SPAR Group, Inc.

Good morning, and welcome to the SPAR Group second quarter 2023 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist 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 may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Sandy Martin with three-part 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 2023 second quarter results. Joining me on the call today are SPAR's Chief Executive Officer, Mike Matacunas, and the company's Chief Financial Officer, Antonio Calistopato. 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, 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, prior 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 will we issued earlier today is posted on the Investors Relations section of our website at sparinc.com. A copy of the release has also been included in an AK submitted to the SEC. 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'm pleased to share our second quarter results. At the end of our prepared remarks today, we will open the line for questions from analysts and institutional investors. The first half of 2023 has been the strongest six months in the history of the business. Revenue, gross profit, EBIT have all reached new levels. As I've said in the past, revenue can move between quarters, but our client agreements and services are longstanding and have consistently been expanding. But the heart of our business are merchandising and marketing services. This is the legacy of the company and work we do for some of the world's largest businesses. These services have continued to grow as businesses look to outsource this work to third parties. Our merchandising services grew by 16% in the United States for the second quarter, 18% in Brazil, 9% in Mexico, and so on. Year-to-date, these services in the United States are up 28%, There's strong improvement in related gross margin. In short, the core of our business is strong and growing. Our U.S. remodel business, in which we assist retailers in staging, renovating, repurposing the sales floor, and overall improvement, the physical store, has started the year slower than it finished in 2022. Our clients have been delaying projects into future quarters. This is likely a reaction to the rising U.S. interest rates. As a reminder, remodeling stores is a staple of operating a retail business. Every store needs to be cared for and renovated at some level every few years. What has accelerated the need for this work is the growth of online and shift in consumer buying habits. The consumer is looking for a wide assortment of product in their neighborhood retail stores. So, for example, we are working with a large company small box store with thousands of locations to introduce perishables into their assortment. This requires resetting the floor layout, changing fixtures, et cetera. Related to the growth of online, the large box retailers in particular are converting space in their stores to pack and ship online orders. We've been doing this work for the last few years with our clients. I expect more to come as we head into the holiday season at the back end of this year. While I'm disappointed at the performance of our remodel business year to date, I'm confident this work remains in front of us. As the demand hasn't dropped, the schedule has extended. The last item I will mention before going through the highlights of the second quarter is the fluctuation of currencies and the impact on our business. Let's use South Africa in the second quarter as a prime example. Our business in South Africa performed well in the second quarter. We grew the top line in local currency by 7%. Our leadership and team in South Africa did a really nice job staying ahead of the impact of a slowing economy. A lot of our clients are consumable clients that are less impacted by inflation, such as P&G, think diapers, or baby formula. The rising interest rate in the U.S. has increased demand for the U.S. dollar compared to the South African RAN. The impact of the currency exchange rate for us was to turn a 7% growth for South Africa into a 10% decline in U.S. dollars. As we continue to successfully grow our international businesses, I would ask that you note the operational health of these businesses. regardless of the conversion of currency fluctuations. Turning to our second quarter results, our consolidated revenue was $66 million, a decline of 2.7% from the prior year same period. Our gross profit was 13.1 million, up 1%. Operating income was 2 million, and our consolidated net income was 1.1 million compared to 1.6 million for the same period in 2022. On a constant currency basis, our consolidated revenue would have been 68.4 or up half a million dollars, or approximately 1%. The exchange rate impact was a negative $2.4 million. Breaking our revenue results by segment, the Americas, which includes the United States, Canada, Mexico, and Brazil, represents approximately 79% of our revenue in the quarter. EMEA, which reflects South Africa, represents about 12%, and Asia Pacific, which includes Japan, China, India and Australia is now 9%. Our second quarter revenue in the United States was a tale of two cities. Merchandising services were up 16% over last year and remodeling services down. For merchandising, we continue to see growth in the quarter. We've added new clients, increased our productivity, and improved margins. On our remodeling business, retailers delayed planned projects and store remodels. which is shifting expected revenues out of the first half into the second half of 2023 and, in some cases, into the first part of 2024. We have no indication yet that these projects have been canceled, so we believe this is a seasonal shift from prior patterns and a temporary reaction to rising interest rates. A small but important bright spot, we saw an increase in unplanned work in the second quarter related to our U.S. clients, which speaks again to the scope of our relationships and the preference of our clients who reach out to spar when they have important work. Canada had an outstanding second quarter. Our Canadian revenue increased 48% compared to the same period last year. This is a reflection of the intentional focus we began to apply when expanding this business as of mid-2022. I expect this trend to continue in Canada under the leadership of Mianna Reid and oversight of Ron Lutz, our Global Chief Commercial Officer. Brazil also had a strong second quarter with revenues increasing 18% over the prior year same period. The team in Brazil has really generated excitement with brands and large clients over the last few years. We base our operations in Sao Paulo, but the impact and services are provided across the country. Mexico had a solid quarter of 9% over the same period last year. I wanted to make a particular note of this as our efforts to rebuild this business post All of the legislative change in Mexico has taken root. Turning our attention to EMEA or South Africa, revenue in the second quarter was down 10% from the prior year. This is entirely explained by currency conversion. In constant currency, revenue is up by 7%. While I'm displeased by the exchange rate impact in our business, I appreciate the work and efforts of our team in Johannesburg, Cape Town, Durban, and other parts of South Africa. that continue to provide great services for our clients such as P&G, Nestle, Woolworths, Rhodes Food Group, Akel, JDE, and more. Asia Pacific, that includes Japan, China, India, and Australia, increased revenue by 5% and gross profit by 500 basis points. While this is a small part of our business, I want to call out Australia that grew top line by 28% over the same quarter in 2022. Based on the results, We've established a solid footing after a challenging two years in Australia under the leadership of Craig Zealy and Dean Nixon. After Antonio covers the detailed financial results, I will come back and share additional thoughts and insights about the business. With that, I will turn the call over to Antonio to review our results.

