SPAR Group Q4 2023 Earnings Call Transcript

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April 1, 2024

Key Takeaways

  • In Q4 2023, consolidated revenue rose 0.7% to $65.1 million, gross profit increased 11% with a 210 bps margin improvement to 22.8%, EBITDA swung to a $3.1 million gain from a $0.25 million loss, and net income was $0.8 million versus a $1.84 million loss last year.
  • The core U.S. owned merchandising business grew 9% in Q4, Canada surged 66%, and Japan rose 8%, offset by declines in Brazil, South Africa and U.S. joint ventures.
  • For the full year, revenue was up 0.6% to $262.7 million, led by U.S. merchandising (+20%), Canadian revenue (+52%) and a 423% jump in Canada remodel projects, while distribution, assembly and insulation grew over 50%.
  • Full-year gross profit margins expanded 160 bps to 21.1%, EBITDA improved 54% to $11.4 million, and net income was $3.9 million versus a $0.7 million loss in 2022.
  • The company is divesting its interests in Australia, China, NMS U.S., Brazil and South Africa (about 25–30% of 2023 revenue) to simplify operations and repatriate over $30 million in cash for core growth initiatives and potential shareholder returns.
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Earnings Conference Call
SPAR Group Q4 2023
00:00 / 00:00

There are 5 speakers on the call.

Operator

As a reminder, this conference is being recorded. I would now like to hand the call to Sandy Martin with 3 Part Advisors. Sandy, 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 the 2023 Q4 and full year results. Joining me on the call today are Spar's Chief Executive Officer, Mike Matyakunis and the company's Chief Financial Officer, Antonio Callisto 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. 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 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.

Speaker 1

Please refer to today's earnings press release for our disclosures on forward looking 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 an 8 ks submitted to the SEC.

Speaker 1

And now, I would like to turn the call over to the company's CEO, