
<unk> opened a number of new location, but you're also kind of dealing with that under supply of temp workers, which I can I can kind of negate the ability to do that so.
My question really is what is this something that you're seeing from your franchisees about growing organically through opening new locations.
So.
And I think that where we're seeing most of our growth isn't necessary organic growth isn't necessarily.
Lets say our franchisee in Omaha, saying, let me open in Lincoln as well.
Rather it's.
Our franchisee in.
Milwaukee missed it really isn't I'm using hypothetical yes sure happen, but.
Let's say are our higher quest direct franchise in Milwaukee, then, saying, let me also open a snelling that as more of the organic growth that we're getting rather than rather than geographic expansion and part of that is because right now it's very difficult.
The recruiting environment is still very is still very difficult and so.
I'm not suggesting that we.
We have all sorts of.
People looking to open all sorts of.
All sorts of offices, but by the same token like I said to extend their existing product line.
Seeing we're seeing a fair bit of demand for that and I would hope and expect that to be.
The future, which is part of going back to one of the earlier questions as far as even offering like niche products.
Is that it's obviously easier for a franchisee.
Hey, it would be far easier for our franchisee in again in Colorado Springs, too, where we only have a higher quest directly would be far easier for him.
And for us for that matter to say, hey, I'm going to open a snelling and higher quest or in Colorado Springs, as well versus opening in Santa Fe, New Mexico.
It just it's simpler so the more we can offer.
The more they can leverage their local staff.
The more we can drive organic growth without.
And in a way that is easier for them I think.
Yes, no that makes a lot of sense to me I think ultimately what youre, saying is rather than geographical expansion as opportunities for you to expand within our region across different products and services and that would be a driver of.
Organic growth.
Okay and then my last question kind of goes with that or at least with how you've expanded across industry verticals. You know my understanding is Q3.
Typically the peak in terms of seasonality that you see but now that you've expanded in.
Did three acquisitions in beginning of the year end.
What is your expectation regarding seasonality moving forward do you.
<unk> got to be exacerbated or dampened in anyway, or really just kind of maintained as what you've seen historically.
So I would say that if you.
Pull out.
Acquisitions made in the prior four quarters.
Right. So in other words, we're going to have growth if were as long as we continue to do acquisitions.
Our number comparisons are always going to look you know what I'm, saying are going to look strong.
Would you be allowed to the extent you pull out those acquisitions I do believe that our seasonality will be.
More muted than it has been in the past simply because higher quest direct which is really really seasonal.
Hum.
<unk> is making up a smaller percentage of our overall.
System wide sales. So I would just say we will still have it you've got to realize too is even like Q3 has more business days than any other quarter. So just based on the number of business days, it's going to always be in almost probably.
Any business other than I can.
Retail or something.
It's going to be fairly common for the Q3 to be bigger because there's yeah. There's more business days. So it makes sense. So.
So seasonality will absolutely always exist in Q1 will always be.
We will always be.
Somewhat lower.
It won't be as pronounced.
Got it awesome. Thanks for taking my questions guys.
Thank you.
Next question is coming from Aaron Edelheit from mindset capital Aaron Your line is live. Please go ahead.
Hey, Rick My question I wanted to ask was.
More of how you think about capital allocation going forward.
When I look at this quarter and I see the machine that you have now built.
You are generating $4 $5 million, a quarter or so $4 million to $5 million a quarter of free cash flow, just assuming kind of flat accounts receivable you have.
Built this cash machine with like 50, 560% operating margin it doesn't really require a capex when.
When I look out into 2023, assuming.
That.
It's not the Apocalypse.
How do you think about like.
What you do with that cash.
Obviously, theres acquisitions, but you pay a small dividend.
I know that you guys are big shareholders. So you could you could buy back stock, but that lowers the float.
I'm curious if you could.
Sure any thoughts you have with <unk>.
What you would do.
In the in the new year.
With your cash flow.
So that's a.
Again, obviously, a fair and.
Fair question.
And.
It's interesting and I'm glad you asked the question because there are two.
Number of comparisons that I think are really important and kind of bear out. What you started your question with one is is that we right now have less debt than what we did at the end of the basically on September 32019.
We had more debt than we do right now and yet we have obviously made numerous acquisitions and to the extent that our adjusted EBITDA. This year. If it just continues at the same rate will literally exceed our total revenues for 2021.
Which is pretty amazing right I mean, that's that's that's like that's a pretty.
That's a that's something that.
You know that's something that.
I agree that is amazing I didn't realize that rarely that rarely happens. So of course, what do you do with the money right.
And the funny part about it is is that we have a certain cadence in which we want to grow and growth takes money.
And we're frankly pretty conservative when it couldn't have pretty conservative we are conservative when it comes to employing a.
A lot of.
A lot of leverage where we're just not that.
You know what we're just generally not that company.
So part of the reason even if you go back he was in the second quarter of last year, we filed a shelf registration thinking we would potentially need.
From time to time to issue some stock to do to fund growth, but but to be honest with you our.
Our cash flow has increased to such a point that.
I think that the we have the ability to continue to fund.
What would be.
Acquisitions at a level of what we've been doing the last three years from.
Straight out of cash flow and hopefully, maybe even a little bit more.
But realistically I think that.
We will probably.
But you know.
We don't have so much extra cash that it's gonna be burning a hole in our pocket either we have a lot of opportunities.
There to continue to grow and that's why I wanted to draw it back to those two numerical comparisons at the beginning is to simply say.
