SPAR Group, Inc.

Good morning and welcome to the SPAR Group third 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 touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Sandy Martin, three-part advisor. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us for Spar Group, Inc.' 's conference call to review 2023 third 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. The 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 today in today's discussion that are not historical fact, including statements, expectations, future events, or future financial performance are 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 today's earnings press release 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 update or revise any forward-looking statements publicly. 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 Metakounis. Mike?

Thank you, Sandy, and good morning, everyone. I am pleased to share our third quarter results. At the end of our prepared remarks today, we will open the line for questions from analysts and institutional investors. On a consolidated basis, our third quarter revenue was down 3.6%. Our results reflect growth in our merchandising services, strong progress in distribution services, and the beginning of a recovery in our remodel services. For merchandising, our U.S. merchandising business grew by 27%. Canada merchandising grew by 23%. Mexico by 28%. And Brazil by 10%. We believe there is material incremental opportunity and a growing addressable market as more brands and retailers turn to us for the last product touch and driving consumer experience. We bring both scale and speed. The great strength in our merchandising services business was offset on a consolidated basis by our Asia-Pacific businesses, our smaller joint ventures, and the U.S. remodel business is now beginning to recover in the current quarter after slowing earlier in the year. As a reminder, I shared on prior calls that some of our remodel clients had pushed out or delayed remodel work. We expect this to fully recover over the next 12 months, and we are positioned to take even more share as we look forward. Our distribution business had an exceptionally strong third quarter. We launched this business 24 months ago, and we are building momentum each quarter. While it is on a base of small numbers, it was up 10x in the third quarter over the prior period last year. Our Asia-Pacific business represents 8.4% of our revenue, but declined 21% in the third quarter. EMEA, which is comprised of South Africa, which now makes up 11.7% of our revenue, declined 12%, making our performance in the Americas which is the United States, Canada, Mexico, and Brazil, the cornerstone of our results. Against the lower consolidated revenue, we delivered 4% more margin dollars and an incremental 150 basis points of gross margin percent in the quarter. This is our fourth successive quarter in a row of gross margin percent improvement. For the third quarter, the U.S. merchandising gross margin was up 290 basis points. South Africa, while challenged on revenue, increased gross margin percent by 90 basis points, and Brazil delivered a 230 basis point improvement over the same period last year. I am pleased with our continued progress and profitability and our ability to successfully recruit, retain, and reward great talent to serve our clients. As a note, we are up 140 basis points year-to-date on consolidated gross margin percent. Consolidated EBITDA was approximately $2.1 million against approximately $2.2 million for the same period last year. Within this number, you will note that our attributable adjusted EBITDA is up 21.5% year-on-year for the quarter. In short, our shareholders own a greater percentage of the EBITDA than last year. This is not a single quarter change. Attributable adjusted EBITDA is up 23.8% for the first nine months of the year. Lastly, operating income was 1.5 million, and our consolidated net income was 1.1 million compared to 900,000 for the same period in 2022. I've noted in prior calls that clients had delayed remodel and transformation projects early in the year. We began to see the first signs of recovery in this business in the third quarter. While the U.S. remodel business was still softer than the same period last year, it was up 60% over the second quarter this year. One of the other exciting developments in this market is the growth of of this service in Canada. Our expectations for Canada remodel work in 2023 included growth of over 400% for this part of our business. Again, I expect the remodel and transformation service business to take another nine to 12 months to fully recover, but retailers are all looking for ways to engage the consumer, refreshing the assortments in the store, changing the footprint to enable directly online fulfillment, and exploring alternative checkout solutions. We believe there is great potential in this market, and this will be a sustainable, repeatable business for SPAR. 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 the results.

