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spk00: Good afternoon, ladies and gentlemen, and welcome to the HireQuest, Inc. First Quarter 2021 Earnings Event. 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 Moss, with Hayden IR.
spk02: Sir, the floor is yours. Thank you, Operator. I would like to welcome everybody to the call. Hosting the call today are HireQuest CEO Rick Hermans and CFO Corey Smith. Please be aware that some of the comments made during our call today may include forward-looking statements within the meaning of federal securities laws. Statements about our beliefs and expectations contain 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 higher quest 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 files at the SEC, including without limitation the 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 higherquest.com or at the SEC's website, 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 May 31st. A link to the replay on the website 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 tell the call to the CEO of HireQuest, Rick Hermans. Rick?
spk04: Thank you for joining us. As most of you know, on March 1st, we completed our acquisition of certain assets of Snelling, a 67-year-old staffing company headquartered in Richardson, Texas. On March 22nd, we completed our acquisition of the franchise relationships and certain other assets of Link, a family-owned staffing company headquartered in Houston, Texas. These two acquisitions significantly increase our scale and accelerate our entrance into the traditional commercial staffing model, giving us an additional franchising model to sell and additional revenue streams. We were able to complete these acquisitions at favorable terms due to the challenge our industry is experiencing due to the pandemic and our unique position as a franchisor. To be sure, these challenges have impacted us as well, resulting in lower system-wide sales and lower royalty revenues. It's been particularly challenging for our franchises, though they have responded admirably. But our model is structured to minimize the risk of events like these And while it has been challenging, others in our industry have fared much worse. As a result, we were able to take advantage of our balance sheet and our profitable business model and make these two highly strategic and accretive acquisitions. Because these were both completed late in the first quarter, the impact on our revenue and net income was minimal. However, $1.4 million in acquisition-related expenses have shown up in the first quarter, and we expect additional impact in the second quarter. Our efforts since closing these two acquisitions have focused on integrating the new franchisees and taking steps to de-risk the transactions, and we have made significant progress on both fronts. At this point, the operational integration of the new franchises is largely complete. Our franchisees and the corporate team put in substantial time and effort to accomplish this, and as a result, we don't have the financial or operational burden of running multiple systems. In our efforts to de-risk the transactions, first we assign the California-based franchise agreements of six linked franchises and one Snelling branch to a third party. This third party will serve as the franchisor and will pay HireQuest a royalty of 9% of the gross profit of the offices in perpetuity. This royalty revenue represents yet another lucrative low-risk revenue stream for us. We also sold the three remaining California Snelling branches to the same third party. These branches will also be part of the same royalty agreement in perpetuity once the buyer receives regulatory approval to franchise the offices. Finally, we sold four previously Snelling branches and one on-site location to a different third party for consideration of approximately $1 million cash. This was a straight sale. The result is that, after normal consolidation, we have added a net 64 locations to our portfolio, including 36 Snelling branches and 28 Link branches. The vast majority of these offices will operate as Snelling on a go-forward basis. We will see the full contribution of these branches in the second quarter, but our efforts continue to improve operations and efficiency at these acquired branches. As I stated previously, the two models, first, on-demand staffing, where we have historically excelled, and second, traditional commercial staffing, which is the historical model of Link and Snelling, are complementary. And they deliver several benefits for us, which include, one, they increase our national scale, making it easier to sell to national accounts and making our various trade names more recognizable. by adding commercial or weekly pay staffing models to our existing on-demand staffing operation significantly diversifies our approach. Three, we were able to meaningfully grow our system-wide sales that attract evaluations, taking advantage of the inherent leverage in our business model. Four, as it relates to Snelling, we acquired a 67-year-old brand name that is well regarded throughout the industry. Five, They enable us to efficiently leverage our corporate resources and our workers' compensation efforts, creating incremental profitability. Going forward, we will continue to evaluate additional strategic transactions, screening for fit within our existing business structure and solid economics that contribute to our financial results in a positive and meaningful way. Deploying a disciplined approach to M&A including taking steps to de-risk transactions as we have with the Snelling and Link transactions, we are focused on accretive opportunities that open to us new geographies and lines of business, strengthen the presence of our existing franchisees, or provide access to targeted national accounts. Before I turn over the call to Corey to discuss the financial results further, I wanted to mention that the Board of Directors has decided to increase our regular quarterly dividend. We will pay a $0.06 per share dividend on June 15 to shareholders of record on June 1. Our expectation is that we will continue to pay a 6% dividend quarterly going forward. With that, I'll turn the call over to Corey. Corey?
