SPAR Group, Inc.

Good morning and welcome to the SPAR Group's fourth quarter and full year fiscal 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you can press star then on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I'll now turn the conference over to Sandy Martin, three partner advisors. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the SPAR Group, Inc.' 's conference call to review 2022 fourth quarter and fiscal year results. Joining me on the call today are SPAR's Chief Executive Officer, Mike Matacunas, and the company's Chief Financial Officer, Antonio Calisto-Pedo. This call is 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, 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 statements made in today's discussion that are not historical facts including statements or expectations of future events or future financial performance, and 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 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 website at sparinc.com. And now I would like to turn the call over to the company's CEO, Mike Matacunas. Mike?

Thank you, Sandy, and good morning, everyone. I am pleased to share our fiscal 2022 results. At the end of our prepared remarks today, we will open the line for questions from analysts and institutional investors. Fiscal 2022 was a transformational year for the company. We successfully grew our businesses, which primarily include merchandising, reset and remodeling, and distribution services, with exceptional strength in the United States and Brazil. Australia was also strong, albeit it's small in comparison to our other geographic footprint. Our 2022 top 10 clients make up 49% of our revenue, which are primarily located in the Americas. These longstanding recurring clients add stability and predictability to our business model. I will speak about our opportunity pipeline and outlook for fiscal 2023 after Antonio provides more details on our 2022 results. I am very pleased with the company's performance for the year. We established priorities and initiatives for 2022, and we met or exceeded our objectives. Our top-line margin and operational initiatives were successfully accomplished in a dynamic and challenging macroeconomic backdrop. The demand environment remained robust throughout 2022, and we were successful implementing technology to advance our recruiting and client service efforts. I'm proud of our entire SPAR team and want to thank them for their hard work and dedication last year. Now turning to our results. We reported record full-year revenue of $261 million, which grew by 3.5% on a constant currency basis. For the fourth quarter, total revenue was $64.6 million, This reflects a strong 7.7% increase year-over-year on a reported basis. On a constant currency basis, which excludes the FX impact, revenue grew by 11.8% over the year-ago quarter. Our Americas segment reported record revenue of $48.6 million, an increase of 20.8%. And the Americas grew organically or on a constant currency basis by 21.2% during the fourth quarter, which was due to strong momentum in the U.S. and Brazil. The Americas segment also includes Mexico and Canada. Within the Americas, the U.S. grew by over 20% and delivered close to $25 million in revenue. Our core merchandising services business grew by 28% in the fourth quarter with the addition of new clients and expansion in our current client agreements. Our resets and remodel business was up 72%, and it is worth noting this division has more than doubled over the past five years, up 113%. The momentum continues as we're working together with more than 20 of the largest retailers in the country, often as a preferred partner, to help them reset categories, remodel locations, and renovate stores. We continue to remain bullish on the prospects of our remodel business as the industry continues to invest in reinventing physical stores across key segments such as big box, discount, drug, and convenience. Our Brazil joint venture reported record growth of 30% in the fourth quarter. This strength is based on winning new business and an expanded share of wallet for existing clients. In addition, we grew EBIT for our Brazil venture by 49%. We've expanded our scope of work for several key clients, including Nivi and Red Bull. And in 2023, we've been awarded a three-year contract with 3M. Adding new logos with large international companies speaks to our positive reputation as a global service partner. Our EMEA segment representing our joint venture in South Africa, reported revenue of $9.4 million, down 2.1%, and on a constant currency basis, expanded by 13.6% over the prior year quarter. We have won new clients, renewed large multi-year agreements, and increased EMEA EBIT on a reported basis of 27%. Organically, EBIT for EMEA grew by a strong 28.5% over last year's quarter. The strengthening of the U.S. dollar devalued the RAND in 2022. Asia Pacific segment reported revenue of $6.7 million, which represents a decline of approximately $3.5 million, or 34.8%. On a constant currency basis, total revenue was down by 26.9% due to China revenue declines of 46%, Japan declines of 33%, India declines of 17%, offset by a strong 25% increase in Australia, albeit small numbers in this joint venture. We continue to watch the APAC market. It makes up approximately 9% of our overall revenue, but it is immaterial to our bottom line. Therefore, we are exploring alternative approaches to improve the leverage of these businesses, ensure we are focused on delivering value for our clients. With a solid organic revenue performance in the quarter of almost 12%, let's now turn to gross margin. Our fourth quarter gross margin was 20.7% compared to 17.7% last year, a 300 basis point expansion. Our Americas segment, which represented 75% of the total business in the quarter compared to 67% last year, grew gross margin to 19.3%, more than a 500 basis point improvement from 14.2% gross profit margin a year ago. Our focus continues to be on pricing, productivity, and leverage of technology during the quarter. Our EMEA segment reported a strong 27.2% gross margin, an improvement of 120 basis points. continue to make progress on merchandiser productivity margin enhancement initiatives this year. I'm pleased that this is reflected in our fourth quarter number. The countries that make up APAC for us, China, Japan, India, and Australia combined, delivered a gross margin of 21.8%, sequentially better than 21.2% in the second quarter, and down 210 basis points from the prior year same period. Notwithstanding the strength in our consolidated gross profit during the fourth quarter, a 41% drop year-over-year in gross margin dollars from APAC impacted our consolidated gross margin percent. We continue to focus on gross profit, and I am pleased with the results to date. I believe there's more opportunity to enhance margins, and we will continue to pursue this strategy. Relative to operating income, we reported consolidated operating loss of $760,000, which had a fair bit of non-recurring noise in the numbers. In the fourth quarter of 2022, we recorded a non-cash goodwill impairment, as well as one-time expenses related to our strategic alternatives announcement. In the same period in 2021, we paid expenses related to the majority stockholders changing control. Without these non-cash and one-time expenses and carving out the APEC segment, our operating income improved from last year in the same period. As I noted in the press release, I expect these expenses and effects to be temporary in nature while we stay focusing on growing the top line and improving gross profits and creating more operating leverage. After Antonio covers the detailed financial results. I will come back and share key strategic wins and then speak about my view on our opportunity pipeline and progress. With that, I will turn the call over to Antonio to review our results.

