HireQuest, Inc. Q4 FY2020 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the HireQuest, Inc. Fourth Quarter and Year-End 2020 Earnings Event. At this time, all participants are in placed on a listen-only mode. We will open the floor for your questions and comments after the presentation. It is my pleasure to turn the floor over to your host, Brett Maas with Hayden IR. Sir, the floor is yours.

Thank you, operator. I would like to welcome everybody to the call. Hosting the call today are HireQuest’s CEO, Rick Hermanns and CFO, Cory Smith. Please be aware, some of the comments made during our call may include forward-looking statements within the meaning of federal securities laws. Statements about our beliefs and expectations containing words such as may, could, would, will, should, believe, expect, anticipate and similar expressions constitute forward-looking statements. These statements involve risks and uncertainties regarding our operations and our future results that could cause HireQuest’s results to differ materially from management’s current expectations. We encourage you to review the safe harbor statements and risk factors contained in the company’s earnings release and its filings with the SEC, including, without limitation, the most recent annual report on Form 10-K, the other periodic reports, which identify specific risk factors that may also cause actual results or events to differ materially from those described in the forward-looking statements. Copies of the company’s most recent reports on Form 10-K and 10-Q may be obtained on the company’s website at hirequest.com or at the SEC’s website at sec.gov. The company does not undertake to publicly update or revise any forward-looking statements after the call or date of this call. I would also like to remind everyone that this call will be available for replay through March 25. A link to the website replay of the call was also provided in the earnings release and is available on the company’s website at hirequest.com. I would now like to turn the call over to HireQuest CEO, Rick Hermanns. Rick?