Our you know the deals we do.
We do them in sort of in the.
Are you of the fact that they provide a.
Fair return on our on.
On our capital and so I don't know.
There's no shortage of deals out there I guess is what I'm, saying that the shortage. That's good to hear so what youre, saying is that.
With the cash that you're generating every quarter.
Yes.
In your pipeline you see enough deals that.
That you could put that you can put that cash to work.
To continue your strategy.
<unk>.
And.
And you're confident because that that is obviously <unk>.
Just based on your previous comments Ted.
Adjusted EBITDA is now larger than 2021 revenue like.
Well I want to see that keep going so if you're confident that.
That you can put that cash to work that that makes me happy as a shareholder no and I think that Thats a fair statement again that can change on a you know that can change on a dime, but I don't really.
I don't see anything that does and frankly, we have a very resourceful VP of corporate development, David Hartley, who goes out and he finds all sorts of designs.
He finds all sorts of deals. So it's not we just don't have a shortage is really what it comes down to no I'm not saying.
There's a lot of we go through a lot of.
We have to go kiss a lot of frogs before we find that prints, but where we're working.
Theres plenty out there.
Gotcha.
Oh up question to that because <unk> been able to create so much value through acquisition.
And it's been such a driver of your model.
When I think about the economy.
In your in your mind.
Weird ways as a weaker economy.
Help you.
Acquire more companies.
While it may slightly weaker weaken your business, assuming it's not like a total collapse or how how should I view, the or how do you think about the lens of potential acquisitions or distress. Because you. Obviously took advantage of it during COVID-19 when there was a lot of distress.
Yeah.
So that is the big silver lining for US again, as I said before and all that.
Never never pushed back on it a bad a bad economy is bad for our current results.
But if it's bad for our results and we maintain a clean capital structure.
It's going to be extraordinarily bad form.
For Levered competitors, and that's going to create more opportunities and so the the best deals.
That we tend to see our.
Distressed companies and <unk>.
I'm a believer in the service business, especially.
Frankly, im not necessarily interested typically in let's say finding a company that has been the best run company for the last 40 years.
And a couple that had been running it want to retire because there's really no place to go but down right I mean kudos to them for running a great ship, but if they're leaving.
Hard to best I can do typically is.
To sustain it at.
I'd far rather see.
Somebody who's had some difficulties because they went out and they they bought too big of a house and they had a strip. They had you know they kind of had a they or some large client win bad on them and they are in a little bit more of a desperation mode.
That creates a lot bigger opportunities for us.
So all that being said that's the silver lining short run it's still it's still sucks our numbers are down our.
Our numbers you know our results are worse and stuff like that but again, we retain our good capital structure.
We're in a position to scoop up company at a better price than what we can in a.
Normal sort of a normal economy, and frankly selling would be the perfect example of that.
No.
The last question I wanted to ask because I just wanted to make sure again, assuming theres not just like epic collapse, the way I understand at least your accounts receivable is that.
While you are not seeing any slowdown now if there was a slowdown.
You would your accounts receivable would start.
Falling so your cash what I remember from 2020 watching your cash balances explode higher when things slow down.
And so in a weird way you'd become suddenly over capitalized.
DNA.
If there was a significant slowdown which would probably help your ability to acquire any distressed companies.
Companies am I thinking that correctly.
No that's right to give you an idea basically.
We were we were never debt free until the great recession.
But we lost we lost.
40% of our business of course that means our a R dropped by 40%. So we we.
We went we were conservatively leveraged even going into that recession.
But obviously that made a big difference if where let's just say for the sake of argument, we did $123 million. This last quarter. So, let's just say it's Neil.
Just shy of 10, we'll just use $10 million as a proxy right well, obviously, if our sales go down 40% in a severe recession, well youre, probably looking at $20 million to $25 million.
Of a are coming in and even you know you'll lose some on your accruals and stuff, but basically you're talking about.
Recapturing something like $20 million of working capital.
We're sitting with three $3 million of total debt, so we'd be sitting with 17 million bucks of cash on our balance sheet.
And this is the value of using that at all.
So this is this is the value of your model of why you have no debt is because.
If things do hit the fan.
<unk> built this in a way that you are actually much stronger and then just keep growing and find those future snellings right well hopefully that's right hopefully look and I wanted to I want to caution one thing to make sure that so that's on page.
Five years from now or eight years. So now it doesn't sit there and say hey, wait a second buddy.
Because one of the one of the things that the interesting part and I had said it earlier that every recession is different and one of the things that made for example, the the great recession, such a bad event for the staffing industry is how many.
People didn't pay their bills how many.
Real estate.
Projects went bad and so even though our did collapse.
There were also a lot more there were a lot more bad that's out there which saw on our franchisees, but historically we've provided.
We've provided some support for them to get them through that type of a time so.
I want to make sure that I'm not completely no.
For sure and I appreciate I, just I'm sure just serve risk.
One of the things I appreciate the most is how conservative then.
On top of the EUR, so as a shareholder thanks, great quarter. Thanks for answering my questions. Thanks Aaron.
Thank you and this does conclude today's question and answer session I would now like to pass the floor back to management for closing remarks.
So thank you everybody for tuning in and.
I think that again it was a very good quarter for us and I am.
Again confident in the future of the company I think that if you.
Just look at what we've done over that last three years and project that going forward. Thank you can see why we're so excited about the company again I want to thank our franchisees I want to thank my employees.
And I just.
Thank the shareholders for supporting US again have a good night.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.
Yeah.