spk01: Thank you, Rick, and good afternoon, everyone. Thanks for joining us. Our total revenue is made up of two components, franchise royalties, which make up roughly 90% of total revenue, and service revenue. Total revenue for the first quarter of 2021 was $3.4 million compared to $4.1 million for the same quarter last year, a decrease of 17.4%. Franchise royalties for the quarter were $3.3 million compared to $3.7 million last year, a decrease of 12%. This decrease was primarily due to the economic shutdown caused by COVID-19. Service revenue, which is generated from interest charged to our franchisees on overdue accounts receivable and fees for various optional services, was $144,000 compared to $415,000 last year, a decrease of 65.3%. This decrease was largely due to a decrease in miscellaneous fees charged for optional services. Selling general and administrative expenses were $3.8 million in the first quarter of 2021 compared to $3.3 million in the first quarter of 2020. This increase was primarily due to $1.4 million in non-recurring expenses related to our two acquisitions, a relative increase in charges related to workers' compensation costs of approximately $892,000, and an increase in computer-related costs of approximately $89,000. These increases were partially offset by a decrease in professional fees of $130,000 in the absence of the $1.4 million note impairment incurred last year. As Rick mentioned, there will be additional transaction-related expenses recognized in the second quarter. Net income for the quarter was $3.7 million, or 27 cents per diluted share, compared to net income of $875,000, or 6 cents per diluted share last year. Net income this year included miscellaneous income of approximately $3.9 million related to the transactions surrounding the Link and Snelling acquisitions. Also included in net income is approximately $1.4 million in non-recurring acquisition related expenses. Moving on to the balance sheet. Our current assets at March 31st, 2021 were $34.5 million. compared to $39 million at December 31, 2020. Current assets at March 31, 2021 included $2 million of cash and $29.7 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 reserve at March 31, 2021 was $3.3 million compared to $5.9 million at December 31st, 2020. We collected approximately $5.5 million in cash from these notes during the first quarter, which included approximately $5.3 million related to the sale of specific notes and payments of approximately $249,000. Beginning in the third quarter of 2020, our board approved and the company paid its first quarterly dividend of 5 cents per common share. Subsequently, the Board approved a $0.05 cash dividend for payments in December and again in March. As Rick mentioned, the Board increased the dividend to $0.06 per share, which will be paid on June 15th to shareholders of record as of June 1st. We expect to pay this increased quarterly dividend each quarter in 2021, subject to our Board's discretion. And with that, I will turn the call back over to the operator for Q&A.
spk00: Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that if you are listening via speakerphone, you please pick up your handset for optimum sound quality. If your question has been answered and you no longer wish to ask it, you may press star 2 to be removed from the queue. Once again, if you have any questions or comments, please press star 1 on your phone at this time. And our first question today is coming from Erin Adelheid
spk03: mindset mindset capital your line is live hi I wanted to ask you what conditions you're seeing when I think about the first quarter and I think about lots of lockdowns and the surges and we're in a very different place thanks to the vaccines today And can you just describe what you're seeing business condition-wise and the demand for your services now versus what was going on in the first quarter?
