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Edited Transcript of HQI.OQ earnings conference call or presentation 30-Mar-20 2:00pm GMT

Q4 2019 Hirequest Inc Earnings Call

Jun 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Hirequest Inc earnings conference call or presentation Monday, March 30, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cory Smith

HireQuest, Inc. - CFO & Treasurer

* Richard F. Hermanns

HireQuest, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Brett Maas

Hayden IR, LLC - Managing Principal

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Presentation

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Operator [1]

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Greetings, and welcome to HireQuest Fourth Quarter and Year-End 2019 Earnings Conference Call. (Operator Instructions) Please note this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Brett Maas, with Hayden IR. Thank you. You may begin.

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Brett Maas, Hayden IR, LLC - Managing Principal [2]

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Thank you, operator. I'd like to welcome everybody to the call. Hosting the call today are HireQuest CEO, Rick Hermanns; and CFO, Cory Smith.

Please be aware that some of the comments made during our call may 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 future results that could cause HireQuest 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 in its filings with the Securities and Exchange Commission, including, without limitation, the most recent annual report on Form 10-K, the most recent quarterly report on Form 10-Q and other periodic reports, which identify specific risk factors that also may cause actual results or events to differ materially from those described in forward-looking statements. Copies of the company's most recent reports on forms 10-K and 10-Q may be obtained on the company's website at hirequestllc.com or the SEC's website at sec.gov. The company does not undertake to publicly update or revise any forward-looking statements after the call or the date of this call.

I'd like to remind everyone, this call will be available for replay through April 13, starting at 1:00 p.m. Eastern Time today. A link to the website replay of the call was also provided in the earnings release. It's also available on the company's website again at hirequestllc.com.

I'd like to now turn the call over to CEO of HireQuest, Rick Hermanns. Rick?

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Richard F. Hermanns, HireQuest, Inc. - Chairman, President & CEO [3]

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Thank you for joining us. 2019 was an eventful and productive year for HireQuest, culminating with terrific financial results for the fourth quarter, which were made possible by the completion of the merger with Command Center and the conversion of all company-owned branches to our proven, successful franchise model.

We entered 2020 with efficient business operations operating at a powerful scale, virtually unencumbered by legacy and transition activities. Our company is well capitalized with a strong balance sheet and a historically profitable, self-sustaining operating model that is generating positive cash flow.

Our fourth quarter results illustrate this with $3.8 million of income from continuing operations on $5.9 million in revenue and $4.2 million in cash reserves with 0 debt. These results were achieved through the successful execution of our merger integration plan and included converting all of the legacy Command Center locations to HireQuest franchise models, exiting the California market via the sale of all 4 company-owned locations to an independent third party and improvements to operating processes that delivered increased efficiencies and a leaner cost structure.

Today, all of our revenue is derived from franchise royalties and service revenue, and our operating infrastructure is appropriately sized to serve approximately 130 franchised-owned offices. While we are a few -- while there are a few minor legacy issues that remain, we completed the rightsizing of our operational support ahead of schedule, including early termination of the lease for the Command Center's headquarters in Lakewood, Colorado.

As we turn the page and look forward to our goals in 2020, we are primarily focused on protection of our business in preparation for an increasingly volatile economy. Our cash generation and steadily improving balance sheet provides us with the flexibility to select appropriate investment opportunities at the right time for us. Historically, investments in existing franchises have created acceptable returns with relatively short payback that create new profitable streams of revenue for future periods.

At the same time, we continue to search for and consider opportunities for growth through acquisitions that could add markets where we currently lack a presence or perhaps access to national accounts. As always, we are taking a disciplined and prudent approach to acquisition with the ultimate goal of acquiring assets that could be transitioned to our franchise model as quickly as possible.

In many cases, we provide buyer financing. And fortunately, our balance sheet affords us the flexibility to do just that. Our proven model is profitable and provides acceptable returns. We have no interest in deviating from what we know, and what we know works despite business and economic uncertainty and ongoing volatility.

The COVID-19 outbreak has begun to impact our operations and revenue as well as those of our franchisees. We expect the effects to become more acute in the next 2 months. Certain regions are being more affected than others.