Thank you for joining us. This has certainly been an eventful period for HireQuest. Over the last 120 days, we have taken advantage of our balance sheet and our profitable business model to make two highly strategic and accretive acquisitions during what continues to be a challenging period for our industry. The result of these two acquisitions is that we have additional revenue streams and a stronger national presence. We have augmented our on-demand staffing model provided through HireQuest Direct franchises nationwide by adding traditional commercial staffing, which will be sold by franchisees of the well-respected 70-year-old Snelling Staffing name. These two models are complementary and deliver several benefits for us, including one; first, they increase our national scale, making it easier to sell to national accounts and making our various trade names more recognizable. Second, adding commercial or weekly-pay staffing models to our existing on-demand staffing operations significantly diversifies our approach. Third, we were able to meaningfully grow our system-wide sales at attractive valuations, taking advantage of the inherent leverage in our business model. Fourth, as it relates to Snelling, we acquired a well-regarded 70-year-old brand name throughout the industry. Finally, they enable us to efficiently leverage our corporate resources and our workers' compensation efforts, creating incremental profitability. Combined, our system-wide sales should exceed $340 million even without a return to pre-COVID system-wide sales levels. In addition, we have licensed our trademarks for 10 offices in California, which should produce at least another $20 million in system-wide sales. HireQuest was built on a risk-mitigated business model, positioning us to deliver consistent profits even in challenging environments. Indeed, this has been one of the most challenging environments for the on-demand staffing sector that we are likely to see in our lifetimes, with the cancellation of sporting events, concerts, auto auctions, and many other events that provide significant volume for our franchisees. Nevertheless, we remain profitable. While it has been difficult for many of our franchisees, most have performed admirably and are well-positioned to emerge stronger from this challenge. Similarly, we took steps to de-risk these two transactions. We expect to further reduce any risk involved in these acquisitions in the future. First, we acquired Snelling Staffing, purchasing 47 locations that generated approximately $87 million of system-wide sales in 2020. We determined that it was in our best strategic interest to sell certain Snelling locations to third parties and have done so. As mentioned before, four of these offices were transitioned to a third party in California who will license the Snelling trademark and pay us a royalty. Second, we have closed the acquisition of LINK Staffing, acquiring 35 locations in nine states, adding incremental $57 million in system-wide sales. In line with our California strategy, we transferred the franchise agreements of six of these offices to be operated pursuant to the trademark license agreement. We expect these locations to convert to the Snelling name as it is well-known in the industry. Financially, our royalty revenue reflects the challenges related to the pandemic. The temporary employment market began to find its footing following the bottoming out that we experienced over spring and summer months, and we were able to navigate through the shutdowns, construction delays, and other effects of the pandemic, which speak to our franchisees' resilience and professionalism. The staffing industry is subject to economic and business cycle risk even under the best of conditions. Our franchise business model was designed with this in mind to reduce quarter-to-quarter volatility and insulate us from extreme swings in economic activity. Over 2020, we demonstrated the value of our approach and remain profitable on double-digit declines in system-wide sales and revenues. Our franchisees rose to the serious challenge of adjusting staffing levels and expenses to align with current economic conditions and a steep decline in system-wide sales. Looking ahead, we are encouraged by the increasing availability of vaccines and what appears to be a moderation in the number of COVID-19 cases over the last several weeks. As a reminder, though, as the economy as a whole shows signs of recovery, there are certain sectors like leisure and hospitality, where we have exposure that will likely be slower to recover, which highlights the significance of our recent acquisitions. Going forward, we will continue to evaluate additional strategic transactions screening for fit within our existing business structure and solid economics that contribute positively and meaningfully to our financial results. Deploying a disciplined approach to M&A, we are focused on opportunities that provide an entry into new and attractive geographies, strengthen the presence of our existing franchisees, provide access to targeted national accounts, or place us in industries with similar employment dynamics. Any deals we accept will need to demonstrate an ability to be absorbed into our franchise model quickly and deliver a positive financial contribution in a short amount of time. We are not interested in chasing scale or growth that does not fit within our existing profile. For the year, we delivered more than $5 million of net income or $0.39 per diluted share, despite the nearly 13% decrease in system-wide sales and significant reserves placed on notes receivable. Importantly, we generated positive cash flow of more than $9 million, adding to our cash reserves and providing us with the resources and flexibility to selectively pursue the two strategic transactions I just discussed. Subsequent to these transactions, our balance sheet remains solid, and we expect again to be debt-free following the integration of the 80 new locations in a relatively short time. Disciplined and responsible capital allocation remains a critical cornerstone to our strategic framework and the overall health of the company. Simultaneously, we are allocating a portion of our cash flow to our shareholders in the form of regular quarterly cash dividends. Beginning in the third quarter of 2020, we declared a cash dividend of $0.05 per common share, which was followed by additional dividends at the same rate in December and March. We intend to continue to pay this dividend on a quarterly basis based on our business results and financial position at the discretion of the board. Our commitment to regular cash dividends underscores our confidence in our business model and our franchisees and the quality of the services they provide. Let me turn the call over now to Cory to discuss the financial results further. Cory?