Thank you, Mike, and good morning, everyone. Today, we filed our Form 10-K with the SEC after filing a 12-B-25 notification of late filing on March 31st. This late filing was written required after we discovered and corrected an error that triggered the material weakness in our internal controls over financial reporting involving international accounting. Now, turning to the financial results, our fourth quarter 2022 net revenues totaled $64.6 million, an increase of 7.7%, which includes $48.6 million of revenue from the Americas, $9.4 million from MAI, and $6.6 million from APAC. As the U.S. dollar strengthened against other currencies this quarter and for the year, a number of our international businesses suffered from significant foreign exchange adjustments. Excluding the foreign exchange impact, our fourth quarter revenue improved by 11.8% on a constant currency basis. Reported revenues by segment for Q4 versus the previous year comprised of the Americas up by 20.8%, EMEA down by 2.1%, and APAC revenues down by 34.8%. As Mike has mentioned earlier, our Americas segment revenue strength was primarily driven by a positive momentum from our reset and remodel work in the U.S. and Brazil. The revenue decrease in EMEA was due solely to negative foreign exchange impacts for our South African business. In constant currencies, EMEA revenues would have been up 13.6% compared to before last year. Headwinds in APAC for the quarter was due to pandemic-related lockdowns in both China and Japan. Australia's revenue was strong, but the numbers are small and did not offset pressure results from other countries for APAC. Fourth quarter gross profit was $13.4 million, or 20.7% of revenues, compared to $10.6 million, or 11.7% of revenues in the prior year quarter. Mike discussed this 300 basis point improvement from the previous year, which was based on initiatives that we implemented during that year. We recorded a non-cash $2.5 million impairment charge for goodwill in the fourth quarter of 2022. Selling general and administrative expenses for the fourth quarter totals 11.2 or 17.3% of revenues compared to $13.2 million or 22% of revenues in the prior year quarter. STNA increases in 2022 included a 1.2 million bad debt write-off on one customer that filed for bankruptcy in the US, as well as fees, correction there, sorry, did not file for bankruptcy, is facing financial hardship, as well as fees for the strategic alternative advisory work. Also, in the prior year, we recorded a majority shareholder change in control costs. The fourth quarter operating income was $760,000 versus operating income of $3.1 million in the previous year quarter. Net loss attributable to SPAR Group Inc. for the fourth quarter was $351,000, or two cents per share, compared to a net loss of $4.4 million. Excuse me. Excuse me. Net loss attributable to SPAR Group Inc. for Q4 was $351,000, or 2 cents per share, compared to a net loss of $4.4 million, or 21 cents per share, in the year-ago quarter. Adjusted net income attributable to SPAR Group Inc. in the quarter was $1.9 million, or 8 cents per share, compared to a loss of $644,000, or 3 cents per share, in the year-ago quarter. Consolidated adjusted EBITDA in the 2022 fourth quarter was $5.2 million compared to a loss of $1.2 million in the prior year quarter. Q4 adjusted EBITDA attributable to SPAR Group was $4.1 million compared to a loss of $3 million in the previous year quarter. For the year, net revenues were $261.3 million at 2.2% from the year-ago period. For the segments, year-to-date revenues were $198.6 million for the Americas, representing 76% of the total revenue, while the MEA was $36.7 million, or 14% of total revenue, and APAC was $26 million, or 10% of revenue. Gross profit for 2022 was $51 million, or 19.5% of revenues, compared favorably to $47.5 million, or 18.6 percent of revenues in the prior year period. Growth margin increased 90 basis points. The improvement was due to strength in Americas, up 180 basis points, and EMEA growth margin was up 210 basis points due to successful improvement actions and favorable mix shift in certain markets. Despite strength in the other two segments, APAC negatively impacted by margin, excuse me, APAC negatively impacted margin by 380 basis points due to pandemic lockdowns for the year. For the year, we reported a non-cash $2.5 million impairment charge for goodwill that we mentioned for Q4. SCNA expenses were 41.1 million or 15.7% of revenues compared to 36.8 million or 14.4% of revenues in the prior year periods primarily due to a rebound of business from the pandemic. In addition, the full year results included one year expenses that are not part of the run rates STNA costs. Full year operating income was 5.4 million versus 4.2 million the year ago period. For the full year, net loss attributable to Spar Group Inc. was 732,000 or 3 cents per share compared to $1.8 million or $0.08 per share in the year-ago period. Adjusted net income attributable to SPAR was $1.6 million or $0.07 per share, compared to $2.6 million or $0.12 per share in the year-ago period. Consolidated adjusted EBITDA for the full year was $10.8 million, compared to $11.9 million in the prior year. Excluding the non-controlling interest, adjusted EBITDA attributable to Spark Group Inc. was $6.1 million compared to $7 million in the prior year. You can find the gap to non-gap reconciliation of management's financial measures at the end of today's press release. Now, turning to the company's financial position as of December 31, 2022. The company balance sheet remains strong. and the total worldwide liquidity at the year end was $14.7 million with $9.3 million in cash, cash equivalents and restricted cash, and $5.4 million of unused availability at the year end. The company's working capital as of December 31st was $26.4 million, and the accounts receivable balance was $63.7 million. Finally, for the year, We repurchased 151,156 shares of SGRP common stock under our board-authorized share repurchase program. With that, I would like to turn back to Mike.

