SPAR Group, Inc.

Good morning, and welcome to the SPAR Group Second Quarter 2024 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. Please note, this event is being recorded. I would now like to turn the conference over to Sandy Martin of Three Part Advisors. Please go ahead.

Thank you, Operator, and good morning, everyone. We appreciate you joining us for the Spar Group, Inc. conference call to review the second quarter 2024 results. Joining me on the call today are Spar's Chief Executive Officer, Mike Matakunas, and the company's Chief Financial Officer, Antonio Calisto-Pato. 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 in today's discussion that are not historical facts, including statements, expectations, 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 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. A release copy was also included in the eight case submitted to the SEC. Now I would like to turn the call over to the company's CEO, Mike Matacunas.

Thank you, Sandy, and good morning. I am pleased to share our second quarter results and continued progress. We will not be opening the line for questions today in light of our announced co-private transaction that is in process. We announced on June 5th that we signed a letter of intent with Highwire Capital to take Spar Group private. This process is ongoing. and we will make additional announcements as we complete the appropriate steps. For the second quarter, our consolidated revenue was $57 million as we exited several global joint ventures in the quarter, and the performance of these businesses was in last year's numbers. To be specific, note that South Africa, China, Australia, and National Merchandising Services revenue was not in our 2024 second quarter numbers. Brazil was in two of the three months in the quarter. We realize this makes comparing our performance difficult as we complete the simplification of our business. Perhaps the best way to think about our second quarter is to look within our America segment that made up 94% of the company's total quarter revenue. Let's look at the United States and Canada specifically. These are our core businesses, and they had a strong performance. The United States revenue was up 37% over last year. You may recall that our remodel business had slowed in the second quarter last year while clients pulled back on capital projects. As I noted in last quarter's call, the remodel business recovered faster than we expected and grew by 88% over last year in the second quarter. We've added new clients and expanded our key client relationships. The merchandising work also grew in the second quarter. We re-signed a $5 million annual agreement with a long tenured client and expanded our work in another small box discount retailer with more than 10,000 stores. At the same time, we negotiated a new four-year $25 million plus agreement with a leading brand that expands our current business and covers both the United States and Canada. Behind both of these growth stories is our assembly and distribution services business that grew by 17.5% in the second quarter. We expanded our services and distribution centers and initiated new work in bike assembly for a large retailer. Consolidated gross margin for the quarter was 19.2%. This is a 100 basis point improvement over the first quarter reflects the strong growth in remodel and transformation work. The remodel and transformation margins are lower than merchandising, so when this grows disproportionately, the consolidated margin is lower. SG&A for the second quarter was $9.5 million, down $1.1 million from $10.6 million last year, but up 60 basis points as a percent of revenue. As you might expect, as we divest from these international joint ventures, the cost of exiting has a tail on it. In addition, we are spending money to support our strategic initiative. In general, we believe the dollars are trending the right way and we are managing SG&A carefully. As a result of the one-time capital gain, consolidated EBITDA for the quarter was $6.4 million, up approximately $4 million from last year. The resulting net income attributable to SPAR for the quarter was $3.6 million, or 15 cents per share. We have more work to complete the simplification of our business. We are announcing our exit of our business in Japan today. This transaction has been completed and will close without condition later this month. We continue to operate in the U.S., Canada, Mexico, and India. The core of our business is the U.S. and Canada with significant growth potential. We have dialed in our ability to recruit. The pipeline is strong. Cash is excellent. We are energized by the market's reaction to our strategy. After Antonio covers more detailed financial results, I will share additional thoughts and insights about the business. Antonio.

Thank you, Mike. And good morning, everyone. In the second quarter, net revenues total $57.3 million, reflecting a decline from the prior year due to our strategic exits of our South Africa, China, Australia, and NMS joint ventures. These exits resulted in zero revenues from these entities in the current quarter compared to last year. However, Q2 net revenues were primarily driven by the Americas segment, which generated $54 million, marking a 3.8% increase compared to the prior year. During the second quarter, we completed the acquisition of the remaining 49% of ResourcePlus, now owning 100% of all US businesses. Our joint venture in Brazil was sold in the second quarter, and as a result, we reported partial quarter of revenues in Q2 2024 compared to last year. As Mike mentioned, our ongoing U.S.-based revenues increased by 37%, and our Canadian business saw a 14% increase. This growth is primarily due to our remodel business and continuation of a significant recovery in store remodels that started in 2023. Our gross profit for the second quarter was $11 million, or 19.2% of revenues, compared to $13.1 million, or 19.9% of revenues in the prior year quarter. The margin compression was primarily due to a shift towards the remodeling business, which inherently has higher labor and travel costs. Selling general and administrative expenses were $9.5 million, or 16.7% of revenues in the second quarter, compared to $10.6 million, or 16.1% of revenues in the prior year. SCNA costs including non-recurring strategic alternative costs of $325,000 during Q2 2024. The second quarter also included a $4.9 million net gain on the sale of the Brazil joint venture, which was partially offset by a loss on the China joint venture. Operating income for the quarter was $5.9 million, a significant increase from $2 million in the prior year period. Net income attributable to SPAR Group Inc. for Q2 was $3.6 million, or 15 cents per diluted share, compared to a net income of $639,000, or 3 cents per share, in the year-ago quarter. Adjusted net income attributable to SPAR Group Inc. was $99,000, or 0 cents per diluted share, compared to $696,000, or 3 cents per share, in the year-ago quarter. Consolidated EBITDA for the second quarter of 2024 was $6.4 million, compared to $2.5 million in the prior year quarter. This includes gains of $4.9 million on the sale of joint ventures. Consolidated adjusted EBITDA was $1.9 million, compared to $2.6 million in the prior year. Due to adjusted EBITDA, attributable to SPAR Group Inc. was $1.4 million, compared to $1.6 million in the prior year quarter. Now turning to the year-to-date results, net revenues for the first half of 2024 were $126 million, with the Americas segment contributing $108.7 million. This represents a decrease from $130 million in the prior year, primarily due to our strategic exits from Australia, the U.S. NMS joint ventures, as of the end of 2023 and from South Africa, Brazil, and China during the first half of 2024. First half net income attributable to SPAR Group Inc. was $10.3 million or 43 cents per diluted share, a significant improvement compared to $1.5 million or 6 cents per diluted share in the prior year. Adjusted net income attributable to SPAR Group Inc. for the 2024 first half was $1.4 million or 6 cents per diluted share compared to $1.3 million or 5 cents per diluted share in the prior year. Consolidated adjusted EBITDA for the first half of 2024 was $5.3 million compared to $6.7 million in the prior year. Turning to the company financial position as of June 30, 2024, our balance sheet remains strong with total worldwide liquidity at quarter end of $33.5 million. This includes $21.7 million in cash, cash equivalents, and restricted cash, and $11.8 million of unused availability. Cash from operating activities was $170,000 in the first six months of the year, and the net increase in cash was $11 million. As of June 30, The company's networking capital stood at $24.8 million, and the accounts receivable balance was $38 million. With that, I would like to turn it back to Mike.

