SPAR Group, Inc.

Good day and welcome to the SPAR Group first quarter 2022 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note today's event is being recorded. I would now like to turn the conference over to Sandy Martin. Please go ahead, ma'am.

Thank you, Operator, and good morning, everyone. We appreciate you joining us for the Spar Group, Inc.' 's conference call to review first quarter results for 2022. Joining me on the call today are Spar's Chief Executive Officer, Mike Matacunas, and the company's Chief Financial Officer, Faye DeVries. This call is also being webcast and can be accessed through the audio link on the events and presentations page of the investor relations section at investors.sparinc.com. Information recorded on this call speaks only as of today, May 16, 2022, so please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical fact, including statements or expectations or future events or future financial performance or forward-looking statements, made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements by their nature are uncertain and outside of the company's control. Actual results may differ materially from those expressed or implied. Please refer to the earnings press release that was issued today for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management may also refer to non-GAAP financial measures, and the reconciliations to the nearest GAAP measures can be found at the end of our earnings release. SPAR Group assumes no obligation to publicly update or revise any forward-looking statements. Finally, the earnings press release we issued earlier today is posted on the investor relations section of our web website at sparinc.com. A copy of the release has also been included in an 8K submitted to the SEC. And now I would like to turn the call over to the company's CEO, Mike Matakunis. Mike?

Thank you, Sandy, and good morning, everyone. I am pleased to share with you our first quarter results and comment on progress against our transformation plan. First, I would like to welcome our existing investors and prospective investors to the call. I remain excited about our future and appreciate your interest in our business. As we reported our results this morning, you will note that we have changed our segment reporting to better reflect our business and global operations. Historically, the company has presented domestic versus international results. When I considered our growth strategy and how our clients buy services, I decided to change our segment reporting to America's Europe, Middle East and Africa, shortened to EMEA, and Asia Pacific, also shortened to APAC. Our Americas segment includes Canada, the United States, Mexico and Brazil. The EMEA segment is comprised of our business in South Africa. And finally, our Asia Pacific segment, also known as APAC, is comprised of Japan, China, Australia and India. Again, this segmentation is a better reflection of how our clients buy services and enables us to win broader global opportunities. With this said, this morning, we announced our results for the first quarter, 2022. Total revenue for the first quarter was $59 million compared to $61 million in 2021. This reflects a decrease of approximately 3% from the same period last year. America's segment revenue was $43 million against the $45 million prior year. This is a 4.9% decrease in revenue. Our EMEA segment revenue was $9.2 million against $7.7 million the same period last year. This reflects a 19.5% increase in revenue year over year. Our APAC segment revenue was $6.8 million down 18.1% year over year. As a reminder for those who are new investors to SPARM, first quarter last year was an unusually strong quarter due to pent-up demand on the tail of the pandemic. While our first quarter total revenue was down 3%, we performed well against our internal plan and we are off to a good start for 2022. Our gross profit was 20.1% of revenue, flat to last year for the same period, but up 240 basis points over our fourth quarter percentage. The quarter-over-quarter improvement in gross profit is the result of renegotiated terms and our internal efforts to drive efficiencies. Our initiatives are beginning to show progress. and we are on track to achieve our longer-term goal of higher margins and profits. Operating income for the first quarter is $2.1 million, and net income is $674,000, resulting in an earnings per share of $0.03. To provide more insight to our performance, I would like to comment on three topics, our U.S. business, China, and the role global inflation plays in our business. Our business in the United States serves both consumer packaged goods and retail companies, Our CPG clients include companies such as P&G, Kimberly Clark, Colgate, Hallmark, MJ Holding, Reynolds, and more. Our retail clients include companies such as Walmart, Target, CVS, Dollar General, Family Dollar, Meijer, and many more. As a reminder, we provide merchandising and brand marketing services for these clients across 48 contiguous states in the U.S. We are in stores every day revitalizing the store, merchandising the shelves, and making certain our clients present an exciting and compelling merchandising environment. Many of the investors I talk with ask about the impact of U.S. labor rate increases in our business, and now, with the low unemployment rate in the States, the impact this may have on our performance. First, on the labor rates, we have factored the impact of these increases in our business and taken out costs to ensure we drive profitability. We believe the changes in future rates are largely known, and therefore, we have a plan to accommodate this in the future. Our plans include a combination of technology to drive process efficiency and growth of higher margin services that add incremental value to our clients. Second is our business relies on hiring and retaining many, many people in the U.S. I'm constantly watching the unemployment rate and reviewing our recruiting results weekly. We have recently changed the software and digital platform we use to recruit, and the initial results are promising. We have been able to successfully recruit over the first quarter, and I have every reason to believe we will be able to recruit going forward. I'm proud of our team driving the U.S. business and confident their efforts will continue to produce results. China is a relatively small piece of our business, but we were impacted by the lockdown in Shanghai that began in March. While some parts of the world have begun to return to a more typical economy, China is an exception. I'm in constant contact with our leadership in China and monitoring the health of our team there. The revenue impact on our business in the first quarter was approximately 400,000 U.S. dollars, yet minimal to our bottom line. While I estimate the continuation of the lockdowns will have a top-line impact, the net effect will be small. We are continuing to monitor this situation carefully. As reported, global inflation in the first quarter is approximately 6%. As a business operating in nine countries, we watch this closely, along with the implied impact on labor and our clients. For SPAR, we did not see a material impact on our business related to the rise in prices in the first quarter. In fact, our business grew faster relative to prior year than the revenue of many of our clients, which I view as an indicator that we are taking market share from our competitors. In talking with our clients directly, I know they are managing their budgets closely, and many are now turning to SPAR to take over their field services and provide a shared resource to drive efficiency in their businesses. The constant pricing pressure provides us an opportunity to deliver the merchandising and marketing services they need to drive top line while enabling them to save direct costs. As we watch all of these issues and work with our clients to drive results, we are also constantly looking for opportunities to simplify and accelerate the business, to keep focus on driving value for our shareholders, clients, and associates. In the first quarter, we began efforts to simplify and streamline our internal reporting and back office support. We also began moving our software technology that we believe is the most functionally robust in the market to an enhanced cloud platform to enable our growth and support our transformation plan. Combined with the partnerships we announced in the first quarter with Repsly, Clearbox Retail, and Parallel Dots, we are committed to, as one business partner recently commented, be the most progressive company in this marketplace that thinks ahead of the market, innovates, and brings ideas. Looking forward, we have much to do. Our team is energized, focused, and committed. We are piloting ideas, developing more partnerships and programs across countries. We're expanding our relationships across borders, and we are on our way to transform Spar to a global software and services company that can provide end-to-end merchandising, marketing, and distribution services for consumer goods and retail companies, every product, everywhere, every day. Now, I will turn the call over to Faye DeVries, our Chief Financial Officer. to review our first quarter financial results. Then I will come back with a few closing comments.

