SPAR Group Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 14, 2023

There are 5 speakers on the call.

Operator

Good morning, and welcome to the SPAR Group Second Quarter 2023 Financial Results Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Sandy Martin with 3 Part Advisors.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Spar Group Inc. Conference call to review 2023 Second Quarter Results. Joining me on the call today are Spar's Chief Executive Officer, Mike Matakunas and the company's Chief Financial Officer, Antonio Calisto Pado. 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.

Speaker 1

Sparinc.com. Information recorded on this call speaks only as of today, so please be advised that any time sensitive 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 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 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.

Speaker 1

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 Finally, the earnings press release we issued earlier today is posted on the Investor Relations section of our website at sparinc.com. A copy of the release has also been included in an 8 ks submitted to the SEC. And now, I would like to turn the call over to the company's CEO, Mike Matakunis. Mike?

Speaker 2

Thank you, Sandy, and good morning, everyone. I'm pleased to share our 2nd 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 twenty twenty three has been the strongest 6 months in the history of the business. Revenue, gross Profit, EBIT have all reached new levels.

Speaker 2

As I've said in the past, revenue can move between quarters, but our client agreements And services are long standing and have consistently been expanding. At the heart of our business are merchandising and marketing services. This is the legacy of the 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 3rd parties. Our merchandising services grew by 16% in the United States for the 2nd quarter, 18% in Brazil, 9% in Mexico and so on.

Speaker 2

Year to date, these services in the United States are up 28%, 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 to physical store It started the year slower than it finished in 2022.

Speaker 2

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.

Speaker 2

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, etcetera.

Speaker 2

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. If the demand hasn't dropped, the schedule has extended.

Speaker 2

The last item I will mention before going through the highlights of the 2nd quarter It's 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 Q2. 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.

Speaker 2

A lot of our clients are consumable clients That are less impacted by inflation such as P and G, think diapers or baby formula. The rising interest rate in the U. S. Has increased demand for the U. Dollar compared to the South African rand, the impact of the currency exchange rate for us was to turn a 7% growth for South Africa Regardless of the conversion of currency fluctuations.

Speaker 2

Turning to our 2nd quarter results, our consolidated revenue was $66,000,000 A decline of 2.7% from the prior year same period. Our gross profit was $13,100,000 up 1%. Operating income was $2,000,000 and our consolidated net income was $1,100,000 compared to $1,600,000 for the same period in 2022. On a constant currency basis, our consolidated revenue would have been $68,400,000 or up $500,000 or approximately 1%. The exchange rate impact was a negative $2,400,000 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%.

Speaker 2

Our 2nd quarter revenue in United States was Tale of 2 cities. Merchandising services were up 16% over last year and remodeling services 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 twenty twenty three, and in some cases into the 1st part of 2024. We have no indication yet that these projects have been canceled, so we believe It's a seasonal shift from prior patterns and a temporary reaction to rising interest rates, a small but important bright spot.

Speaker 2

We saw an increase in unplanned work in the Q2 related to our U. S. Clients, which speaks again to the scope of our relationships and the preference of our clients Canada had an outstanding Q2. Our Canadian revenue increased 48% compared to the same period last year. This is a reflection of the intentional focus we began to apply on expanding this business as of mid-twenty 22.

Speaker 2

I expect this trend to continue in Canada under the leadership of Miana 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 It's really generated excitement with brands and large clients over the last few years. We base our operations in Sao Paulo, But the impact in services are provided across the country. Mexico had a solid quarter, up 9% over the same period last year.

Speaker 2

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 2nd quarter was down 10% from the prior year. This is entirely explained Currency conversion. In constant currency, revenue is up by 7%.

Speaker 2

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 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 2020 Based on the results, we've established a solid footing after a challenging 2 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

Speaker 3

Thank you, Mike, and good morning, everyone. 2nd quarter 2023 net revenues totaled $65,900,000 a decline of 2.75% on Reported numbers, but a growth of 0.8 percent on a constant currency basis. Net revenues Comprise $52,100,000 of revenue from the Americas, dollars 8,200,000 from EMEA and $5,700,000 from Asia Pacific. Reported revenues by segment 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.