Thank you, Antonio. Last fall, we announced that the board had initiated a process to evaluate potential strategic alternatives to maximize shareholder value. This process includes a full range of options, including a sale, merger divestiture, going private, as well as other potential value creation opportunities to accelerate our growth and return profile as a publicly traded company. The management team is fully engaged on exploring ways to unlock value for the shareholders of SPAR. We have not concluded this process yet, and I do not have an update today, so I will not be answering questions related to the company's strategic alternatives process after our remarks. As I mentioned earlier, We made significant progress with our long-term strategic goals, both short-term and longer-term. We organically expanded the U.S. business by expanding store experience and remodeling services. We also established fulfillment solution capabilities, expanded our services in Canada, developed a talent framework, and invested in establishing a data lake with expanded analytics of our Sparview technology. A quick example of our talent framework advancement was evidenced in Q4 as we hired over 2,400 reps using artificial intelligence. This is the way our reps like to sign up for work on our platform. With regard to gross margin, our internal initiatives resulted in margin expansions in 2022, especially during the fourth quarter. Our business has not slowed, our pipeline is robust, and we have continued to take market share from our competitors. While we recognize that there are macro headwinds, we do not expect this to have a meaningful impact on our plans. Our business is resilient. We work with brands and retailers that are needed in any economic environment. Whether customers are trading up or down, Our largest 10 clients include those in the discount retailing market, large box retailers who are continuing to open stores, and brands that sell consumable products that people need every day, like food products, pharmacies, and more. Many of these companies have been announcing comparable sales growth and business expansion. Most businesses are looking for ways to optimize their cost structure. We've begun discussions with a number of clients and prospects that have input cost pressures and margin challenges and are exploring how SPAR can provide incremental operating leverage. For those with large field organizations, they're asking us about syndicated models that share expenses, better use of technology to capture insights, to make targeted visits, and multi-country agreements that can create leverage for them. As I mentioned last quarter, our only constraint to growing our business is access to labor. We've invested in recruiting resources dedicated to identifying this future SPAR team member. We've also invested in technology to remove the friction from hiring to paying our people. Our recruiting track record to date has been quite good. We are tracking our contact hour conversion rate weekly to ensure that we are attracting the right talent and leveraging all of the appropriate technology. Now, let me make a few comments about our pipeline and opportunities. As I noted earlier, we are not seeing a softening of the business. In the fourth quarter, we closed on multi-year contracts that have potential for revenue of $32 million, in addition to many other million-dollar or smaller contracts. A typical profile for one of these larger agreements is either replacing a competitor and providing in-store merchandising across the geography, we're assuming responsibility for a number of store remodels. Looking into 2023, we have several active multimillion-dollar opportunities in our pipeline across the U.S., Brazil, South Africa, and India. The health of our pipeline improves our ability to expand client relationships and wallet share across borders. This is something that is unique to Spark in our global marketplace. An area that we continue to aggressively lean into is retail analytics and technology tools. We've invested in resources offshore to our India business to expand our business insights and analytics offering. We've taken lessons learned from the best branded retailers in the world while capturing data from every visit to provide insights to opportunities and the performance challenges for our clients. These resources support our business and clients in multiple countries. We continue to believe that the application of artificial intelligence is important. We captured more than 19 million pictures globally in 2022. and more than 32 million inventory data points just in the United States. Our vision is to turn each of these data points into value creation for our clients by applying machine learning and artificial intelligence. Earlier this year, we launched our partnership with Parallel Dots to apply image recognition, and we now have expanded this by applying AI tools on top of our Sparview images to solve broader business challenges. We made great progress in 2022 in expanding our data analytics and insights work. We're privileged to work with some of the best companies in the world, such as Family Dollar, Walmart, 3M, CVS, Nivea, Foster Grant, Cargo, McKesson, Advanced Auto, P&G, and many, many more. Many of these are longstanding relationships that provide recurring revenue for us. We aspire to earn more of their business while winning new clients and pursuing our long-term vision to be the most creative, energizing, and effective merchandising, marketing, and distribution services business on the planet. This is our ambitious goal. Let me wrap up my comments by again thanking our team. and recognizing their dedication and commitment each day. I'm grateful that I'm allowed to work with this incredible group of people and look forward to an even brighter future. With that, I'd like to open the line for questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to sum up our roster. Our first question will come from Theodore O'Neill with Litchfield Hills Research. You may now go ahead.

