HireQuest, Inc. Q3 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the HireQuest Third Quarter 2021 Earnings Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Brett Maas. 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 contain and include forward-looking statements within the meaning of federal securities laws. Statements about our beliefs and expectations containing words such as may, could, would, will, should, believe, expect, anticipate and similar expressions constitute forward-looking statements. These statements involve risks and uncertainties regarding our operations and our future results and could cause actual results to differ materially from management’s current expectations. We encourage you to review the safe harbor statements and risk factors contained in the Company’s earnings release and its filings with the SEC, including without limitation, most recent annual report on Form 10-K and other periodic reports, which identify specific risk factors that may also cause actual results or events to differ materially from those described in the forward-looking statements. Copies of the Company’s most recent reports on Form 10-K and 10-Q may be obtained on the Company’s website at hirequest.com or at the SEC 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 November 25th. A link to the website replay of the call is also provided in the earnings release and available on the Company’s website at hirequest.com. I’d like to now turn the call over to the CEO of HireQuest, Rick Hermanns. Rick?

Thank you for joining us. This past quarter marked a milestone for us with weekly sales from our legacy HireQuest direct franchisees pulling even with 2019 numbers for the first time since the beginning of the pandemic. Over the course of the quarter, weekly sales results improved from trailing 2019 comparisons of 10% to 15% in early July to pulling even by the end of September. Given the continued uncertainty and headwinds from the pandemic, we’re excited by their momentum going into the end of the year. Q3 system-wide sales of $99.6 million and total revenue of $6.9 million both represent record results for HireQuest, driven by a combination of organic growth and contributions from our Snelling and Link acquisitions. We also had record adjusted EBITDA of $5.3 million. This is especially notable given that we recently completed two large acquisitions at the end of the first quarter. Our ability to integrate both Snelling and Link and, within two quarters, see the results from the increased scale highlights the benefits and potential operating leverage of the franchisor model. Adjusting for the extraordinary non-cash compensation and the nonrecurring note charge in the quarter, we comfortably achieved our stated net income target of 3.5% to 4.5% of system-wide sales. Subsequent to the end of the quarter, we announced two acquisitions: first, our acquisition of Recruit Media at the beginning of October accelerates our development efforts and will provide new tools for our franchisees to better serve their clients and workforce; second, we announced that we entered into a definitive agreement to acquire Dental Power Staffing division of Dental Power, and we expect to close this transaction before the end of the year. As we’ve said in the past, we believe that our franchise model can be applied across a broad range of staffing verticals and service industries, and we continue to evaluate the best avenues to enter these verticals, whether through internal development, acquisitions, or a combination. Smaller transactions like Dental Power give us a platform to build on, both organically and through add-on acquisitions. Before I turn over the call to Cory to discuss the financial results further, I wanted to mention that the Board of Directors has declared our regular quarterly dividend. We will pay a $0.06 per share dividend on December 15th to shareholders of record on December 1st. Our expectation is that we will continue to pay a $0.06 dividend quarterly going forward.

Thank you, Rick, and good afternoon, everyone. Total revenue for the third quarter of 2021 was $6.9 million compared to $3.4 million for the same quarter last year, an increase of 103%. Our total revenue is made up of two components: franchise royalties, our primary source of revenue which typically accounts for about 95% of our total revenue; and service revenue. Franchise royalties for the quarter were $6.5 million compared to $3.2 million last year, an increase of 103%. While the addition of Snelling and Link locations contributed to this growth, we experienced organic growth of 52% during the third quarter. We also achieved a milestone this quarter with system-wide sales matching 2019 levels, levels we have not seen since the pandemic began in early 2020. Service revenue, which is generated from interest charged to our franchisees on overdue accounts receivable and fees for various optional services, was $341,000 compared to $164,000 last year. Selling, general and administrative expenses for the quarter were $3 million compared to $1.4 million last year. This increase was partially due to additional expenses to support the Snelling and Link acquisitions, but also included an additional $460,000 in non-cash compensation costs as well as a non-recurring charge of $307,000 related to an increase in the reserve placed on notes receivable related to the 2019 sale of locations in the state of California. Net income for the quarter was $3.2 million or $0.23 per diluted share compared to net income of $2 million or $0.15 per diluted share last year. Adjusted EBITDA in the third quarter of 2021 was $5.3 million compared to $2.9 million in the third quarter of last year. We believe adjusted EBITDA is a relevant metric for us going forward due to the size of non-cash operating expenses running through our P&L. A detailed reconciliation of adjusted EBITDA to net income is provided in our 10-Q. Moving on to the balance sheet. Our current assets at September 30, 2021, were $46.7 million compared to $39 million at December 31, 2020. Current assets at September 30 included $4.8 million of cash and $38.4 million of accounts receivable, while current assets at December 31, 2020, included $13.7 million of cash and $21.3 million of accounts receivable. Our notes receivable balance, net of reserves at September 30, was $4.3 million compared to $8.1 million at December 31, 2020. During the second quarter, we closed on a new $63.2 million credit facility comprised of a $60 million revolving credit facility and a $3.2 million term loan. We believe that this new facility provides us with flexibility and room for both organic growth as well as the capacity to capitalize on potential future acquisitions. Beginning in the third quarter of 2020, our Board approved and the Company paid its first quarterly dividend of $0.05 per common share. Since then, we have paid a regular quarterly dividend. In June 2021, our Board approved an increase in our quarterly dividend from $0.05 to $0.06 per common share. As Rick mentioned, we will pay this $0.06 dividend on December 15th to shareholders of record as of December 1st. And we expect to continue to pay this increased dividend each quarter in 2022, subject to the Board’s discretion.

