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spk03: 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 open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Brett Moss. Sir, the floor is yours.
spk04: 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 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 question, I'm sorry, 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 to 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 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 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 is available on the company's website at higherquest.com. I'd like to now turn the call over to the CEO of HigherQuest, Rick Hermans. Rick?
spk02: Thank you for joining us. This past quarter marked a milestone for us with weekly sales from our legacy HigherQuest 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 Weekly sales results improved from trailing 2019 comps 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. and were driven by a combination of organic growth and the contributions from our Snelling and Link acquisitions. We also had record adjusted EBITDA of $5.3 million. This is especially notable given 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 non-recurring 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 the 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 avenue to enter these verticals, internal development, acquisitions, or a combination. Smaller transactions such as dental power give us a platform to build on both organically and through add-on acquisitions. Before I turn over the call to Corey 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 6% dividend quarterly going forward. With that, I'll turn the call over to Corey. Corey?
spk01: Thank you, Rick, and good afternoon, everyone. Thank you for joining us. 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 23 cents per diluted share, compared to net income of $2 million, or 15 cents 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 30th was $4.3 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 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, and 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. And with that, I will turn the call back over to the operator for questions and answer.
spk00: Okay. Hello, everyone. Please submit your questions at this time. We do have a question from Erin Idleheart.
spk03: As a reminder, the floor is now open for general questions. If you have a question or comment, please press star 1 on your phone. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality.
spk00: Please hold on while we poll for additional questions. Aaron, the floor is yours. Yes.
spk05: Rick, can you hear me?
spk02: I can.
spk05: Oh, okay. Great. Congratulations on the great results. I was really surprised happily on the operating leverage and wanted to ask you, is there 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?
spk02: Thank you and 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, even though we did a lot of expense cutting in the beginning of the pandemic, you can only still cut so far. And so really the operating leverage has come back significantly with the, you know, with the sort of bit of the releasing of the pandemic's grip on the economy. And of course the acquisitions of Snelling and Link having boosted it, you know, having boosted our operating leverage as well. So no, I wouldn't look at it as anomaly as well and at all.
spk05: okay uh now we've been i obviously you open the newspaper you talk to anyone in business and there are shortages of labor i have to assume higher quest is experiencing similar things do you have any idea if there were bottlenecks for you to provide labor to your customers can you give me any metrics of what you could be doing if there weren't either shortages of labor or if there are bottlenecks, could you give me any thoughts on how much better you could have done, even though I'm really happy with these results?
spk02: Yeah, so it's a double-edged sword. So let me first state that I do think that the ending of the supplemental $300 a week unemployment benefits really helped our filling of orders towards the end of the quarter. And as I stated earlier, is we went from running, you know, 10% to 15% behind 2019 numbers to basically even by the end of the quarter. A lot of that had to do with the return. It's sort of like Return of the Jedi. Well, this was like Return of the Worker. And so the ending of that $300 supplemental, you know, a fair number of people back into the workforce. Now, as far as bottlenecks and stuff like that, we certainly have more unfilled orders now than we've ever had in the company's history. However, I, and so sure, we could probably be 10 to 15% higher if we could fill every order. But I want to be careful in overstating that because the shortage of workers also leads to more orders, and so it probably balances itself, if that makes any sense.
spk05: Yeah, no, it makes sense. Last question about kind of new verticals. I remember on the last call I asked a question about trucking. You announced your first foray into trucking. healthcare with the dental staffing business. When I look long term and I think about the opportunities of this vertical, how big do you think, could dental be like a billion dollar system sales business or you had mentioned last quarter that you thought that trucking could be enormous I'm just wondering how you think about in the long term. I'm not looking for next quarter or next year, but just how big could some of these verticals or specifically the dental opportunity be?
spk02: Right. So obviously with trucking, when you have it pretty much widely acknowledged that there's a shortage of 500,000 truckers right now, it's easy to see where it becomes literally you know a nine to ten figure opportunity on the other hand dental is not that and it's not really our strategy necessarily to you know to be necessarily it doesn't have to be huge it doesn't have to be huge segment and part of going into dental what's helpful about going into dental is we're and yet in a limited way to start with is for us to develop our own systems so that we can grow from there. So I would say medical more broadly is obviously a huge opportunity. Dental is not a small opportunity but really should be viewed more as an entree into the more you know, is probably more, you know, into the more skilled and professional areas. Gotcha.
spk05: So it's kind of like dipping your toe into the medical field. And we should, maybe this isn't the last announcement we're going to see in that.
spk02: Yeah. And that's not saying that there's anything now, you know, it's, it's, we truly, you know, there's a lot of credentialing and, you know, medical is significantly different than, you know, a person like, working on an assembly line. And so, you know, we want to make sure that we do the, you know, that we do a good job with it. Now, that being said, that's why we bought a more than 40 year old company to get 40 years of experience within that industry or our, I'm sorry, we, you know, are contracted to buy it. Um, you know, that that's part of the reason for buying a company with that much experiences is that, like I said, it'll help us develop our systems.
spk00: Gotcha. Thank you so much.
spk02: Sure thing.
spk03: As a reminder to our participants, simply press star 1 on your phone at this time to be added to the Q&A for questions.
spk00: We do not currently have any participants in the Q&A field at this time. All right.
spk02: Well, then I'd like to thank everybody who joined us to thank you for joining us. And we look forward to seeing what the fourth quarter brings. And again, we thank you and have a good day.
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