At our behest, most, if not all of our independent franchise businesses, have already implemented special operating procedures to reduce the likelihood of a spread of the virus. In general, those franchisees whose businesses are oriented towards construction, manufacturing, logistics or waste services, have been less impacted than those whose businesses are more oriented towards hospitality services.

We believe that the recently passed CARES Act and the benefits it created for small businesses, particularly through loans and grants, will provide significantly -- will provide significant relief for our franchisees, and we hope that it will blunt the most negative business effects of the outbreak in the near term. We have advised our franchisees to be very cautious in extending credit to their clients, and we are monitoring the quality of our accounts receivable.

To the extent that COVID-19 leads to a recession, it is a near certainty that our revenues will decline. We've already begun developing plans to adjust our fixed costs should the effects of this outbreak last more than 2 or 3 months. I've run a staffing company through 3 prior recessions and, thus, I'm no stranger to the dangers and opportunities that recessions create. To the extent that our revenues were to decline, we should be able to mitigate a significant portion of the negative effects. That is while a relatively mild drop in revenues will likely result in a nominal amount of income decline, we are more able to sustain our typical net margins in a mild recession. The larger the decline in revenues, the more difficult it is to maintain net income margins.

Given that we are in an environment that is unlike any other that we have experienced before, it is ultimately impossible to predict what the ultimate impact of the coronavirus and its fallout will be on our earnings.

2019 was a year of great accomplishment in positioning for future growth. Our business model is solid, profitable and self-sustaining within a proven ability to generate robust margins and positive cash flow. Our balance sheet is strong with healthy cash reserves and 0 debt, providing us with a fair amount of insulation to current economic volatility and the flexibility to pursue a variety of growth opportunities.

Let me turn the call over now to Cory to discuss the fourth quarter results. Cory?

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Cory Smith, HireQuest, Inc. - CFO & Treasurer [4]

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Thank you, Rick, and good morning, everyone. As a reminder, at the end of our third quarter, nearly all of our company-owned locations were sold to franchisees as part of our strategy to convert all of our corporate-owned locations to franchisees. In addition, we sold the assets related to our California locations to an unaffiliated third party outside of our franchise system as part of our strategy to exit the California market. As a result of these changes, our financial results include income from discontinued operations. My prepared remarks relate only to our ongoing operations.

Franchise royalty revenue in the fourth quarter of 2019 was $5.4 million compared to $3.3 million in the fourth quarter of 2018, an increase of 66%, with 26% of this increase attributable to offices acquired during the merger.

Service revenue was up 70% to $476,000 compared to $280,000 in the fourth quarter of last year. Service revenue is generated from interest charge to our franchisees on overdue accounts receivable and through fees for various optional services we offer our franchisees. Virtually all of this increase is attributable to original HireQuest locations.

Total revenue in the fourth quarter of 2019 was $5.9 million compared to $3.3 million in the fourth quarter of 2018 with 24% of this increase attributable to offices acquired in our merger with Command Center.

Selling, general and administrative expenses in the fourth quarter of 2019 were $3.1 million compared to $1.3 million in the fourth quarter of last year. This year-over-year increase is due to merger-related expenses, including rebranding and restructuring expenses and increase in legal and other professional fees and increased compensation costs.

Income from continuing operations was $3.8 million or $0.28 per diluted share in the fourth quarter of 2019 compared to $2.2 million or $0.22 per diluted share in the fourth quarter of 2018.

Moving to the balance sheet. At December 31, 2019, we had current assets of $37 million, which included cash of $4.2 million and accounts receivable of $28 million. At the end of 2018, current assets were $22 million and included cash of $1.3 million and accounts receivable of $21 million.

And with that, I'll turn the call back over to Rob, the operator, for Q&A.

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Operator [5]

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(Operator Instructions) There are no questions at this time. At this point, I'd like to turn the call back over to Rick Hermanns for closing comments.

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Richard F. Hermanns, HireQuest, Inc. - Chairman, President & CEO [6]

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Well, thank you, everybody. Again, as much as the COVID-19 situation bears a great deal of watchfulness, I'm very pleased with the results that we had in the fourth quarter and, again, look forward to the opportunities this may provide and for the future. And so again, thank you for joining us.

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Operator [7]

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This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.