HireQuest, Inc.

Good day, ladies and gentlemen, and welcome to the HireQuest, Inc. Second Quarter 2021 Earnings Call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Brett Moss. 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 some of the comments made during our call may include forward-looking statements within the meaning of the 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 higher question or higher question results to differ materially from my organization's current expectations. We encourage you to review the safe harvest statements and risk factors contained in the company's earnings release and its filings of the SEC, including without limitation the most recent annual report on Form 10-K and other periodic reports, which identifies specific risk factors that may also cause actual results or events to differ materially from those described in the forelooking statement. 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'd also like to remind everyone that this call will be available for replay through August 23rd. A link to the website replay of the call will also be provided in the earnings release and is available on the company's website at hirequest.com. I'd like to now turn the call over to the CEO of HireQuest, Rick Hermans. Rick, the floor is yours.

Thank you for joining us. I'd like to congratulate our franchisees for a successful quarter. This time last year, none of us knew what the next day would bring. But our franchisees have adapted to the evolving business environment. Every day, our franchisees across the country service their clients and provide thousands of people the opportunity to work. Our organic system-wide sales were up 30% for the second quarter, and when you include the acquisitions of Snelling and Link, we were up over 100%, despite some lingering headwinds from COVID. The second quarter was notable due to the fact that it's the first period with significantly reduced impact from external factors. The second half of 2019 was impacted by significant costs related to the merger with Command Center. And in 2020, we, like the rest of the world, were managing through the pandemic. As this past quarter developed, we were largely free from all that noise. The second quarter results are beginning to demonstrate the amount of operating leverage our franchise model can generate. The acquisitions of Snelling and Link are important factors in getting us back to a level of system-wide sales where we can hit our stated target of 3.5% to 4.5% net income, although the additional amortization expense from these transactions may require an adjustment in our targets. System-wide sales are still lagging a bit behind what we would expect non-pandemic levels to be, but that provides an opportunity for further organic growth as the economy continues to rebound in the second half of 2021. One of the benefits of our geographic footprint is that our franchisees are spread across 35 states with a good number in economically dynamic states like Florida and Texas, who have largely resisted mass business shutdowns. We also launched a new franchise offering, DriverQuest, focused on staffing for transportations and logistics industry, long-haul and last-mile trucking, have become a growing industry segment for a number of years in conjunction with the growth of e-commerce. The pandemic accelerated further adoption and growth in this area and exacerbated the supply and demand issues for companies trying to find drivers. This is a specialized industry with specific needs, and we wanted to make sure that we were able to structure an offering that benefits the employees, clients, and franchisees. We're excited about the growth opportunities DriverQuest offers to new and existing franchisees. We believe that our franchise model can be applied across a broader range of service industries, and we continue to evaluate the best avenue to enter these new verticals, internal development, acquisitions, or a combination. Before I turn over the call to Corey to discuss the financial results further, I wanted to mention that the Board of Directors declared our regular quarterly dividend. We will pay a six cent per share dividend on September 15th, 2021 to shareholders of record on September 1st. Our expectation is we will continue to pay a six percent dividend quarterly going forward. With that, I'll turn the call over to Corey. Corey?

Thank you, Rick, and good afternoon, everyone. Thank you for joining us. Total revenue for the second quarter of 2021 was $5.7 million compared to $2.9 million for the second quarter of last year, an increase of 96.7%. While the acquisitions of Snelling and Link contributed to this growth, we also experienced organic growth of approximately 40% for the quarter. Our total revenue is made up of two components. Franchise royalties, our primary source of revenue, which typically accounts for over 90% of our total revenue, and service revenue. Franchise royalties for the second quarter were $5.5 million compared to $2.6 million last year, an increase of 106.5%. Service revenue, which is generated from interest charged to our franchisees on overdue accounts receivable, license fees, and fees for various optional services we offer our franchisees, was $256,000 compared to $262,000 last year, a nominal decrease. Selling general and administrative expenses were $2 million in the second quarter of this year, compared to $1.9 million in the second quarter of last year. This increase was due to non-recurring acquisition related expenses of approximately $168,000, increased compensation costs of approximately $212,000, increased dues and subscriptions of approximately $92,000, and increased stock-based compensation costs of approximately $58,000. These increases were partially offset by a decrease in workers' compensation costs of approximately $190,000 and a decrease in bad debt expense of approximately $263,000. Adding to what Rick said, as demonstrated by our results this past quarter where we saw our net income and system-wide sales double while only having a modest impact on our cost structure, demonstrates the scalability that we can leverage in our business model. Net income in the second quarter was $2.7 million or 20 cents per diluted share compared to net income of $1.2 million or 9 cents per diluted share for the second quarter last year. Included in net income this quarter was approximately $168,000 in non-recurring acquisition related expenses. Adjusted EBITDA in the second quarter of 2021 was $4.4 million compared to $1.2 million in the second quarter of last year. We believe adjusted EBIT as a relevant and important metric for us going forward due to the magnitude of non-cash and non-recurring items running through our income statement and is thus useful when analyzing our results of operations. Moving on to the balance sheet. Our current assets at June 30th, 2021 were $41.2 million compared to $39 million at December 31st, 2020. Significant components of current assets at June 30th, 2021 included $2.2 million of cash and $35.1 million of accounts receivable, while current assets at December 31, 2020 included $13.7 million of cash and $21.3 million of accounts receivable. The decrease in cash is directly related to the acquisitions of Snelling and Link and the associated increase in working capital needs. Our notes receivable balance net of reserve at June 30, 2021 was $4.8 million, compared to $8.1 million at December 31st, 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 access to working capital to facilitate 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 cash dividend each quarter. Recently, our board approved an increase in our dividend from $0.05 to $0.06 per common share, with our first $0.06 dividend being paid in June of this year. We will pay our next $0.06 dividend on September 15th to shareholders of record as of September 1st And we expect to continue to pay this increased dividend each quarter for the rest of the year, subject to board's approval. And with that, I will turn the call back over to the operator for Q&A.