Thank you, Mike, and good morning, everyone. Second quarter 2023 net revenues totaled $65.9 million, a decline of 2.75% on reported numbers, but a growth of 0.8% on the constant currency basis. Net revenues comprised $52.1 million of revenue from the Americas, $8.2 million from EMEA, and $5.7 million from Asia Pacific. Reported revenues by segments for Q2 versus the prior year included a decline of 2.2% in the Americas, while EMEA declined 10.3%, and APAC revenues increased by 5%. As Mike mentioned earlier, our American segment revenue softness was a result of U.S. client store remodels that have been pushed out, offset somewhat by strong U.S. merchandising services, as well as momentum in Brazil and Canada. Second quarter gross profit was 13.1 million or 19.9% of revenues compared to 12.9 million or 19.1% of revenues in the prior year quarter. Mike discussed this 80 basis points improvement from the prior year, which was based on improved contract terms and pricing, system enhancements, and other containment, as well as services mix shifts in the quarter. Tallying general and administrative expenses for the second quarter total $10.6 million, or 16.1% of revenues, compared to $10.1 million, or 14.9% of revenues in the prior year quarter. SG&A costs include the non-recurring items primarily associated with the project with the strategic alternatives, which totaled $111,000, as well as other corporate costs during the second quarter. The second quarter operating income was $2 million, which is down 15.2% versus operating income of $2.4 million in the prior year quarter. Net income attributable to SPAR Group for Q2 was $639,000, or 3 cents per share. compared to an net income of $1.1 million, or 5 cents per share, in the year-ago quarter. Adjusted net income attributable to SPAR Group in the quarter was $696,000, or 3 cents per share, compared to $1.3 million, or 6 cents per share, in the year-ago quarter. Consolidated adjusted EBITDA in the 2023 second quarter was $2.6 million compared to $3 million in the prior year quarter. Q2 adjusted EBITDA attributable to SPAR Group was 1.6 million compared to 2.1 million in the prior year quarter. Now turning to the company's financial position as of June 30, 2023. The company balance sheet remained strong and total worldwide liquidity at quarter end was $19.8 million with a $10.9 million in cash, cash equivalent and restricted cash, and $8.9 million of unused availability at quarter end. The company's working capital as of June 30th was $27.2 million, and the accounts receivable balance was $63 million. With that, I would like to turn it back to Mike.