Congratulations on the great results. I was really pleasantly surprised by the operating leverage and wanted to ask you if there was some step change, or how should we think about this quarter when I look at your adjusted EBITDA margin? That was much higher than I expected and very happy with it. Going forward, was this an anomaly, or how should I think about this?

Well, thank you, and I appreciate the question. I would say that no, it’s not an anomaly really at all. It’s just hitting pretty much right about exactly where we should be. The prior periods, obviously, were affected by the pandemic. So, when you go back to 2020, we were even though we did a lot of expense cutting in the beginning of the pandemic, you can only cut so far. And so, really, the operating leverage has come back significantly with a bit of the releasing of the pandemic’s grip on the economy, and of course, the acquisitions of Snelling and Link having boosted our operating leverage as well. So, no, I wouldn’t look at it as an anomaly at all.

Okay. We’ve seen that there are labor shortages everywhere, as reflected in the news and conversations in the business world. I assume HireQuest is facing similar challenges. Do you have any insights on whether there were issues in supplying labor to your clients? Can you share any metrics on what you might have achieved if there weren't labor shortages or other bottlenecks? I’d appreciate your thoughts on how much better you could have performed, even though I’m pleased with these results.

Yes, it's a complex situation. I believe the end of the extra $300 weekly unemployment benefits really helped us increase our order fulfillment towards the end of the quarter. We improved from being 10% to 15% behind 2019 figures to achieving nearly even by the end of the quarter. A significant factor in this was the influx of workers returning to the job market after the cessation of that supplemental pay. Although we currently have more unfilled orders than ever in the company's history, which could have led to an increase of about 10% to 15% in our performance if we could fulfill every order, I want to be cautious in emphasizing that. The shortage of workers also drives demand for more orders, so it somewhat balances out.

Got you. Yes, that makes sense. I have one last question about new verticals. On the last call, I inquired about trucking, and you mentioned your initial entry into healthcare with the dental staffing business. Looking at the long-term opportunities in this vertical, how substantial do you believe the dental sector could be? Could it potentially become a $1 billion system sales business? You also stated last quarter that trucking could be immense. I'm curious about your long-term perspective. I'm not asking about the next quarter or next year, but how significant do you think these verticals, particularly the dental opportunity, could be?

Certainly. In the trucking industry, it is widely recognized that there is a shortage of around 500,000 truck drivers at this time, which highlights the significant opportunity in that space. However, dental is different. It's not necessarily part of our strategy to focus solely on a massive segment. Our approach in dental is somewhat limited initially, allowing us to develop our systems for future growth. Medical, in a broader sense, presents a substantial opportunity, while dental should be seen as an entry point into more skilled and professional fields, rather than a large market in its own right.

So, it’s like just starting to explore the medical field? And perhaps this isn’t the final announcement we’ll make regarding that venture?

Yes. And that’s not saying that there’s anything now. There’s a lot of credentialing, and medical is significantly different from a person working on an assembly line. We want to make sure that we do a good job with it. Now, that being said, that’s why we bought a company with more than 40 years of experience within that industry. Part of the reason for buying a company with that much experience is that it will help us develop our systems.

We do not currently have any participants in the Q&A field at this time.

All right. Well, then I’d like to thank everybody who joined us and we look forward to seeing what the fourth quarter brings. Again, we thank you, and have a good day.