Thank you. The floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. Questions will be taken in the order they were received. If at any time your question has been answered, you can remove yourself from the queue by pressing 1. Again, ladies and gentlemen, if you do have a question, please press star 1 on your telephone keypad at this time. Our first question comes from Aaron Edhight. Please state your question.

Hey, Rick. Congratulations to you and your team on just a great quarter. I wanted to ask you big picture-wise, I love the announcement of drive requests. And I wanted – I just – like, how big do you think that could be? And more importantly, if I think about HireQuest as kind of a platform of what you're doing, I can think of many other verticals, and I believe we've discussed security guards, et cetera, where you could do similar things. And I'm just wondering if you could give – Just some thoughts on the opportunity in trucking and logistics and using HireQuest as a platform for organic growth going forward.

Sure, and good to talk to you, Aaron. So the HireQuest is a very nice add-on to our existing product offering, in part because it fits within a lot of what we were already offering But due to the specialized nature of the liability related to it, we stayed away from trucking. But over the beginning of the year, we developed sort of risk procedures to be able to make that offering. So we're very excited about it, if only because we've been turning away a lot of trucking-related business for years. And so we think that we will be able to capitalize on it. As far as the extent of it, you know, it's a really large industry and growing. And so there's no reason why, you know, there's no reason why it couldn't rival the size of our other divisions. You know, there's nothing really restraining it. It is a large market. And, you know, we're out there always looking for – as far as going on to security guards, et cetera, we are always looking for those other opportunities. As we've said in the past, our model is very scalable, not just within the temporary staffing – not just within the staffing industry per se, but also – you know, as it relates, you know, we have very similar characteristics. And so we're excited about the opportunities because, you know, there really isn't a cap on our growth that, you know, that we would end up having to go into bad sort of jurisdictions or chase after low margin business. So really the sky's the limit.

And so is it accurate to say that when you announced you have 35 franchisees that are launching with this, then your franchisees are already providing these services today and there is franchise, not system-wide revenue, but royalties coming in now from trucking? Or is that an accurate statement to make?

Yes, that's accurate. But I will have to – I do have to caution one thing. Obviously, we have one franchisee that trucking is their primary line. So I don't want to oversell this and say that we have 35 new people signed up that just want to devote their time to trucking. This is a lot of those 35 people. are people who were turning down business in the past and are now able to fill those orders. So the answer is yes, we are currently already doing business, generating royalty revenue from DriverQuest. That said, it's just a temperate a bit as well, though it's also from people who This is business we left on the table in the past.

Gotcha. So this is business, but you see it as an opportunity long-term. I get that it's starting small and that people have to grow this, but you were turning away business. Now you're not. And over time, this could be a significant driver of system-wide revenue and therefore franchise revenue. royalties.

Absolutely. And look, truck drivers are well compensated, you know, are well compensated individuals. And so, you know, it doesn't take, you know, it doesn't take a lot of people placed in order to generate, you know, to generate significant revenues. And so we are, we're very excited about the opportunities.

Great. My next question is just about potential acquisitions going forward? I know you only announce something when you close, but could you describe just the pipeline of opportunities? Are you still excited about what you're seeing beyond just like organic opportunities of just an acquisition pipeline?

You know, that's a question I have to be careful in answering. We are always out there looking. There are certain ones where if you'd have asked me three weeks ago what the pipeline is, it would be different than what I would say today and what it was three months ago. I would say that the, you know, and sometimes you think you have a deal and you spend weeks getting it to the point of a deal and then it falls apart. But I think the fact is, is that we are actively engaged in seeking out opportunities. And so there will be, you know, I do believe there will be consistent opportunities. The really, the bigger question is, is do they fit our parameters from a profitability standpoint that, you know, and basically that properly priced that, we want to actually execute on it. And that's, that's really the bigger issue. There's all sorts of stuff we could overpay for, but that's not, you know, that's not, that's not our, that's not our goal.

Great.

Thank you very much. No, no, no, absolutely. It's a big country. It's a big country and there's a lot of, you know, and there's, there's a lot of verticals. There's a, you know, so there's a lot of opportunities.

No, no, that's, that's all I want to, and I know that you're, going to be very disciplined with your approach and treat it like it's your capital, so I'm very confident. Thank you, and a great quarter again.

Thank you.

Again, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad at this time. Please hold while we poll for questions. Okay, and it doesn't look like we have any further questions coming in. I'll turn it back over to you for closing remarks.

Well, again, I want to thank everybody for joining us today. I appreciate your interest in the company. Hopefully you're a shareholder, then I really appreciate you being on. Again, I hope that as you take the time to look through the 10-Q that what you'll see is really the progress that we've made in quickly assimilating the Snelling and Link acquisitions and I think one of the key points that as we develop that it's important to stress is our ability to quickly assimilate acquisitions and which gives us the opportunity to grow because of our franchise model we don't assume nearly as many of the operational you know, issues to integrate. And that allows us to make more acquisitions in a shorter period of time. And I think that, if nothing else, the second quarter of this year really demonstrates how quickly that we can integrate even a 50% uptick in our business, that we can do that really with relatively minimal cost and in a very short period of time. And so, again, I want to thank you and have a good day. Thank you.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.