HireQuest, Inc. (HQI) Q4 2019 Earnings Report, Transcript and Summary

Greetings and welcome to HireQuest Fourth Quarter and Year-End 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [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.

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 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 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 it’s filings with the SEC, including without limitation the most recent Annual Report on Form 10-K, most recent quarterly report on form 10-Q and other periodic reports, which identifies 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 at the SEC's website at www.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 13th starting at 1:00 PM eastern time today. I'll link to the website replay of the call was also provided the earnings release, results are available on the Company's website again and hirequestllc.com. I'd like to now turn the call over to CEO of HireQuest, Rick Hermanns. Rick?

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 in 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 and $5.9 million in revenue and $4.2 million in cash reserves with zero 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 HireQuests franchise model, exceeding the California market via the sale of all four company-owned locations to an independent third party and improvements to operating processes that delivered increased efficiencies and a linear 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 there are a few minor legacy issues that remain, we completed the right sizing of our operational support ahead of schedule including early termination of the lease for the Command Centers headquarters in Lakewood, Colorado. As we turned the page and look forward to our goals in 2020, we are primarily focused on protection of our business and 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 market, where we currently lack of presence or perhaps access to national accounts. As always, we're taking a disciplined and prudent approach to acquisition. With the ultimate goal of acquiring assets that can 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 accessible return. 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 effect to become more acute in the next two months certain regions are being more effective than others. At our behalf, most, if not all of our independent franchise businesses have already implemented special operating procedures to reduce the likelihood of the 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 toward hospitality services. We believe that the recently passed CARES Act, as a benefit it created for small businesses particularly through loans and grants 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. We are monitoring the quality of our accounts receivable. To the extent the 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 to be effective this outright last more than two or three months. I've run a stack attempting through three prior recessions and that's a no stranger to the dangers and opportunities that recessions create. To the extent that our revenues worst decline, we should be able to mitigate a significant portion of this negative effect 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 revenue, the more difficult it is to maintain net income margin. 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 accomplishments positioning for future growth. Our business model is solid, profitable and self-sustaining with a proven ability to generate robust margin positive cash flow. Our balance sheet is strong with healthy cash reserves and zero debt, providing us with a fair amount of installation to current economic liability 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?

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 the 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 was generated from interest charge to our franchisees on overdue accounts receivable and from fees for various optional services we offer our franchisees virtually all of these increases 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 officers 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 the 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 fourth quarter of 2019, compared to $2.2 million for $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.

Well, thank you everybody. Again, as much as the COVID-19 situation, there's 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.

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