Thank you, Antonio. Recently, in the midst of the strategic initiative by an interested party, I was asked why I joined SPAR. What makes SPAR different than the competition? What are the secret ingredients? What is the potential? Most importantly, why is this a good investment? And the first part of my answer is that SPAR serves a growing need in the market. As labor for retailers becomes tighter, consumer expectations rise, room for operational error, smaller retailers need flexibility and they need it more than before. 20 years ago, you could operate a small retail store with 175 to 215 hours of weekly payroll. It means a store manager, assistant store manager, one to two cashiers, and a series of part-time staff. Today, the cost of this staff is higher, recruiting is more difficult, retention nearly unheard of, and more remote locations than ever. If you want to operate a great retail box, you need flexibility. One of the basic forms of this flexibility is third-party labor. And you, as a retailer, leverage the vendors and brands to provide labor to stock their shelves, maintain presentations, and change price tags, et cetera. With successful retailers today such as Target, Walmart, Dollar General, Family Dollar, Meyers, and so many more, they understand this. They're expanding the labor ecosystem to support their business and differentiate themselves, and this is an area of distinction for SPAR. SPAR offers the unique combination of scale and flexibility. The competition only goes for scale, but the future requires both. To put a finer point on it, The competition locks you into the scale approach by representing the brand. In other words, retailers have to do it their way as opposed to the best way for the retailer's consumer. Now, I'm a 30-plus year retailer. That's not a sustainable way to do business in this sector. If you want to win, you enable the retailer to optimize the consumer experience in whatever way makes them win. If five below needs to turn the greeting cards to make sure Mother's Day is set and nothing else, done. If Dollar General wants to introduce an exciting new category of product and then maintain it for six months, done. If the bleach aisle needs new pricing, checkout area replenishing, gift cards audited, done. Flexibility. Only Spar offers this approach in the market, and the need for this flexibility on a greater scale is growing every year. The second part of the answer I give is that we needed to go on a diet and get to a lean, focused machine. For those who have followed me in my career, you know I like transformation, boldness, and delivering results. When I arrived at Spar, we were in nine countries plus two defunct others. We had domestic and international joint ventures. We were distracted by global economic issues, repatriating cash, transfer pricing, and management calls from 6 in the morning until 10 at night to cover the time zone. And fundamentally, our shareholders were not getting value from this. A decades-old strategy did not produce results for our shareholders. We needed to trim the fast. and work our core. Core strength and stability is the basis for our growth, and as far as core was merchandising and retail transformation in the United States and Canada. This is where we can create long-term sustainable value for our shareholders. Accomplishing this transformation has been a monumental task, negotiating exits in far-reaching countries while strengthening our core, all the while focusing on shareholder value creation has taken time, but the initial results are compelling. The third reason I give to why SPAR is our secret ingredient are people. I've met and considered the CEOs of my competition serious executives. These are proven professionals with a history of success, but they don't have what I have, the SPAR team. Corey Belzer, our chief operating officer, is widely known as a thought leader and proven executive. William Linane, our chief strategy and growth officer, has decades of approving results. Antonio Calistopato, our chief financial officer, has a master in tax law degree and MBA just to keep his mind sharp. And behind this group are hundreds of others just like them. Deep in the DNA of SPAR is a client-centric, collaborative, innovative, and inspirational spirit. One of the greatest parts of my job is to spend time with our team members and share in their delight as they solve complex problems with really creative ideas. So while others stare inwards and into the rear view mirror, the SPAR team looks out the windshield, predicting the bend in the road, read the signs and understand the changing landscape. And I know that other CEOs have talked about their teams with reverence and appreciation, but this SPAR group is different. I've worked at the top of the Fortune 150, built successful businesses, bought companies and had the privilege of working with some amazing people. But this is the only place where you can find this many of them. There's a group of talented, passionate and dedicated people who care each day about their work and client success, and this is a special ingredient. Having underscored these three points, growing demand, a focused machine, and amazing people, I also want to thank our board comprised of proven senior executives. We've accomplished more in the last 12 months with this board than the company has in the last 10 years. I appreciate their guidance, partnership, and support for driving value and delivering results for the shareholders. While we have much more to do and exciting times ahead, our mantra for 2024 is go for bull. This is a great time to be SPAR. Thank you for your interest in SPAR and participating in our earnings conference call today, and have a great day.

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