Thank you, Rick, and good afternoon, everyone. Thank you for joining us. Total revenue in 2020 was $13.8 million compared to $15.9 million in 2019, a decrease of 13%, primarily due to the economic shutdown caused by COVID-19. Total revenue consists of two components: franchise royalties, which make up roughly 90% of total revenue, and service revenue. Franchise royalties in 2020 were $12.8 million compared to $14.7 million in 2019, a decrease of 12.8%. Service revenue, which is generated from interest charged to our franchisees on overdue accounts receivable and fees for various optional services, was $1 million compared to $1.2 million in 2019, a decrease of 15.5%, largely due to a decrease in miscellaneous fees charged for optional services. Selling, general and administrative expenses in 2020 were down 33.7% to $8.7 million compared to $13.1 million in 2019. This $4.4 million decrease was primarily due to $5.1 million in merger-related expenses incurred in 2019, not present in 2020. This decrease was partially offset by an increase in stock-based compensation and a reserve placed on our notes receivable issued to finance the sale of offices acquired in the 2019 merger. This reserve was directly related to the negative impact COVID-19 has had on the economy, the financial condition of our borrowers, and the value of the underlying collateral. Net income in 2020 was $5.4 million or $0.39 per diluted share compared to a net loss from continuing operations of $505,000, or negative $0.05 per diluted share in 2019. Taking a look at the fourth quarter: total revenue in the fourth quarter of 2020 was $3.4 million compared to $5.9 million in the fourth quarter of 2019, a decrease of 42%, again related to the economic shutdown caused by COVID-19. Franchise royalties in Q4 2020 were $3.2 million compared to $5.4 million in the fourth quarter of 2019, a decrease of 40.2%. Service revenue was $176,000 compared to $476,000 in the fourth quarter of 2019, a decrease of 63%. This decrease is largely due to a reduction in miscellaneous fees charged for optional services. Selling, general and administrative expenses in the fourth quarter of 2020 were down 31.5% to $2.2 million compared to $3.1 million in the fourth quarter of 2019. This $973,000 decrease was primarily due to a reduction in payroll costs and lower stock-based compensation. Net income was $1.4 million or $0.10 per diluted share in the fourth quarter of 2020 compared to $3.5 million or $0.26 per diluted share in the fourth quarter of 2019. The fourth quarter of 2019 included a loss from continuing operations of $315,000 or negative $0.02 per diluted share. Beginning in the third quarter, our Board approved and the company paid its first quarterly dividend of $0.05 per common share to shareholders of record as of September 1, 2020. Subsequently, the Board approved a $0.05 cash dividend for payment in December and again in March of 2021. In 2020, we returned approximately $1.4 million in cash to our shareholders in the form of dividends. We expect to continue this practice and pay a cash dividend each quarter at the Board’s discretion. Moving onto the balance sheet: we have grown our current assets to $39 million as of December 31, 2020, from $37 million at December 31, 2019. Current assets at December 31, 2020, included $13.7 million of cash and $21.3 million of accounts receivable, while current assets at December 31, 2019, included $4.2 million of cash and $28.2 million of accounts receivable. Property and equipment increased by $1.3 million since the end of 2019 to $3.2 million at the end of 2020, as we continue the construction on a new building adjacent to our corporate headquarters, which will give us additional room for growth. We also began an IT project updating our front office software in 2020 that resulted in an intangible asset of $343,000 as of December 31, 2020. Our notes receivable balance net of reserves at December 31, 2020, was $5.9 million. During 2020, we collected approximately $2.1 million in cash from these notes. And with that, I will turn the call back over to the operator for Q&A.

Certainly. Ladies and gentlemen, the floor is now open for questions. Our first question is coming from Aaron Edelheit. Your line is live.

Hi, Rick. I wanted to ask you about the two acquisitions. In the press release, you mentioned they have around $133 million in system-wide sales. However, in the 8-Ks, I see that Snelling reported $95 million in 2020, but had $123 million in 2019 and $135 million in 2018. Similarly, LINK reported $57 million last year, but did $85 million in 2019 and over $100 million in the year prior. Given the context of a post-COVID return to normalcy, is there any reason to believe these companies couldn't return to their previous performance levels? With your team’s focus and investment, I would think it's possible they might even exceed those previous numbers. I'm curious for your thoughts on this. While I know you can't speak to the timing, is there any reason we couldn't reach those levels again? This could indicate a potential revenue increase of 30% to even 100% for the newly acquired companies.

I appreciate the question, Aaron. You're correct in your thinking. If we operate under the assumption that the economy returns to conditions similar to those in 2019, there’s no fundamental reason to believe we can’t achieve those past results. For example, our system-wide sales in 2019, including the first half from Command Center, were approximately $291 million. Currently, we are looking at around $210 million, roughly 30% less. It’s important to note that we haven’t closed multiple offices in various markets that prevent us from reaching that $291 million again. So, to answer your question, I would suggest that even with our current sales, once we assume a full 12 months combining Snelling, LINK, and HireQuest, we should expect revenues in the $300 million range, possibly reaching $350 million to $360 million. If we consider even a 25% return to 2019 levels, total system sales could push towards $450 million or $460 million once the economy recovers. However, there are numerous factors that could affect that recovery, some of which are beyond our control. That said, there’s nothing inherent holding us back.

Gotcha.