Thank you, Mike, and good morning, everyone. Third quarter 2023 net revenues totaled $67.3 million, a decline of 3.6% on reported numbers. Net revenues included $53.8 billion of revenue from the Americas, $7.9 million from EMEA, and $5.7 million from Asia Pacific. Reported revenues by segment for Q3 versus the prior year were essentially flat for the Americas, while EMEA declined 12.1%, and APAC revenues declined by 20.6%. As Mike mentioned earlier, our American segment reflects strong merchandising revenues with softness from the U.S. client store remodels that have been pushed out. Similar to the second quarter, we continue to see strong sales momentous for the third quarter related to merchandise services in the U.S., Canada, Brazil, and Mexico. Third quarter gross profit was $13.4 million, or 19.9% of revenues, compared to $12.8 million, or 18%. of revenues in the prior year quarter. Mike discussed this 150 basis point improvement from the prior year, which was based on improvement contract terms and pricing, system enhancements, and other cost containment, as well as services makeshift in the quarter. Selling general and administrative expenses for the third quarter totaled $11.3 million. or 16.8% of revenues, compared to $10.6 million, or 15.2% of revenues, in the prior year quarter. SG&A costs included non-recurring items primarily associated with the project to review strategic alternatives, which totaled $143,000, as well as other corporate costs during the third quarter. The third quarter operating income was $1.5 million, down 10.4%, versus operating income of $1.7 million in the prior year quarter. Net income attributable to Spar Group Inc. for Q3 was $259,000, or 0.01 per share, compared to a net loss of $32,000, or zero per share, in the year-ago quarter. Adjusted net income attributable to SPAR Group Inc. in the quarter was $570,000 or 0.02 per share compared to $212,000 or 0.01 per share in the year-ago quarter. Consolidated adjusted EBITDA in the 2023 third quarter was $2.5 million and changed from the prior year quarter. Q3 adjusted EBITDA, attributable to Spark Group Inc., was $1.5 million, up from $1.2 million in the prior year quarter. Now, turning to the company's financial position as of September 30, 2023, the company's balance sheet remains strong, and total worldwide liquidity at quarter end was $12.4 million, with $8 million in cash, cash equivalents, and restricted cash, and $4.4 million of unused availability at corner ends. The company's net working capital as of September 30 was $27.5 million, and the accounts receivable balance was $65.7 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 sales, strategic M&A deal, or going private transaction to name just a few options. The management team and I are fully engaged with the board in exploring ways to unlock value for the shareholders of SPAR. While I appreciate that this process may be taking longer than most initially expected, I would encourage you to be patient. We've not completed this process yet. I do not have an update today, so I'll not answer your questions about the company's strategic alternatives process after our remarks. As part of leading a global business, we have the responsibility to constantly assess and evaluate the performance of a complex set of variables. On the one hand, we need to develop broad and strategic relationships with some of the world's most impressive brand companies, such as P&G, Clorox, Kraft Heinz, Lindt, et cetera. Secondly, we need to monitor the economies of each operating country to make good investments and optimize our capital. This means staying up to date with interest rates, fiscal policies, tax requirements, and more. Third, we need to enable leadership at each operating company and business to succeed. This could take the form of working alongside our leaders in each country or can mean investing in their infrastructure for growth and profitability. After nearly three years leading the company, I have had the opportunity to evaluate each operating entity to leadership, economies, and our opportunity. The result of this evaluation is that not all parts are created equal. We have reviewed each part of our business for its performance, its potential, and likely capital needs. On behalf of our shareholders, our responsibility is to build and operate the most successful, focused, and profitable businesses. As a data point, the growth of our core U.S. merchandising business of 27% in the third quarter and 72% top-line growth in our Canadian business are a good example of the material market opportunity we have in North America. There's so much more we can do with the sum of these incredible clients. Spar is one of the most unique and successful services business in the market. We have a tangible window of opportunity for the next several years to take more market share, grow the bottom line, and expand our value-added services. Many of our competitors are distracted or entangled. We have a clarity of purpose and opportunity. This is a great time to be Spar. While we are intensely focusing on building from our strength, we will be working aggressively to reduce our U.S. debt and related interest expense. We have undertaken a number of initiatives to repatriate cash and ensure we optimize the use of every dollar on behalf of our shareholders. This is completely aligned with how we think of the market opportunity. As more and more large clients turn to us, take over their field organizations or provide services, we're exploring improved terms that improve our liquidity and reduce our carrying expense. In our first discussions with key clients with these terms, we have found willing partners. They see SPAR as a strategic partner and our success means their success. Our relationships with these large clients spend years. We have long tenured client relationships and partnerships. This provides us more opportunity, but it also means we've become an important part of how they operate and succeed. In a way, their success is connected to our plans and growth. Our focus on operating results, portfolio contribution, capital structure, will evolve over the next few quarters, but I'm confident this sets Spar up for years to come as a strong, leading services provider. One of the other exciting changes at Spar in the quarter was the seating of three new board members. We named a new chairman and two other independent directors. These appointments advance the company's corporate governance work, and I am delighted to welcome James Gillis as our new chairman of the board, as well as two new directors, Ms. Linda Houston and Mr. John Bodie. These highly respected business leaders Each brings valuable experience to further enhance and balance the diverse skills on the board and develop our strategic growth plans to unlock value. We, and I personally, look forward to benefiting from their expertise as Spar Group continues to accelerate its business strategy and build on its position as a leading global merchandising, marketing, and distribution services company. And lastly, before we open up 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 is our clients. We need to perform at a world-class level. Our mantra is every client, every day. Thank you for your commitment, passion, and dedication thus far. I'm grateful to lead this outstanding group of people and look forward to building shareholder value and generating revenue, profitability, and incremental cashflow. 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 one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. The first question is from Theodore O'Neill of Litchfield Hills Research. Please go ahead.