Speaker 3

S. Client store remodels that have been pushed out, offset somewhat 2nd quarter gross profit was $13,100,000 or 19.9 percent of revenues compared to 12,900,000 Or 19.1 percent 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 containments as well as services mix shifts in the quarter. Selling, general and administrative expenses The Q2 totaled $10,600,000 or 16.1 percent of revenues compared to $10,100,000 or 14.9 percent of revenues in the prior year quarter. SG and A costs included non recurring items primarily associated with the project Strategic alternatives, which totaled $111,000 as well as other corporate costs during the Q2.

Speaker 3

The 2nd quarter operating income was $2,000,000 which is down 15.2% versus operating income of $2,400,000 in the prior year quarter. Net income attributable to Spark Group for Q2 Was $639,000 or $0.03 per share compared to a net income of $1,100,000 or $0.05 per share in the year ago quarter. Adjusted net income attributable to Spark Group in the quarter was 696 $1,000 or $0.03 per share compared to $1,300,000 or $0.06 per share in the year ago quarter. Consolidated adjusted EBITDA in the 2023 Q2 was $2,600,000 compared to $3,000,000 in the prior year quarter. Q2 adjusted EBIT attributable to Spire Group was $1,600,000 compared to $2,100,000 in the prior year quarter.

Speaker 3

Now turning to the company's financial position as of June 30, 2023. The company balance sheet remains strong and total worldwide liquidity at quarter end was $19,800,000 With a $10,900,000 in cash, cash equivalents and restricted cash and $8,900,000 of unused availability at quarter end. The company's working capital as of June 30 was $27,200,000 and the accounts receivable balance was 63 With that, I would like to turn it back to Mike.

Speaker 2

Thank you, Antonio. Alternatives to maximize shareholder value. This includes a full range of options that we have shared, including a sale, strategic M and A deal or our going private The management team and I are fully engaged with the Board on exploring ways to unlock value for our shareholders Spar, we've 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 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.

Speaker 2

We formed a committee of professionals from different levels 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.

Speaker 2

S. Received an award as a top 50 talent acquisition profession. Danny Craft, our Head of Marketing and our team are 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 make 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.

Speaker 2

This is a business we launched in late 2021 And I'm pleased it's on track to deliver nearly $5,000,000 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 We 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 grow with it.

Speaker 2

Based on our legacy of being the last person to touch the product before the consumer in stores, we are growing our business to be the last person I also want to touch on the subject of technology. To the cloud, and I'm pleased to report that this work is done. We captured more than 19,000,000 photos last year, and the growth of our business was outrunning our 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 8 of our 9 countries. Beyond the application itself, we've made great strides in expanding the analytics we provide clients.

Speaker 2

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 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 Just what companies in the world is our clients, we need to perform at a world class level. Our mantra is every client, Every day.

Speaker 2

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 With that, I would like to open the line for questions. Operator?

Operator

We will now begin the question and answer session. 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.

Speaker 4

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?

Speaker 2

Theo, first of all, can you hear me okay?

Speaker 4

Yes.

Speaker 2

I'm good. Thanks. Just checking, first of all, thanks for your question. We are having discussions with retailers and I can't say 2 years ago we had the same. So because you've seen a lot of this The press where the shrink number has gone up dramatically.

Speaker 2

What we've been tasked with is to have our team who is 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 4 foot span of shelf, does it give any indication of an area that looks like it has more stock up than it should have, Even if we're not touching that particular product. So we are having some very interesting creative discussions about that because I think that will continue to be a challenge

Speaker 4

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?

Speaker 2

Yes. We haven't seen a lot of the devices The 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 Retailers count shrink 2 different ways. They count it once a year, which means it's very hard to get your arms around it real time. You don't see it coming until you count it We'll use cycle count it.

Speaker 2

So you 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 So now retailers are asking us to look at lots of other categories more regularly We're used to when we're doing merchandising. But we haven't had a lot of that remodel because that's an incremental cost to the retailers that I don't think they've yet determined as a

Speaker 4

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?

Speaker 2

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 exact use it for the barcode or the packaging And use that for self checkout, but we haven't anybody who's ready to sort of take that leap. We're aware as you are. There are businesses They're 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 it yet.

Speaker 2

I think there's still plenty of technology hurdles to get over before we're all walking out without checking out.

Operator

Showing no further questions. This concludes our question and answer session. I would like to turn the conference back over to Michael Matakounis for any closing remarks.

Speaker 2

Well, again, operator, thank you for turning it back. 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 earnings conference call today. Look forward to providing an update of our progress when we report the Q3 results. And thank you again.

Operator

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

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SPAR Group Q2 2023
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