HireQuest, Inc. Q1 FY2022 Earnings Call

Good afternoon, everyone, and thank you for participating in today's conference call to discuss HireQuest's financial results for the first quarter ended March 31, 2022. As a reminder, this conference is being recorded. I would now like to turn the conference over to Jennifer Belodeau of IMS Investor Relations. Please go ahead.

Thank you, operator. I would like to welcome everybody to the call. Hosting the call today are HireQuest's CEO, Rick Hermanns; and CFO, David S. Burnett. I would like to take a moment to read the safe harbor statement. This conference call contains forward-looking statements as defined within Section 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 HireQuest 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 guarantees of future performance and involve risks and uncertainties, including those described in HireQuest's 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, HireQuest undertakes no obligation to update or revise forward-looking statements to reflect changed conditions. I would now like to turn the call over to the CEO of HireQuest, Rick Hermanns. Go ahead, Rick.

Thank you for joining us for today's call. To begin, I will provide an overview of financial and strategic highlights for the quarter, and then David will share more details surrounding first-quarter results. This was a strong quarter for us. We continued momentum with both our existing and acquired franchisees generating growth year-over-year. Franchise royalties grew 102% to $6.6 million, and organic franchise royalties grew 30% compared to the first quarter of 2021. Overall, total revenues increased by 139% to $8.1 million compared to the prior year period. This revenue growth and the operating leverage of our business model resulted in a record quarterly adjusted EBITDA of $5.3 million, a 246% increase from the first quarter of 2021. Historically, Q1 is often our lowest quarter, as is common in the temporary and direct dispatch labor industry. Our Q1 results show the receding impacts of the pandemic, as well as the contributions from the expanded offerings we acquired in the past 12 months, some of which have less seasonality to their operations. We added four new franchise locations this past quarter in addition to the locations we acquired. As many of you know, we offer numerous incentives to our franchisees to alleviate financial and logistical obstacles that can limit their potential for growth. Beyond the attractive economics provided by our franchise model, we support our franchisees in multiple ways, including payroll and accounts receivable financing, back-end operations, and help to lower operating expenses and save managerial time. Finally, we also support organic growth by financing expansion costs into new territories or through acquisitions, an important value add that is unique to our company. The time and resources we dedicate to making franchise expansion a reasonable endeavor differentiates us from our peers. On the acquisition front, through 2021 and into the first quarter of 2022, we strategically expanded our end markets and geographic footprint. We continue to remain active on the M&A front, and we believe there is substantial opportunity for us to build out existing offerings as well as enter new service verticals beyond traditional staffing. A cornerstone of our strategy is to convert acquisitions into franchises. Conversion activity may generate transaction-related expenses. And to that point, we saw $3.6 million of these costs in the first quarter. So while reported net income was $603,000 or $0.04 a share, excluding the $3.6 million charge and related tax effects, net income for the first quarter would have been significantly higher. We are pleased with the progress made and key developments achieved in the first quarter, and we are energized to drive continued success as we move through 2022. We're optimistic about the opportunities we're seeing to continue the growth of our business, and I look forward to sharing more details as our locations and service offerings grow. With that, I'll pass it along to our CFO, David Burnett, for a closer look at our first-quarter results. David?

