HireQuest, Inc. (NASDAQ:HQI) Q1 2020 Earnings Conference Call - Final Transcript

May 11, 2020 • 04:30 pm ET

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HireQuest, Inc. (NASDAQ:HQI) Q1 2020 Earnings Conference Call - Final Transcript

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Executive
Richard Hermanns

and a business model that consistently generates operating cash flow, we are better equipped than a lot of our competitors to weather economic cycles. With no debt to service and a lean cost structure, we remain focused on serving our franchisees and protecting our business as volatility is expected to continue in the short-term.

Our franchisees are facing challenging conditions as a result of the pandemic with certain regions and industries being more affected than others. As I've said in the past, our business is quite susceptible to economic fluctuations. This is proving true yet again. To date, our franchisees have closed or consolidated 13 offices, at least in part due to the ongoing financial impact of COVID-19. Of these closures, 11 were in metropolitan areas where our franchisees still maintain a presence to serve customers. The other two locations did not historically produce large volumes of sales. We do not expect the closures in and of themselves to have a significant impact on our revenues. In general, 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 and auto auctions. Fortunately, we do not have any branches operating in the Northeastern United States or in California, two of the largest hotspots. However, due to the rapidly changing situation, the impact of our operational and financial performance over the coming quarters is difficult to predict.

To the extent COVID-19 has led to a recession, it is a near certainty that our system-wide sales will decline in 2020. We have already taken appropriate action to significantly reduce our fixed costs to account for the anticipated drop in revenues. Should the current situation continue to deteriorate into the summer, more actions will be taken.

To the extent that our revenues have begun to decline, we will mostly likely also experience a decline in income. The larger the decline in revenue, the more difficult it will be to maintain our core operating margin, which approached 55% in the first quarter of 2020 when excluding the impact of the $1.4 million one-time reserve on notes receivable.

The recently passed CARES Act, which provides loans and grants to small businesses is expected to provide some relief for our franchisees. Many of our franchisees have already received funds or have been approved for funds under the Paycheck Protection Program and we are optimistic that this program will help to circumvent some of the downward pressure on their business, at least in the near-term. We have also advised our franchisees to be cautious and extending credit to their clients and we continue to monitor the quality of our accounts receivable.

During the first quarter of this year, we recorded a $1.4 million reserve against outstanding notes issued in conjunction with the sale of office locations acquired as part of the Command Center merger. This reserve is directly related to the negative impact COVID-19 has had on the economy. There was no