SPAR Group Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
April 17, 2023

Key Takeaways

  • Record FY2022 revenue of $261.3 M (+3.5% constant currency) and Q4 revenue of $64.6 M (+11.8% constant currency), driven by 21.2% organic growth in the Americas.
  • Fourth-quarter gross margin expanded by 300 basis points to 20.7%, with Americas margins up over 500 basis points on pricing, productivity and technology initiatives.
  • APAC revenues declined 34.8% in Q4 due to China and Japan lockdowns, which pulled down consolidated margins despite strong performance in Australia.
  • The company recorded a $2.5 M non-cash goodwill impairment and one-time strategic-alternative fees, while the Board continues to explore sale, merger and other value-creation options.
  • A robust pipeline includes multiyear contracts with potential $32 M in incremental revenue, supported by AI-driven recruiting (2,400 reps hired in Q4) and analytics via the SparView platform.
AI Generated. May Contain Errors.
Earnings Conference Call
SPAR Group Q4 2022
00:00 / 00:00

There are 5 speakers on the call.

Operator

Good morning, and welcome to the SPARC Group 4th Quarter and Full Year Fiscal 2022 Earnings 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 Partner 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 2022 4th quarter and fiscal year results. Joining me on the call today are Spar's Chief Executive Officer, Mike Matyakounis And the company's Chief Financial Officer, Antonio Calisto Pedro. This call is being webcast and can be accessed through the audio link 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.

Speaker 1

Forward looking statements, by their nature, are Please refer to the earnings press release that was issued today for our disclosures on forward looking statements. These factors and other risks 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 Matakunis. Mike?

Speaker 2

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.

Speaker 2

Australia was also strong, albeit is 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 long standing 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'm very pleased with the company's performance for the year.

Speaker 2

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. 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 Spark team and want to thank them for their hard work and dedication last year. Now turning to our results.

Speaker 2

We reported record full year revenue of $261,000,000 which grew by 3.5% on a constant currency basis. For the Q4, total revenue was $64,600,000 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 $48,600,000 an increase of 20.8 percent. The Americas grew organically or on a constant currency basis by 21.2% during the Q4, which was due to strong momentum in the U.

Speaker 2

S. And Brazil. The Americas segment also includes Mexico and Canada. Within the Americas, the U. S.

Speaker 2

Grew by over 20% and delivered close to $25,000,000 in revenue. Our core merchandising services business grew by 28% in the 4th 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 5 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 And reinventing physical stores across key segments such as big box, discount, drug and convenience.

Speaker 2

Our Brazil joint venture reported record growth of 30 in the Q4. 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 NIVEA and Red Bull. And in 2023, we've been awarded a 3 year contract 3 ms 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 $9,400,000 down 2.1 percent And on a constant currency basis expanded by 13.6% over the prior year quarter.

Speaker 2

We have won new clients, renewed large Multi year agreements and increased EBIT on a reported basis of 27%. Organically, EBIT for EMEA grew by a strong Asia Pacific segment reported revenue of $6,700,000 which represents a decline of approximately $3,500,000 or 34.8 percent. 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.

Speaker 2

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 4th 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.

Speaker 2

Our EMEA segment reported a strong 27.2 percent 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 4th 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 percent in the 2nd quarter and down 210 basis points from the prior year same period. Notwithstanding the strength in our consolidated gross profit, during the Q4, a 41% drop year over year in gross margin dollars from APAC impacted our consolidated gross margin percent.

Speaker 2

We continue to focus on gross profit and I'm pleased with the results to date. 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 Q4 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' change in control.

Speaker 2

Without these non cash and one time expenses and carving out the APAC 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, 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.

Speaker 3

Thank you, Mike, and good morning, everyone. Today, we filed our Form 10 ks with the SEC after filing a 12b-twenty 5 notification of late filing on March 31. This late filing was required after we discovered and corrected an error that triggered the material weakness in our internal controls over financial involving international accounting. Now turning to the financial results. Our Q4 2022 net revenues totaled $64,600,000 an increase of 7.7 percent, which includes $48,600,000 of revenue from the Americas, dollars 9,400,000 from EMEA and $6,600,000 from APAC.

Speaker 3

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 4th 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 percent, EMEA down by 2.1 percent and APAC revenues down by 34.8%.

Speaker 3

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 In constant currencies, EMEA revenues would have been up 13.6% compared to Q4 last year. Headwinds in APAC for the quarter was due to pandemic related lockdowns in both China and Japan.

Speaker 3

Australia's revenue was strong, but the numbers are small and did not offset pressure results from other countries for APAC. 4th quarter gross profit was $13,400,000 or 20.7 percent of revenues compared to $10,600,000 or 11.7 percent of revenues in the prior quarter prior year quarter. Mike discussed this 300 basis point improvement from the for previous year, which was based on initiatives that we implemented during that year. We recorded a non cash $2,500,000 impairment charge for goodwill in the Q4 of 2022. Selling general and administrative expenses for the 4th quarter totaled 11.2% or 17.3 percent of revenues compared to CAD13.2 million or 22 percent of revenues in the prior year quarter.

Speaker 3

SG and A increases in 20 2 included a $1,200,000 bad debt write off on 1 customer that filed for bankruptcy in the U. S. As well as fees Correction there, sorry, I did not talk for bankruptcy. It's facing financial hardship as well as fees for the strategic alternative advisory work. Also in the prior year, we recorded majority stake shareholder change in control costs.