Thank you, Rick, and good afternoon, everybody. Thank you for joining us today. We're kicking off 2022 with another solid quarter. Total revenue for the first quarter was $8.1 million compared to $3.4 million for the same quarter last year, an increase of 139.4%. Our total revenue is comprised of three components: franchise royalties, which is our primary source of revenue and typically accounts for about 90% of our total revenue; service revenue, which is generated from interest charged to our franchisees on overdue accounts receivable and fees for various optional services; and third is staffing revenue from owned locations. Franchise royalties and service revenue are derived from our franchise base. From time to time, we may have owned location staffing revenue as a result of acquired businesses that are not converted to franchises. During the first quarter of 2022, owned revenue included the dental staffing operations acquired in December of 2021. One of the two locations acquired as part of the Dubin transaction in February is also earned but is reported as discontinued operations while we are actively seeking a franchisee. Franchise royalties for the quarter were $6.6 million compared to $3.3 million last year, an increase of 101.7%. In addition to the contribution from the acquired Snelling and Link locations, royalties from our existing franchisees saw strong organic growth of 29.9% during the first quarter. System-wide sales for the quarter were $101 million compared to $56.1 million for the same period in 2021, an increase of 80.1%. Organic system-wide sales grew 35% for existing franchisees. System-wide sales include sales at all offices, whether owned and operated by us or our franchisees. Selling, general, and administrative expenses for the quarter were $2.8 million compared to $3.8 million last year. Most core operating expenses remained relatively flat, reflecting the leverage in our business model with incremental revenue. There were $1.4 million of acquisition-related SG&A costs in 2021, and our workers' compensation expense decreased by almost $800,000 in the first quarter of 2022 compared to last year. Workers' compensation liabilities are difficult to predict and will generally be the most volatile expense in our SG&A. Net income for the quarter was $603,000 or $0.04 per basic and diluted share compared to net income of $3.7 million or $0.28 per basic share and $0.27 per diluted share in the first quarter last year. As Rick mentioned, we realized expenses related to converting newly acquired businesses into franchises during the first quarter of 2022. These expenses amounted to $3.6 million or $3 million after tax. Adjusted EBITDA in the first quarter was $5.3 million compared to $1.5 million in the first quarter of last year. We believe adjusted EBITDA is a relevant metric for us due to the size of acquisition-related charges and noncash operating expenses running through our P&L. A detailed reconciliation of adjusted EBITDA to GAAP net income is provided in our latest 10-Q, which will be filed this afternoon. Moving on now to the balance sheet and cash flow. Our current assets at March 31, 2022, were $47.2 million compared to $42 million at December 31, 2021. Current assets at March 31 included $1.8 million of cash and $41.3 million of accounts receivable. While current assets at December 31, 2021, included $1.3 million of cash and $38.2 million of accounts receivable. Our current liabilities at March 31 were $28.3 million, resulting in net working capital of $18.9 million. At December 31, 2021, current liabilities were $21.4 million. As Rick highlighted, we often provide financing to our franchisees for expansion or initial capital needs. Our franchisee notes receivable balance net of reserves as of March 31 was $4.3 million compared to $4.0 million at December 31, 2021. At March 31, we had approximately $19.2 million in availability under our credit facility even after the three acquisitions completed in the first quarter. We believe that this facility, combined with our existing cash flow from operations, provides us with the flexibility and room for both organic growth as well as the capacity to capitalize on potential future acquisitions. Since the facility was finalized in the second quarter of 2021, we have closed five acquisitions with aggregate consideration of $26.9 million and finished the first quarter with a modest balance of $5.5 million on the credit facility and $1.5 million in seller financing. Beginning in the third quarter of 2020, our Board approved, and the company paid its first dividend. Since then, we have paid a regular quarterly dividend. Continuing that pattern, we paid a $0.06 per common share dividend on March 15, 2022. The Board of Directors recently declared a quarterly cash dividend of $0.06 per share of common stock to be paid on June 15, 2022, to shareholders of record as of June 1, 2022. We expect to continue to pay a dividend for each subsequent quarter subject to the Board's discretion. With that, I will turn the call back over to Rick for closing comments.

Thanks, David. As I mentioned at the start of this call, Q1 was a strong first quarter, and we are looking forward to continuing this momentum through the year. I would like to thank our team, our franchisees, and their workers for the continued excellence demonstrated throughout the quarter, especially given the global challenges we are all currently facing. HireQuest is rapidly filling the market we sought to capture when we started this business, and I look forward to growing with our new and existing franchisees to support this vision. I also want to thank our investors for their continued support, and we look forward to reporting our progress to you at our Annual Shareholders' Meeting on June 15, 2022, at 2:00 p.m. Eastern Time. To enable stockholders to participate remotely, we are pleased to provide stockholders the opportunity to attend the meeting virtually via live audio webcast and telephone dial-in. You may attend, vote, and submit questions during the annual meeting via the Internet. We encourage you to vote prior to the annual meeting via proxy card if you are unable to attend. Now I'll open the line to questions. Thank you.

Our first question comes from Michael Baker. Please announce your affiliation and pose your question.

It’s Jeff on for Mike. We are just wondering if you could kind of discuss the current labor market and what has changed since the beginning of the year, and your outlook on the labor market for the rest of the year? With wage rates and jobs continuing to increase but with a challenging macroeconomic environment, in your view, what are going to be the drivers for the second half of 2022?

Well, thanks, Mike, for the question. The labor market is still incredibly tight, and we just had a meeting in Charleston, in fact, with a lot of our franchisees. I posed the question to the group, which probably contained franchisees that represented 150 to 175 of our franchise locations. To a person, everybody raised their hands as far as still having a hard time finding employees. While it's hard to exactly pin down if we have less open orders or more open orders, at the end of the day, we are still at a point where we're struggling to fill every order. We have a lot more demand than we do people. I haven't candidly really seen much of a slackening of that. From our numbers, clearly, we're filling more orders, and we're focusing really hard on various avenues of recruiting. But five months in, I would still say that we are not that much different than what we were last October or November. When I was reading GDP dropped 1.4% in the first quarter, I'm thinking, gosh, that's like the best downward trajectory in the GDP that I've ever experienced. So I don't know. For us, it's still all systems go at this point.

Our next question comes from Aaron Edelheit.

I really appreciate what you said about everything being on track. Q1 is typically your weakest quarter, so I'm curious about the momentum in your business as you head into your stronger quarters, Q2 and Q3. Do you foresee any reasons for a potential slowdown?

Aaron, thank you for your questions. While there are certainly some macroeconomic risks to consider, including the ongoing war in Europe, skyrocketing oil prices, and inflation at 40-year highs, I want to emphasize that we haven't seen any significant changes internally that would suggest a shift from our historical performance. For instance, we surpassed $100 million in system-wide sales in the first quarter, which is typically our weakest quarter, and that figure doesn't even account for many of our acquisitions. We are positioned very well for the remainder of the year. In our last earnings call, we mentioned that the first quarter would have some disturbances, and the $3.6 million in pretax charges was certainly substantial noise. However, I haven't observed anything similar for the next couple of quarters. I am optimistic that in the upcoming two or three quarters, we will begin to demonstrate the earnings potential of this company and the progress we've made over the past three and a half years.