Oh, thanks very much. Hey, Mike, in the last quarter, you talked specifically on the remodel business about big box stores that are remodeling to handle pack and ship, and you also talked about small box stores introducing perishables. And I was wondering, is all that being pushed out or just part of that?

First of all, Theo, I appreciate the question. Good to hear from you. No, some of the ones that are moving, and again, we're already experiencing recovery on this. Some of the notes I made a moment ago that we're up 60% from second quarter to third quarter back in our remodels. I'm hoping it'll be fast, but it could take anywhere to the first half or a little bit later next year to come back fully. But a lot of the things that moved were the big box stores. The small box, meaning a lot of that's in the discount space. We didn't see as much slowing in that space, so it was more in the larger boxes.

Okay. And what's driving the merchandising growth in Mexico? Is this just a rebound from the employment law changes, or is there something else going on there?

Now, one of this is we picked up a really great big new client that we started to work in the third quarter. It's a large chocolate brand, and that contributed significantly to the quarter results. Part of the challenge in Mexico still remains for us to get our cost structure right, but now that we've got the top line moving in the right direction, I'm bullish on fixing that at the same time over the next couple of quarters.

Okay, and I don't know if you've given any – guidance on this, but gross margins between merchandising and the remodel business, is there any significant difference?

Yeah, that's a great question. There is. And some of what we see the benefit of when merchandising grows so quickly and has grown over the last four quarters, it's a much healthier margin business for us than remodels. And the biggest factor is that remodel work often involves travel. And so the travel is baked into the rate. So you can get a merchandising business that is almost twice the margin of remodels. So as merchandise continues to grow, that will give us some margin space and allow us to even pursue and grab more land share on the remodel, the way I'm thinking about it, over the next couple of quarters.

Okay, thanks very much. Good to hear from you.

Again, if you have a question, please press star, then 1. This concludes our question and answer session. I would like to turn the conference back over to Mike Matakunis for closing remarks.

Thank you, Operator. Just, again, thank you for each participating in the call and listening to our next conference call. I look forward to providing an update on our progress on the next quarter. I'm excited about the next several quarters and our opportunity in the market. So, appreciate it, and thank you again for listening.

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