spk04: Sure. And good to talk to you, Aaron. Aaron, so recognizing the first quarter, as the first quarter progressed, demand increased. became progressively stronger. And throughout the first quarter, really, especially once it got to about March, things definitely were picking up. And so we're at a point now where if you compared us to, let's say, the first quarter of 2019, at least on a sort of on a comparable store basis, we're probably getting close to being within five to 10% of what we were in 2019. So to sort of take a trip down memory lane in the fourth quarter of last year, we were typically running 18 to 20% behind. And so we are now at a point where, like I said, we're running, you know, five, 7% behind 2019, not 2020. We're way ahead of 2020. Um, but of course, you know, April May of last year were the two worst months so that's not surprising as far as the vaccine is there's no question things have opened up although again you know as you can tell stadiums still are not full not everything is back to normal and so I would I would anticipate a further strengthening of revenues that being said the single biggest challenge we face right now is a lack of is a lack of, you know, the ability to find workers is a real challenge for our franchisees and for us. It's basically that, you know, particularly that, you know, as you know, we, you know, our typical employee is, you know, around the $9 to $13 an hour employee, and those are people who, in particular, the attraction of the $300 franchise federal bonus for unemployment you know puts a true disincentive on working because basically you make really you truly make more money staying on unemployment than you do working and so that's been a real real challenge we probably our revenues could probably be I would say 12 to 15 percent higher were we able to find people I think last week or the week before it came out that there are about 7.5 million job openings in the United States, and I think we have 7.4 million of them. I'm being facetious. We obviously don't have 7.4 million open jobs, but we have a lot. And that's really the biggest challenge we have right now. It's not demand. It's finding workers.
spk03: Gotcha. And, you know, It's amazing how your company and the business model has performed in the last year, considering all these crosswinds and crosscurrents from either COVID or, you know, when you describe disincentives and encouraging people to get out. I wanted to go to another thing that's hitting all the headlines, which is inflation. And if I understand correctly, you're a cost plus business. how should I think about the impact of inflation or higher wages or how should I think about it? How do you think about it? Um, for higher question.
spk04: So that's a good question. And in higher wages, frankly, the answer, you know, defies a simple explanation. In other words, First of all, my own position is that anytime you have to go to your client and ask for a price increase, it's just an opportunity for them to potentially leave. And so I would rather not have to do it. So stability in wages is better in that perspective. But it really depends on whether the client realizes that they're short of people that then they're willing to raise the paid wage high enough to make recruiting easier. And so it's a double-edged sword. There are some clients that absolutely refuse to raise the pay rate, even if they end up getting short-filled orders every day. They just refuse to increase the pay rates. Others do because they recognize that the market is a lot different than what it was a year ago. And so it's really a mixed bag. The largest clients, though, typically, again, are paying sort of on a markup basis. And so to your point is that it is somewhat of a cost plus. The issue gets more to are they sort of asleep at the switch when it comes to raising, there's a temptation sometimes for them to say, gosh, you can't get us people at $10 an hour anymore. We need to go look to find a new staffing company, when in reality $10 an hour is probably $2 beneath the going rate for that type of a worker in that market. So I realize that's not a particularly clear answer, but I would just say that it really and truly can create risks for losing clients, and yet on the other hand, it creates certain opportunities for us as well because even to the extent that if we have, this is just more of almost like a math, it's a math lesson that I'm sure most people don't really need, but if we have a, we'll just say a 45% markup on a $10 pay rate, if that pay rate goes up to $11 an hour, our franchisee will make more money at that constant rate And so it can definitely be beneficial to the franchisee so long as they can continue to retain the client despite the higher pay rate.
spk03: Yeah, so it sounds like there might be some short-term, you know, just issues as the market, the labor market kind of normalizes. But in the long run, it will all get settled out, right?