Speaker 3

The 4th quarter operating income was $760,000 versus operating income of $3,100,000 in the previous year quarter. Net loss attributable to Spar Group Inc. For the Q4 was $351,000 or $0.02 per share Compared to a net loss of $4,400,000 Net loss attributable to Spire Group Inc. For Q4 was $351,000 or $0.02 per share compared to a net loss of $4,400,000 or $0.21 per share in the year ago quarter. Adjusted net income attributable The Spark Group Inc.

Speaker 3

In the quarter was $1,900,000 or $0.08 per share compared to a loss of $644,000 or $0.03 per share in the year ago quarter. Consolidated adjusted EBITDA in the 2022 Q4 was CAD5.2 million compared to a loss of CAD1.2 of CAD2.2 million in the prior year quarter. Q4 adjusted EBITDA attributable to Spire Group was CAD4.1 million compared to a loss of CAD3 1,000,000 in the previous year quarter. For the year, net revenues were $261,300,000 up 2.2% from the year ago period. For the segments, year to date revenues were 198 $600,000 for the Americas, representing 76% of the total revenue, while EMEA was 76.7 $1,000,000 or 14 percent of total revenue and APAC was $26,000,000 or 10 percent of revenue.

Speaker 3

Gross profit for 2022 was CAD51 1,000,000 or 19.5 percent of revenues compared favorably to $47,500,000 or 18.6 percent of revenues in the prior year period. Gross margin increased 90 basis points. The improvement was due to strength in the Americas, up 180 points and EMEA gross 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 APAC negatively impacted margin by 380 basis points due to pandemic lockdowns for the year. For the year, we reported a non cash $2,500,000 impairment charge for goodwill that we mentioned for Q4.

Speaker 3

SG and A expenses were CAD41.1 million or 15.7 percent of revenues compared to CAD36.8 million or 14 point 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 1 year expenses that are not part of the run rate SG and A costs. Full year operating income was €5,400,000 versus €4,200,000 in the year ago period. For the full year, net loss attributable to Spire Group Inc. Was 732,000 or $0.03 per share compared to CAD1.8 million or CAD0.08 per share in the year ago period.

Speaker 3

Adjusted net income attributable to Spire was CAD1.6 million or CAD0.07 per share compared to CAD2.6 million or CAD0.12 per share in the year ago period. Consolidated adjusted EBITDA for the full year was $10,800,000 compared to 11.9 $1,000,000 in the prior year. Excluding the non controlling interest, adjusted EBITDA attributable to Spark Group Inc. Was $6,100,000 compared to $7,000,000 in the prior year 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 14,700,000 with $9,300,000 in cash, cash equivalents, unrestricted cash and $5,400,000 of unused availability at year end.

Speaker 3

The company's working capital as of December 31 was $26,400,000 And the accounts receivable balance was $63,700,000 Finally, for the year, we repurchased 151,156 shares of StrP common stock under our Board authorized share repurchase program. With that, I would like to turn back to Mike.

Speaker 2

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've 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.

Speaker 2

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.

Speaker 2

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 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.

Speaker 2

Whether customers are trading up or down, our largest ten clients 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 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 exploring how far we 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, make targeted visits and multi country agreements that can create leverage for them.

Speaker 2

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.

Speaker 2

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 Q4, we closed on multiyear contracts that has potential for revenue of $32,000,000 in addition to many other $1,000,000 or smaller contracts. A typical profile for one of these large agreements is either replacing a competitor Providing in store merchandising across the geography, we're assuming responsibility for a number of store remodels. Looking into 2023, we have several active multi Wallet share across borders, this is something that is unique to Spark in our global marketplace.

Speaker 2

An area that we continue to aggressively lean into is retail and analytics 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 These resources support our business and clients in multiple countries. We continue to believe that the application of artificial intelligence It's important. We captured more than 19,000,000 pictures globally in 2022 and more than 32,000,000 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.

Speaker 2

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, 3 ms, CVS, Niveo, Foster Grant, Cargo, McKesson, Advanced Auto, P&G and many, many more. Many of these are long standing relationships to 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.

Speaker 2

Let me wrap up my comments by again thanking our team 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?

Operator

We will now begin the question and answer session. Our first question will come from Theodore O'Neil with Litchfield Hills Research. You may now go ahead.

Speaker 4

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

Speaker 2

Yes. Theo, thank you for the question and good to hear. Thanks for joining this morning. We've had a few opportunities, particularly in the early part of 'twenty two, 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, 1 of our competitors had sort of abandoned that space and said they didn't want to do that work.

Speaker 2

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. 2nd example, in a large multi Discount retailer, I'm just picking some U. S. Examples for example.

Speaker 2

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 we're 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's management and the way we had served them in 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 For 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.

Speaker 2

So we've been picking up more of that and that has continued into this year as well. Does that help answer the question?

Speaker 4

It does. And 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?

Speaker 2

Yes. In a little of this, I'll comment with my retail background. I spent many years in a senior retail role. In the retail model, you can hire 2 types of people. You can hire a full time person or part time person.

Speaker 2

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 expenses 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 2 people, but they need them for 4 hours, or they need to replenish product, or they need to reset the shelf in a particular department. They need someone for 4 to 8 hours.

Speaker 2

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 consider 8 to 16 hours worth of work each week. So I think that's an opportunity for us for the next few years.

Speaker 4

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

Speaker 2

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

Speaker 4

Thank you very much.

Operator

Thanks for your question. 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.

Speaker 2

Operator, thank you. Just quickly, thanks For all who listened and participated today and for your interest in our company and listening to the earnings conference call today, I look forward to providing an update of our progress and report

Powered by Quartr