Hirequest Inc (HQI) 2019 Q2 法說會逐字稿

Greetings, and welcome to the Command Center, Inc. Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

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

Thank you, operator. I'd like to welcome everyone to the call. Hosting the call today are Command Center 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 Command Center's 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 SEC, including, without limitation, the most recent annual report on Form 10-K 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 commandcenteronline.com or the SEC's website at www.sec.gov. The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call.

Also note that on this call, the company will be discussing non-GAAP financial information. They provide this information as a supplement to information prepared in accordance with the accounting principles generally accepted in the United States or GAAP, G-A-A-P. You can find a reconciliation of these metrics to the reported GAAP results in the reconciliation table provided in the company's earnings release.

I'd like to remind everyone this call will be available for replay through August 27, starting at 1 p.m. Eastern today. A link to a website replay of the call will also be provided in the earnings release, which is also available on the company's website at commandcenteronline.com. Any redistribution, retransmission or rebroadcast of this call in any way without the expressed written consent of the Command Center is strictly prohibited.

Now I'd like to turn the call over to CEO of Command Center, Rick Hermanns. Rick?

Thank you all for joining us, and I'm pleased to conduct my first call as CEO of Command Center as I head into my 29th year as an executive in the staffing industry. As most of you know, this has been a very busy time for our newly combined company. Having completed the merger just 4 weeks ago, we immediately set out to integrate our 2 companies, eliminate duplicative expenses and most importantly, begin the process of converting all of our company-owned branches into franchises. I'm happy to report that we have made noteworthy progress in all 3 areas.

First, we've converted approximately half of Command Center's historic branches to a franchise model since the closing of the merger. Of the remaining locations, we are working through state regulatory requirements and expect to convert the remaining locations into franchises by the end of the year. Accordingly, we expect to enter 2020 with our entire operating portfolio comprised of franchise-owned branches. The integration is also going according to expectations.

Due to the merger transaction, the associated legal, banking and accounting costs and severance associated with eliminating duplicative personnel, we recognized approximately $341,000 of nonrecurring charges in the second quarter. A merger, integration and business model pivot of this scope will take time to complete, and we want to let investors know that we expect very significant charges in Q3 and Q4 of this year in completing these tasks. Obviously, we believe these changes will be of long-term beneficial value to the company and were the rationale for this merger. While this estimate is preliminary and subject to change and may be impacted by accounting rules and the timing of certain costs, we expect nonrecurring charges in the third quarter to be somewhere between $14 million and $19 million.

Once the transition is fully complete, which we expect sometime in 2020, we believe we will be one of the leaders and scale players in the direct dispatch light industrial space. But again, this transformation will not happen overnight and is still in process.

The factors which impact our quarter-to-quarter performance include macroeconomic changes, workers' comp performance and our ability to win national accounts. In addition, as our brand becomes more widely known, we hope to have increased attention from potential franchisees seeking to open territories of their own before they're gone. Our organic growth plans include aggressively pursuing national accounts and incentivizing current franchise owners to buy or open additional territories. Inorganically, we believe there are regional staffing companies that could be attractive acquisition targets, and we will selectively evaluate these opportunities as well. In the near term, we are looking to existing territories that are performing below their potential and seek to increase our presence there. In the medium term, we will look to fill gaps in coverage on our map. While we don't see any signs of the economy slowing at this time, we all know that a recession is coming at some point, and the merger allowed both companies to diversify across industries and geographies to successfully navigate the cycle. While the near term presents many challenges, all that were expected, we continue to believe in the rationale and promise of this combination, and we do believe it is both a positive and exciting time for the company. Cory?

Thank you, Rick, and good afternoon, everyone. I'd like to remind everybody that the results I'm about to describe do not include any contribution related to the merger, which closed a few weeks after the end of this quarter, but do include nonrecurring charges related to the transaction.

Revenue in the second quarter of 2019 was $24.8 million compared to $24.2 million in the year ago quarter, an increase of $662,000 or 2.7%. Gross margin was 26.4% compared to 26.0% in the year ago quarter. This increase is primarily related to a decrease in workers' compensation costs and lower unemployment costs. Consistent with prior quarters, unemployment remains low and continue to put upward pressure on wages paid to our temporary employees, which partially offset the increase in gross margin for this quarter.