Thank you, Mike, and good morning, everyone. As Mike mentioned, we have historically operated under two divisions, domestic and international. The domestic division was comprised of all operations within the United States, and the international division was a consolidation of all operations and joint ventures outside of the United States. To better align the business structure with the company's global growth strategy and leverage in regional footprint, the company effective January 1st, 2022 operates under three divisions, Americas, APEC, and EMEA. The Americas division is comprised of the United States, Canada, Mexico, and Brazil. APAC is comprised of China, Japan, Australia, and India, and EMEA is comprised of South Africa. First quarter 2022 net revenues total $59 million, comprised of $43 million from Americas, $9 million from EMEA, and $7 million from APAC. Compared to the prior year quarter, total revenues decreased by 3.4%. Americas decreased over the prior year by 4.9%, EMEA increased by 19.5%, and APAC decreased by 18.1% from the prior year quarter. The total decrease in net revenues was primarily due to a 2021 change in the labor law in the Americas, more specifically Mexico, the impact of COVID-19 lockdowns in APAC, offset partially by revenues from an acquisition in EMEA the anniversaries in July 2022. Gross profit was $11.8 million, or 20.1% of revenues, compared to $12.3 million, or 20.1% of revenues in the prior year quarter. Gross profit margins were positively impacted by realization of gross profit improvement initiative in EMEA offset by unfavorable profit margin mix in Americas and APEC. Selling, general, and administrative expenses were $9.3 million, or 15.7% of revenues, compared to $9 million, or 14.7% of revenues in the prior year quarter. The increase from the prior year quarter was primarily in an effort to normalize operation post-pandemic versus same period prior year as well as continued investments in the growth of the business, partially offset by a one-time favorable adjustment from the majority stockholder change of control agreement accrued in 2021 and realized in January of 2022. Operating income was $2.1 million versus $2.7 million from the prior year quarter. The decrease from the prior year quarter was due to items mentioned earlier. As Mike mentioned, we shifted back to profitability in the first quarter when net income attributable to Spark Group Inc. of $674,000 of $0.03 per share compared to $917,000 or $0.04 per share in the year-ago quarter. Consolidated adjusted EBITDA in the 2022 first quarter was $2.4 million compared to $3.5 million in the prior year. Adjusted EBITDA attributable to SPAR Group Inc. in the 2022 first quarter was $1.5 million compared to $2.3 million in the prior year. You can find the gap to non-gap reconciliations of management's financial measure for adjusted net income attributable to SPAR Group and adjusted EBITDA at the end of today's earnings release. Turning now to SPAR Group's financial position, cash flow, and balance sheet at the end of first quarter. The company's total worldwide liquidity at the end of first quarter was $18 million, with $14 million in cash, cash equivalents and restricted cash, and $4 million of unused availability as of March 31, 2022. For the three months ended March 31, 2022, net cash using operating activities was $3 million, and capital expenditures, including capitalized software, was $478,000. The company had positive net working capital of $24.9 million at March 31st, 2022. With that, I would like to turn it back to Mike.

Thank you, Fay. Given the recent volatility in the markets, we believe investors will be searching for growth at a reasonable price. And we believe that Spar's investment thesis provides investors with a compelling investment thesis to consider. In summary, we provide a solid foundation with over $250 million of revenue from an international blue-chip client base, a global footprint of comprehensive merchandising and marketing services, services that leverage our proprietary software tools that we are continuing to invest in, 2022 and longer-term initiatives to drive top-line growth and margins expansion, and a proven leadership team with a history of transformation success. We truly believe that we are transforming this company from a tactical resource and execution to a strategic, higher margin, next-generation global software and services business. Our customers constantly ask us to do more, be innovative, and partner with them to change the market. Lastly, I want to thank our associates across all nine countries for their outstanding work in the first quarter. I am proud of this team and company. 2022 will be a terrific year for SPAR, and I'm excited to be leading this group. With that, I want to thank you for your interest in our company and for listening to our earnings conference call today. And we look forward to providing an update on our progress when we report second quarter results.

And, ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect and have a wonderful day.