Got you. And speaking of the noise, I actually don't mind the noise because it means that you're acquiring companies and then converting them to franchises. You made some comments on the call, and I'm just curious about what you're seeing in your potential backlog or your pipeline of potential acquisitions. Could you make some comments on what you're seeing in terms of potential deals? And with the weakness in the stock market, or all the troublesome headlines out there, do you see an increase in activity in terms of maybe some of these smaller companies looking to sell?

I wouldn't say there's really been much of a change. My guess would be, and this is just speculation, if we were to have another quarter of negative growth in the GDP, things were to slow down a bit. I believe that then, as is typical, there would be more of our competitors headed to the exits, which for us creates more opportunities. But I would say that the deal flow we are seeing has been fairly stable for probably a year now, which is just a long way of saying there are still plenty of opportunities out there that are reasonably priced. Obviously, as we've grown, some deals become more difficult to achieve because we already have franchisees in that area and therefore, we don't look to consummate those deals.

Our next question here is Kevin Steinke from Barrington Research.

So you mentioned the four new organic franchise office openings in the first quarter, which seems like a pretty good start to the year. Are you hearing from the franchisee base more incentive to open offices this year now that, hopefully, the pandemic is starting to recede a bit? Or is the labor market tightness giving them some pause? Just any thoughts on the pace of organic office openings you anticipate this year.

It's a good question. As much as we are obviously not afraid to do acquisitions, we really love organic growth. The tightness in the labor market actually creates more of an opportunity to grow. The difficulty is, frankly, finding the appropriate permanent staff to grow. I believe that if we had more of a backlog of trained managers or assistant managers, our franchisees would be able to grow more rapidly. But it's hard to maintain qualified good staff. So the lack of the ability to recruit permanent staff is kind of holding down organic growth, yet the sheer volume of client requirements is acting as an accelerant. You have one very positive factor and one fairly negative factor, and in the end, you're in probably a pretty average spot. I do think, all that being said, it has now been around a year since we did the Snelling and Link acquisitions. There was a lot of learning to be done, and all our franchisees had to learn new software and new systems. I hope that will act as an accelerant towards future growth. So I would say four new offices is pretty good. I would always like to do more, but four is certainly not bad.

Okay, great. Yes, that's a lot of helpful color. I appreciate the comments. When we think about the rest of the year in terms of SG&A, are there any items that we should consider in terms of incentive compensation? Or anything else that would affect that kind of $2.8 million run rate you had? Or is that maybe kind of a fair run rate with some increases built in throughout the year?

That's a great question. I'm glad you asked because I can highlight something. As we all know, our fourth quarter was impacted by a change in how we account for management bonuses. All of the 2021 bonuses, instead of being accrued in the first quarter, were accrued last year. We have now changed to where we are accruing for what we anticipate the bonuses to be in 2022. So the SG&A number, excluding the workers' comp impact, is a fairly solid number. There's nothing anticipated that will either make it a lot better or make it a lot worse. I would say that the workers' comp is probably a bit lighter this quarter than what it would normally be. So you could, if you're forecasting, go a little heavier on SG&A simply because the workers' comp might not perform as well. But as far as the core SG&A, I think it's a very solid number.

All right, great. That's helpful commentary. And just circling back to what you saw throughout the first quarter, again, hopefully, this is fading into the rearview mirror, but do you think there is any noticeable impact on demand from Omicron? Or is it too hard to tell? I think that would have affected labor availability; I know that's still tight. But I mean, anything that maybe you saw earlier in the quarter that your franchisees called out?

No, I would say, if you look at sort of week-by-week sales, they performed almost exactly as expected. So meaning Omicron really didn't have any appreciable impact on our first-quarter results. Our January weekly sales were about what they should have been relative to our March weekly sales just based on over 20 years of history. The weather impacts and holiday impacts are really a lot bigger than anything that Omicron did.

All right. Any thoughts on the timing of maybe converting Dental Power to the franchise or rolling out that franchise dental offering? And also any insight on when the Dubin location could convert to a franchise as well?

Fair questions. With Dental Power, we're still targeting towards the end of this year. We've done a number of operational steps that we think are going to improve the margins significantly. That will make it a more attractive franchise, which will make it a more attractive price for us to sell it to the franchisee yet. We just want to continue implementing those steps. As for the Dubin Group, we just haven't had anybody. It was a fairly significant acquisition. The larger they are, sometimes unless it's the manager who's buying it, those tend to be a little harder to sell because they're a bigger commitment on behalf of a franchise buyer. I could say to you that we have no potential buyer right now; that’s a factual statement. But that could change literally tomorrow, and we could have it sold in 45 days. It's performing fine; it's not a problem. Sometimes it just takes a little longer than we expected.

Congratulations on the good start to the year.

Okay. 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.