Selling, general and administrative expenses were $5.6 million, an increase of approximately $240,000 from $5.4 million for the second quarter last year. This increase is primarily due to recruiting costs and legal and professional fees, including approximately $341,000 in nonrecurring transaction-related expenses. If these nonrecurring expenses are excluded, SG&A decreased by approximately $101,000.

We reported income from operations of $878,000 compared to income from operations of $820,000 in the second quarter last year. Net income was $412,000 or $0.09 per diluted share compared to net income of $563,000 or $0.11 per diluted share in the year ago quarter.

Adjusted EBITDA was $1.4 million compared to $1.3 million last year. Adjusted EBITDA in the second quarter of 2019 included $357,000 in nonrecurring charges and $67,000 in noncash compensation compared to $195,000 in nonrecurring charges and $192,000 in noncash compensation in the year ago quarter.

Moving on to the balance sheet. Cash and cash equivalents at June 28, 2019 were $7 million compared to $8 million at December 28, 2018. In connection with the merger, Command Center commenced a self-tender offer of $6 per share for up to 1.5 million shares of our common stock. Based on the final count by Continental Stock Transfer & Trust Company, the depository for the tender offer, the company has accepted for purchase approximately 1.4 million shares for an aggregate cost of approximately $8.4 million, excluding fees and other expenses related to the tender offer. The shares purchased represent approximately 9.6% of the company's common stock issued and outstanding as of June 28, 2019. Following confirmation of the tender offer, the company has approximately 13 million shares outstanding. We do not intend to repurchase further shares of our stock at this time, but this could change in the future.

And with that, I would like to turn the call back over to the operator for Q&A.

(Operator Instructions) Our first question is from Barry Bruner with Stifel.

Can we get any guidance on what the combined companies are going to do going forward?

Well, no. Look, the position of the company is that we're not going to issue guidance per se. I would simply say that, obviously, there will be a significant change in what you'll see on the top line simply because Hire Quest, historically, as a franchising organization, our top line is only the royalty revenues, not the sort of the underlying sales of the system. And so even on a combined basis, you will see sales drop significantly next year as far as that's concerned. Look, I mean, as a company, and the reason why we choose not to do that, to offer that guidance is we are a very cyclical. We're a very cyclical and seasonal business. And candidly, it's a fool's errand to predict what the economy is going to be like in the third quarter of 2020. And so we just decided to stay away from making any prediction like that.

(Operator Instructions) Our next question is from Michael Potter with Monarch Capital.

Rick, congratulations on getting the merger done and welcome to, I guess, your first public conference call. So along the lines of the prior caller, perhaps not guidance, but can you give us some of the metrics that you've had historically with Hire Quest? And where it is that you're focused? What should we expect in regards to gross margins once all locations are fully franchised? And what's an EBITDA target that you've had historically?

Well, I guess that goes back. I think that's sort of the...

That's not guidance but it's more of looking back of what you've been able to achieve with Hire Quest. And do you think that the foundation is in place here to achieve those same types of metrics?

I'm going to avoid, let's say, this discussion, let's say, specific metrics, but here's what I would say, right? Unlike, let's say, historically, Command Center historically, or for that matter, PeopleReady or any other large staffing company is, tend to swing wildly with the economy and other factors, but a lot of it is very subject to economies of scale in any given branch, right, so earnings change significantly. In our instance, so I would say that I would expect less, less volatility going forward just from the perspective of, in essence, we are working off of sort of the net. I mean our top line doesn't -- we do not see the great quarters, let's say, that, let's say, maybe a company-owned store does. But by the same token, we smooth out our bottom. And so look, the most important part is that I would say going forward is, look, I mean, we need to, much more so even than, let's say, a traditional staffing company because we are really more of a franchisor rather than a temporary staffing company, one of the biggest things that we're compelled to do is keep a good grip on our overhead costs. That's really what will drive our profitability. And so I mean, I would encourage you, obviously, to do your own analysis. But it would be to make sure that our costs stay in line with historically what revenues are. That's really the key to it all is because we have less to work with. We have to watch our costs like a hawk, I guess, is what I'm saying. And that's one of the challenges in the integration is ensuring that our costs stay in line with, let's say, what Hire Quest has experienced historically. And anyway, that's really the single biggest thing.