Thank you, Antonio. As we updated you last quarter, management and the board are still running a process to evaluate potential strategic alternatives to maximize shareholder value. This includes a full range of options that we have shared, including a sale, strategic M&A deal, or a going private transaction, to name just a few options. The management team and I are fully engaged with the board on exploring ways to unlock value for our shareholders, SPAR. We have not completed this process yet, and I do not have an update today. So I'll not be answering questions related to the company's strategic Alternatives process after our remarks. Beyond the curtain of financial results, I'd like to provide our shareholders more insight to the extraordinary effort and commitment of our team. First, I want to highlight the diversity, equity, and inclusion initiative that we launched at the start of the year. We formed a committee of professionals from different levels in all parts of our company to enhance our business, expand our thinking, and ensure SPAR as a place for everyone. I believe embracing diversity of all types makes us a better organization and enables us to create more value for our shareholders. I'm proud of this team and committed to this effort. In addition, members of our organization have won or are currently a finalist in a number of competitive industry awards. I couldn't be more proud. Recently, Tom Knight, our head of talent acquisition of the U.S., received an award as a top 50 talent acquisition professional. Danny Kraft, our head of marketing and our team, our finalists in a top 100 marketing organization competition, and this is just a sample. As a shareholder, I'm proud of the people in the organization and level of talent that is committed to SPAR making a difference every day on our performance and ultimately the value we deliver to our shareholders. With a few other comments, let me provide a brief update on the growth of our fulfillment services business. This is a business we launched in late 2021, and I'm pleased it's on track to deliver nearly $5 million in of net new revenue for 2023 in our U.S. business. We expected this to take 12 to 18 months to get off the ground, and we are exactly where we want to be. We provide resources to support online delivery distribution centers, provide resources to test and prepare new facilities, and we provide fulfillment services for point-of-purchase materials for a number of our clients. As the demand for online shopping remains stable or grows, this positions us to grow with it. Based on our legacy of being the last person to touch the product before the consumer stores, we are growing our business to be the last person who touches the product as it goes in a box to be shipped. I also want to touch on the subject of technology. One of the ways we win is with our Sparview portfolio of applications and software. We have software that enables field merchandising work, remodel work, training, scheduling, geofencing, image recognition, and much more. I've shared before that we invested great effort over the last two years to move the backbone of this technology to the cloud, and I'm pleased to report that this work is done. We captured more than 19 million photos last year, and the growth of our business was outrunning our technology. We solved this by partnering with Amazon Web Services across all of our business, all countries. As a reminder, unlike any competitive tools in our space, Sparview is in multiple languages, including Japanese, and used across eight of our nine countries. Beyond the application itself, we've made great strides in expanding the analytics we provide clients. I stated a few quarters ago that this was an important area of focus, and I'm pleased with the progress to date. We have leveraged the resources in our business in India to build out a standard set of dashboards and reporting for clients to give them insight to demand, potential line of stocks, and more. Lastly, before we open the call to questions, I want to thank each of our team members, managers, leaders, and joint venture partners. Because we have the privilege of working with some of the most successful companies in the world as our clients, we need to perform at a world-class level. Our mantra is every client, every day. This can be exhausting and invigorating at the same time. Thank you for your commitment, passion, and dedication to SPAR. I am grateful that I get to lead this outstanding group of people and look forward to building shareholder value and generating revenue, profitability, and incremental cash flow. With that, I would 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 are 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 will pause momentarily to assemble our roster. Our first question is from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Thanks very much. Mike, I appreciate your comments here about these stores adding perishables and big box stores adding pack and ship. I was wondering... if you're seeing any changes driven by the sort of high level of retail theft that's going on, like we saw in Los Angeles last week.

First of all, can you hear me okay?

Yes.

I'm good, thanks. Just checking. First of all, thanks for your question. We are having discussions with retailers, and I can't say two years ago we had the same. So because you've seen a lot of this in the press where the shrink number has gone up dramatically, What we've been tasked with is to have our team who's doing analytics look for any indicators or data that might suggest shrink is rising. So, for example, looking at stockouts to using our images in a creative way. So when we take an image of a four-foot span of shelf, does it give any indication of an area that looks like it has more stockouts than it should have, even if we're not touching that particular product? We are having some very interesting creative discussions about that because I think that will continue to be a challenge for retailers in the next 6 to 12 months. It's a great question.

Thank you. And I asked the question because I was in a large national supermarket chain that had added a whole bunch of things to the shelves that make it more difficult to grab product and put it in your cart. And I was wondering if that's the sort of thing that would be part of a remodel for you.

Yeah, we haven't seen a lot of the devices that retailers put in as part of our remodels yet. We're seeing it more as an indicator, like can we get a sense of whether shrink is happening? Retailers count shrink two different ways. They count it once a year, which means it's very hard to get your arms around it in real time. You don't see it coming until you count it or you cycle count it. So you'll look at a certain department, for example, As we all know as consumers, we haven't been able to buy razor blades in years without getting somebody with a key or some authority to help open the space up for us. So they cycle count the things that are typically high theft in that case. So now retailers are asking us to look at lots of other categories more regularly than we're used to when we're doing merchandising. But we haven't had a lot of that remodeled because that's an incremental cost to the retailers that I don't think they've yet determined as a return on investment for them.

That makes sense. Are you seeing any trends in stores trying to remove cashiers and go sort of use your platform to do automatic checkout?

We haven't yet. I will say over the last year, a few forward-thinking retailers have asked us about, can you take the idea of image capture, the same tech used for the barcode or the packaging itself, and use that for self-checkout? But we haven't had anybody who's ready to sort of take that leap yet. You know, we're aware, as you are, there are businesses that are testing the customer self-checkout by pick it up, put it in your basket, and walk out. But I haven't really seen any tailwinds behind that yet. I think there's still plenty of technology hurdles to get over before we're all walking out without checking out. Okay, thanks very much.

Again, if you have a question, please press star, then 1. Please stand by as we poll for questions. Showing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Michael Matacunas for any closing remarks.

Well, again, Operator, thank you for turning it back. Just for those who are listening and those who may listen to the recording, just want to thank you for your interest in SPAR and for listening to our conference call today. I look forward to providing an update of our progress when we report the third quarter results. And thank you again.

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