I want to commend you on your successful acquisition of these two companies, especially considering one was a subsidiary of a struggling company. Acquiring them just before the economy reopened is impressive, and as a shareholder, I appreciate your efforts. Do you see more opportunities ahead? I have noticed your remarkable acquisitions, including the one where Command Center helped bring HireQuest public. Could you discuss the potential for continuing to consolidate the industry and incorporating these companies under your management and the effective model you have at HireQuest? That's a great question. Many companies have tried to consolidate the staffing industry over time, but it hasn’t always been successful. Our model is different; we aim for local ownership. This sometimes limits us, as having a franchisee in a market makes it challenging to acquire another in the same area. We're not actively looking to buy new companies. However, we now have a distinct platform for development. Historically, HireQuest had a very limited presence in the traditional commercial staffing market, while Snelling and LINK, though larger, were still relatively small by national standards. Combining them gives us over 80 offices, which enhances our momentum, as the brand and network become more valuable, making growth easier. We've already gained more commitments for new office openings in 2021 than we did in 2020, even before COVID. It's important to note that these acquisitions play a crucial role in fostering organic growth. We're always on the lookout for additional opportunities, and the recent market conditions have become clearer to many. The market was stagnant at the end of 2020, with no one wanting to buy or sell. Now, opportunities have begun to arise, and we'll continue to be proactive where appropriate.

And another question is just beyond staffing, are there other verticals that you could utilize HireQuest's franchise model such as like security guards or trucking? How far do you think you could take the model?

That's an important question that I've touched on in my comments about expanding into markets or industries with similar employment characteristics. The security guard sector serves as a perfect illustration. In reality, a security guard shares many employment traits with a traditional temporary employee, such as a welder. Consequently, there are many industries like this that we can definitely pursue. Instead of seeking poor acquisitions or venturing into weak markets with low margins just to achieve growth, the more viable path for growth is to target heavily fragmented industries, like the security guard business. In these industries, it can be challenging for someone who might be skilled at running a security guard company to access the capital necessary to finance payroll or to have the right expertise to manage a team of 50 or 75 guards. Therefore, there are numerous opportunities for us to grow. The potential for us is nearly limitless.

I have one last question and won’t take up more time. Looking at Live Nation, which owns Ticketmaster and operates concerts, they are experiencing all-time highs. Considering your business, which often involves concerts in stadiums and various sporting events, I think about the vaccine distribution timeline. If every adult has access to vaccines by May or possibly June, it leads me to believe that if concerts and sports return to normal, you could be well-positioned for a strong third quarter. Would you agree with that assessment?

There are two key factors to consider. As a football fan who watched the Super Bowl in the Tampa Bay area, I noticed that there were about 15,000 people in the stadium. Consequently, we did not generate any business from the Super Bowl, whereas in a typical year, we would have seen a significant amount of business. If there are fans in the stands for college football this fall, it will be very beneficial for us because that is a major part of our business. However, I need to mention that we are currently facing challenges in finding employees. Almost all of our franchisees are having difficulty recruiting staff, which I believe is true for many companies across the United States right now. As people spend their tax refunds and stimulus checks, and with the additional unemployment benefits ending, we will likely see an improvement in our system-wide sales, along with individuals returning to work who currently have the financial means to stay home.

Gotcha. Thank you so much. I appreciate it.

Thank you, Aaron.

Thank you. Your next question is coming from Peter Rabover. Your line is live.

Hey, Rick. So congratulations on the acquisitions. Great job. So, I was wondering if you could maybe update us on how that sort of changes your industrial and geographic mix from year-end 2020.