And obviously, and then I would say is, look, I mean, going forward, and again, the data is basically presented, but it's also underlying system-wide revenue is important. And as sort of stated, as stated in the presentation, clearly, we want to grow the system-wide revenues. We're going to do that by focusing on bringing in more national accounts now that we have a, frankly, a far more robust branch network. And also, again, looking for selective and which incidentally, our amount of national accounts is low sort of by industry standards if you compared us to some of the sort of Manpower, Kelly, things like that. They feast off of national accounts. Historically, neither Command nor Hire Quest has done that. And so we feel there's growth in that.

And the other part is, is that I'm a big believer in capitalism as is the rest of the management team of Hire Quest. And the point is, is that our expectation is that, that there will be people who may be historically as a manager with a relatively fixed compensation structure now will -- they'll quickly, as they begin to see how sort of the difference between being a branch with, let's say, moderate revenues versus one with really good revenues, they'll begin to see how much extra money they make, and that will encourage them and incentivize them not only to stay at those higher sales levels, but also to open additional branches. So I hope that answers your question. I hope that answers your question.

Well, to some degree. I mean I'm trying to get enough information to do my work, right, to understand what I have here financially. One thing that I would suggest is, I know you mentioned in your answer, we could look at the presentation. Is there a more recent presentation because I'm on the website right now and the presentation is from December of 2018.

Presentation of what?

Of the company. I would, as an investor, I would like to understand what is the strategic plan.

Well, the answer is, no, there's really nothing else because it hasn't been -- obviously, you will see it in November 15 or maybe October when the third quarter comes out.

Right. Okay. So by the time the third quarter numbers come out, you'll have a strategic plan ready to present to the shareholders?

Well, I mean strategic plan and what it is, I guess, obviously, everybody has a different definition of a strategic plan.

Well, a strategic plan is really what we're trying to achieve here, right? As you said, greater, there's a lot more leverage here, both geographically as well as revenue base. We can go after national accounts more, really, what are we trying to achieve by putting these companies together. There's a reason why you did it, right? You have some sort of vision of what you're trying to achieve.

Well, that's certainly true. But recognizing, and again, and part of where, again, I go back to not wanting to provide guidance is simply, we could execute everything flawlessly, right? We could double our national accounts. But if GDP drops from 2.9% growth to 1.5% growth, we'll be lucky to tread water.

Of course, of course. It's not written in blood. And this is not meant to be argumentative at all and we'll probably take it offline. But assuming things with certain assumptions that the economy continues to grow or at least stays how it is right now, how does this company look? And I'm not looking for guidance. I'm just looking for what is it that we're trying to achieve.

So here's the key, I guess. Here's maybe the key or a sort of a key to look at things, right? Is that, again, and it was implicit in what I said before, but I'll be a little more explicit, which is simply that, we aren't going to grow typically exponentially, right? In other words, for example, at an individual branch level, a branch that bills, let's just say, $20,000 a week might make X. Well, if it bills $30,000, it's not just going to be 1.5x X, it's going to be maybe 3x X, right? It's very, very sensitive to getting over the breakeven point. We, as a franchisor, are not really that way. And so one of the things I would say is simply, look, we're not going to go from -- in other words, if our revenues, system revenues go up 5%, if our earnings go up 5%, we're doing what we're supposed to be doing. Are you following? So that's what I'm saying before. We have 2 main responsibilities. One is to keep control of our costs so that a 5% growth in system revenues translates into a 5% growth of income. Again, we don't have a lot of efficiencies that we can grab to make that 5% sales growth turn into 10% on the bottom line, won't happen. It just won't happen. But by the same token, obviously, we're going to do what we can to drive those sales.

Now again, I do believe that, like I said, capitalism will kick in, and that will give us above industry results as far as revenue increases. I also believe very strongly as well that through our national accounts that we should be able to, again, improve. That's the low-hanging fruit, right? In the long run, it's just, it's filling in our branch network and stuff like that. I mean the only thing I would say is, I think, Labor Ready or PeopleReady, I think their total revenues were like $2.5 billion. Well, what does it say? It says that we're a lot smaller than what they are. And so there is certainly room for us to grow within the direct dispatch staffing space, a lot of growth.

Ladies and gentlemen, we have reached the end of the question-and-answer session and our allotted time for today's call. Command Center thanks you for your time and your participation. You may disconnect your lines at this time.