Thank you very much. Mike, it sounds like you were saying that you're taking market share from some of your competitors. I was wondering if you can expand on that a little bit.

Yeah, Theo, thank you for the question, and good to hear. Thanks for joining this morning. Yeah, we've had a few opportunities, particularly in the early part of 22, we saw a lot of them, and we're starting to see them again early in 2023 in some segments, in particular cosmetics, for example. We, in a large retail pharmacy business here in the United States, one of our competitors had sort of abandoned that space and said they didn't want to do that work. The client, who's also a client of ours, reached out to us, and asked if we would pick that up over thousands of locations. So we're seeing some of that. Second example, in a large multi-box discount retailer, I'm just picking some U.S. examples, for example, we were asked to pick up on one of the large consumer brands. Because they had so many locations, the consumer brand was disappointed with how the integration of the business that was serving them was going. They had been rolled up in one of the acquisitions in the marketplace of a competitor of ours, And they reached out to us because they felt very strongly about SPAR, SPAR's management and the way we had served them at other businesses and gave us half of that business and took it from our competitors. So we're continuing to see that. And lastly, I would say we're seeing as much where organizations or brands have field merchandising teams where they're turning to us and asking us to take some or all of that business just because they've found it difficult to recruit and know that that's one of our core competencies is to attract and engage labor to do the work. So we've been picking up more of that, and that has continued into this year as well. Does that help answer the question?

It does. And, you know, the media is focusing on the retail side about layoffs, and so the view seems not great, but you're saying that you're better positioned here for that kind of environment based on the customer mix you've got.

Yeah, and a little of this I'll comment with my retail background. You know, I spent many years in a senior retail role. In the retail model, you can hire two types of people. You can hire a full-time person or a part-time person. Your part-time is 20 to 24 hours. But oftentimes the work doesn't consume 20 to 24 hours, and that's one of the most expensive resources you can spend as a retailer between that and your inventory. When they find a truck day, for example, comes in and they need two people, but they need them for four hours, or they need to replenish product. where they need to reset the shelf at a particular department. They need someone for four to eight hours. And to be able to do that as a variable expense is really attractive to the retailer in that case. And they're starting to shift more of that to us. So in some of our large clients, for example, they're turning to us instead of adding more part-time labor, they're turning to us and giving us more hours to do, you know, consider it eight to 16 hours worth of work each week. So I think that's an opportunity for us for the next few years.

Okay, and there were fees related to exploring strategic options in the quarter. Will that continue into 2023?

We have allowed for a little bit in 2023, I quite candidly feel. As I said, the process is ongoing. I don't have a lot more to offer at the moment. But, yeah, we've carved out and note some of that in 2022 as well.

Thank you very much.

Thanks for your questions.

Again, if you have a question, please press star then one. It appears there are no further questions. This concludes our question and answer session. I would like to turn the conference back over to Mike for any closing remarks.

Operator, thank you. Just quickly, thanks for all who listened and participated today. If you're interested in our company and listening to the earnings conference call today, I look forward to providing an update of our progress and report the first quarter results. Thank you again.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.