That's a good question, Peter, and it's great to talk to you. From a geographical perspective, we've significantly increased our presence in Texas due to our acquisitions, particularly LINK, which was one of the reasons we were interested in it. Now, our top two states are Florida and Texas, which are among the most dynamic in the country. We're very pleased with that change. The profile of our workforce has shifted considerably, with about 40% of our business now consisting of what you might consider blue-collar workers. On-demand staffing is leaning more towards sectors like construction, recycling, and stadium cleanup, but we've now seen a substantial increase in manufacturing and logistics, which I find very appealing, especially in light of how the pandemic has permanently altered retail by pushing it more online and increasing the demand for logistics services. This shift bodes well for our newly developed product line. Overall, we're focusing more on traditional commercial staffing. Additionally, Snelling has historically engaged in executive search, and we plan to expand that, with the expectation of generating more permanent placement fee income from our franchisees as we invest in this area. The same applies to medical staffing, where Snelling has started a medical staffing division that we intend to develop further. We're excited about the new growth opportunities this creates and believe it strengthens our position in some of the most active markets, particularly in logistics, which will positively impact our bottom line in the long term.

Thank you for the information. My second question is about the recent increases in minimum wage. As you've mentioned, there are more blue-collar workers, and their wages typically rise alongside minimum wage. I'm interested to know if this trend serves as a benefit to your overall sales, allowing you to charge more and retain a higher percentage of sales.

That's a great question. The interesting thing is that when you look at companies like Manpower or Adecco, their largest markets are in Europe. Considering the rigid labor laws and high costs there, if the U.S. moves in that direction, it may not necessarily harm temporary staffing. Personally, I believe that increased wages might ultimately reduce manufacturing activity in the country, which is not a positive outcome. Therefore, I would describe the situation as a mixed bag.

I have a couple of housekeeping questions. Last year, your blended royalty rate was approximately 12.8 on $210 million, which is around 6%. Regarding the $340 million you mentioned, can we expect it to be around 6% as well, or should we anticipate a different dynamic?

I would say that the situation is complex, and I can’t provide a definitive answer. The numbers will likely vary significantly because many of the Snelling franchisees operate under a different royalty model compared to LINK and HireQuest. As a result, the figures may appear misleading. While I wish I could assure you that the data will indicate whether the outcome is positive or negative, it will likely be skewed. Generally, I expect the numbers to decrease slightly because light industrial staffing usually has lower markups, which means our royalty rates are not as high to keep our franchisees competitive. Consequently, our royalty for low-margin accounts is lower, leading me to anticipate a slight downward trend. However, it’s important to note that there are franchisees with agreements that are quite different from the standard.

Okay. Would that affect the other revenue? Will that lead to less accounts receivable, financing, and similar factors or is it more of a general question?

Yes. There are a number of offices, particularly the Snelling ones, where their royalty is essentially tied to the utilization of the Snelling network and name. They do not receive workers' compensation, the full range of back-office support, or cash. This will fundamentally change things, which is why I wanted to emphasize that it’s somewhat like … It's going to muddle things that way. It's going to muddle things that way. But we're still targeting the same net margin as we always have.

Got it. Moving down to the bottom line, I believe you reported around $2.2 million in SG&A in your press release. Is that cash a reasonable run rate to consider, or with these acquisitions, should we expect an increase? I'm just curious about that.

No, there's no question. I want to step back for a moment. My senior management team did an excellent job with both acquisitions by minimizing external costs. We didn't heavily rely on outside advisors; we mostly handled the work ourselves. Given that these acquisitions represented almost 60% of our existing system-wide sales, you might expect significant transaction costs. Fortunately, because of the management team's efforts, we kept those costs to a minimum. Both acquisitions were asset purchases, which means we will have fewer lingering costs to deal with. For comparison, when we merged with Command Center, we were still paying rent on their corporate headquarters six months later. We don't have that issue with either of these deals. However, the first quarter will incur a lot of deal-related expenses.

No, I understand that. I guess I'm just thinking more of a run rate for it to think about, right. So, just kind of for modeling purposes, right? Like, what's your cost base? What's your cash cost base going forward? And I was just curious why the fourth quarter was a good number or not?

The fourth quarter did not yield strong results primarily because we expanded our size by 60%. This increase necessitated additional selling, general, and administrative expenses. However, one of the key objectives of these acquisitions was to recover the operational efficiency we lost during the pandemic. We experienced a significant decline in operational leverage, but now we are positioned to regain it, which is crucial. To maintain our fourth-quarter performance, the rise in SG&A expenses will be proportional and aligned with the 60% increase in sales.