spk04: Yeah, presumably. I mean, there's a fairly defined market price for, let's say, warehouse labor in Indianapolis. I mean, it's really – it'll settle down to whatever – it'll reach its equilibrium. And I do foresee that that equilibrium rate will be certainly higher than what it was in, say, 2019, which was already significantly higher than what it was in, say, 2017. There has been in this country a pretty strong increase in wages at the blue-collar level. There really has been a strong increase. real increase in wages, which is good for the American public, I think. It's a good thing. It's good for our workers, and to the extent that our clients allow us to offer market pay to our employees, it makes it easier for our franchisees to recruit as well.
spk03: No, great. That's very helpful. When I think about this upcoming quarter and your seasonally strongest quarter, which is normally Q3, and I think about that last year, obviously, the full effects of COVID, and you now have added these two acquisitions. Can you talk to what to... I don't even know how to phrase this the right way, but what to expect or what do you expect to see in the, the next two quarters in terms of, is it going to be a slow ramp up? Are you still fixing, you know, uh, or snelling or is there stuff you have to do? Or are we just going to see like the full impact? And it's, it feels like it's going to be pretty dramatic when you report in, um, I guess in August and then for Q3 would be later in the year.
spk04: I think that there won't be, you know, I think that as, you know, basically as GDP grows, so will, you know, so will our revenues. I'm not necessarily, going back to one of your questions you embedded in your question, as far as, let's say, quote-unquote fixing, snelling, first of all, they're all franchised. And so it's not necessarily the pieces are all in place. It's really more a question of does the economy fully recover, let's say, by the third quarter. And I'll give a good example. We have one particular office. I won't say what it is out loud, but basically I have one in mind. that they were and still are heavily, heavily hospitality oriented. And they're still running 70% below last year. So to the extent that I would see anything dramatic, I believe it would still be primarily confined to those markets that are still dramatically behind last year. And there are pockets of those. We have a number of offices that fit that category. The rest of them though, I would just simply say that incrementally they will continue to improve the schools and universities if they're fully opened in fall. Again, that will be helpful. Do conventions start occurring again? All those are really important pretty important aspects. Although I have to say that the, hopefully it's paired with a number of states have moved to become stricter on sort of job seeking activities prior to getting continued unemployment benefits. In other words, even if every stadium, every auto auction, every convention center, every hotel was at 100% capacity in August, if we can't find people, we're still not going to see what we could have seen.
spk03: And I realize that's a little more... No, no, that's really helpful. That's really helpful, just understanding what the short-term... Last question, I'm monopolizing some time. Last conference call, you talked about organic growth. We talked about new verticals expansion. I was just wondering if you have any additional thoughts or just either on what you're seeing for organic store growth to new verticals or expanding on verticals.
spk04: Yeah, and I would say not to Not to quote me because it's not necessarily set yet. I don't have the exact number in my head is what I'm saying. But we have opened probably already maybe five or six new offices. And we have commitments from people to open probably another eight or nine more. So I would like to think that we should be in somewhere in the 10 to 15 new organic office openings through this year, which is, which considering it's still a pandemic and particularly given how the, you know, we're almost halfway through the year. And so we're still not like a hundred percent out of the woods. That's really a nice, um, you know, that's, that's represents probably a six to 7% increase in our number of, you know, in our number of units. And so that I'm pleased with that. we continue to seek accretive acquisitions. And accretive acquisitions don't necessarily just mean in the traditional staffing environment or the on-demand staffing. They do include potentially branching out. And so we're still looking, we continue to look for those opportunities. But again, we're not gonna chase something that doesn't make economic sense either.
spk03: Gotcha. Thank you so much, and congrats to you and the team for just navigating this, and just thanks for the good stewardship.
spk04: Thank you.
spk00: Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 on your phone at this time. We have no further questions in the queue at this time.
spk04: All right. Well, I want to thank everybody for having joined us. And I think that as you watch over the next couple of quarters, that you are as excited as we are to see what the future will be with the new Snelling and Link additions to the company. And again, I thank you for your continued support. Have a good day.
spk00: Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.
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