I understand. Could you provide some details about your building in South Carolina? I know you're adding features to it. How large is the building? Is it more valuable now? Can you leverage it to make more acquisitions?

The building is not going to be the solution that will enable us to acquire other companies. It is nearly complete, but we have experienced delays with the construction. We anticipate it will be finished relatively soon. Given the current state of commercial real estate, I wouldn't say there is any significant hidden equity in it. The cost aligns with what we paid, and it isn't like we built it for $4 million and it's worth $4 million. It's nearly complete, totaling around 25,000 square feet of office space. However, we have leases with external parties for part of it, so we won't occupy the entire building since we don’t require all that space. There is still potential for us to expand within it. If anyone is interested in renting office space in Goose Creek, South Carolina, please reach out to me afterwards, and I would be happy to help set up a lease.

Got it. Well, that's great. I really appreciate all the color you're giving us today, and congratulations on growing the company so much.

Thank you.

Thank you. Your next question is coming from Bill Chin. Your line is live. Bill, your line is live.

Hi. I was wondering if you could comment on the pace of organic growth following the acquisition. How do you view the potential for opening new locations? Do you consider it in terms of the percentage of additional products and services you could offer? Any insights on that would be appreciated.

Sure. I see it primarily in terms of how many new franchises we sell. Ideally, our typical franchisee will generate between $2 million to $3 million in revenue after two or three years. That’s my perspective on it. Of course, results can vary; some may achieve $4 million while others might only reach $1 million in revenue, but I’m focused on the number of units we sell. I anticipate an increase in units, though the growth might be gradual as many will be concentrating on adapting to the new system. By the third or fourth quarter, I believe there will be franchisees who, for example, are currently running a HireQuest Direct, expressing interest in opening a Snelling office in their area. There is substantial opportunity in the direct dispatch business. I am hopeful we will return to a faster organic growth rate. The pandemic significantly impacted new office openings in 2020, but I expect a notable increase in 2021 and early 2022. One thing that sets us apart as a franchise is that we often provide incentives for our franchisees to establish new offices. Rather than spending heavily to recruit from outside the industry, we offer cash incentives to encourage our franchisees to grow their portfolios. With rising vaccination rates and a greater motivation for current franchisees to open additional offices, like Snelling, I am confident that growth will pick up. So, to summarize, yes, I do believe it will pick up, as organic growth is a crucial element of our growth strategy.

What are the initial costs and working capital requirements to establish a new office?

I can't provide specific details because it could be interpreted as selling a franchise, which wouldn't be helpful. However, regarding workers' compensation and working capital, one of the main advantages of our model is that we act as the employer of record for our franchisees, supplying most of the working capital. New franchisees mainly need to hire and develop their staff, cover their office occupancy costs, and pay for utilities and communications. This keeps startup costs relatively low. For example, when we offer a $50,000 incentive for opening an office in Ogallala, Nebraska, that amount significantly aids in establishing that branch.

Is there a typical square footage for the office? Are most of them situated in relatively low-rent areas? I'm trying to understand the dynamic from a retail box perspective.

That's a valid question. There is a distinction between commercial staffing offices like Snelling or LINK and HireQuest Direct. HireQuest Direct is usually located in more transient neighborhoods, and typically, an office ranges from 900 to 2,000 square feet. A direct dispatch office generally exists in a less upscale neighborhood compared to a Snelling office. However, there are nicer Snelling offices in fairly good areas, and it really varies. Each franchisee has a specific target market. For instance, one may have a major client who is a significant cheese brand in a less affluent area but still operates an excellent office. Conversely, others may primarily place administrative or medical staff, which would be based in more upscale neighborhoods.

I guess the follow-up question would be regarding the concept of HireQuest, which focuses on blue-collar industrial staffing solutions with Snelling and LINK. Are there challenges associated with being a franchise that handles both light industrial and medical staffing? With my limited understanding of the staffing industry, it seems like there would be different types of franchisees managing those offices. So, culturally, are there distinct challenges we encounter with Snelling and LINK?

That's a great question. In most of the LINK and Snelling offices, there is definitely a distinction between a typical commercial staffing business and a direct dispatch office. However, the individuals managing them are quite similar. Some franchisees from Snelling and LINK focus more on the administrative or medical sectors, which creates a cultural difference. We only finalized the acquisition of LINK on Monday, so we are currently working on sorting things out. We are in the process of establishing a separate management team for LINK. Providing financial resources, workers' compensation, and back-office support does not differ among LINK, Snelling, or HireQuest Direct; an unemployment claim is an unemployment claim. However, the recruiting support varies significantly for LINK or Snelling compared to HireQuest Direct. Consequently, the management teams for these divisions will be distinct to address these differences.

Got you. That's great information. My last question would be, could you discuss the software or technology services you offer to these franchisees? Are there any custom-built solutions in-house? Do we need different systems for the light industrial segment compared to Snelling and LINK?

There are certainly differences between the African tracking systems and traditional commercial staffing compared to direct dispatch staffing, but our core software is applicable to both. We have already begun rewriting our in-house software, starting at the beginning of last year and gaining momentum towards the end of it. We are continually revising it as technology evolves. While there are nuances that highlight differences, they are not of a significant magnitude. Most software fundamentally requires tracking worker payments, maintaining their information, and managing applicant details. Traditional staffing necessitates more applicant tracking due to the increased vetting process before placing someone, compared to direct dispatch. This means our software must be more capable of sorting through employees. I hope that addresses your question.

No. That's helpful. And I have no further questions. Thank you very much for your feedback.

Thank you. Your next question is coming from Aaron Edelheit. Your line is live.

Hi, Rick. I just have two follow-up questions. One is, just speaking on margins. When I think about your business, I think about kind of normalized earnings power. My first question was just about what would system-wide revenue be in a more normalized world for all the cross-currents from COVID, etc. When I think about $450 million, or maybe $500 million of system-wide revenue on a normalized basis, and things returned to normal, based on past conversations we had, this is before your acquisitions, we were thinking about a 4% net margin, and I'm getting numbers that would indicate to me that HireQuest has earnings power of $1.30 to possibly $1.50 per share. I just want to make sure, based on one of the other callers' questions, is that the right framework to think about in terms of the earnings, the underlying earnings power of the business when things go back to normal?

Well, if we set aside the pandemic, which severely impacted our operating leverage, the expectation for net earnings remains between 3.5% and 4.5%. This has not changed. We don't even need to reach $450 million or $500 million in system-wide sales to achieve this; simply incorporating the acquisitions will bring us closer to our target, which is within the 3.5% to 4.5% range.

Yeah, so basically, when you consider these new businesses, particularly in the commercial sector, they are calculating where HireQuest could be when things return to normal. It's consistent with what we have discussed previously, right?

Yes, that's certainly our expectation. Like I mentioned, margins might be slightly lower due to that, but with increased scale, we hope to optimize our operations. Since the cost is only incurred once, it will be distributed across a larger base, which should certainly benefit us.

Gotcha. And in terms of their acquisitions, how should I think about the integration of these two acquisitions here? As you mentioned, it's like 60% of existing revenue. How long have you been able to do the work already? How long this takes for you to again get your system in place?

Well, thanks to the efforts of the franchisees and my management team, a lot of the work is already completed. Essentially, as of this week, everyone is using our software. For the past six weeks, we have been working hard to get everything set up. Many of the challenging tasks are now finished. While there is still plenty of work ahead, the toughest parts have been addressed. We are now focused on settling in and refining the systems. Overall, we are making significant progress in integrating everything.

Great. Phenomenal job. Thanks so much.

Thank you. There are no further questions in the queue at this time.

Okay. I want to thank everybody for joining us on this call. I hope you are as excited as I am about the future of the company. I appreciate the thoughtful questions and I appreciate you joining us. Thank you and have a good day.

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.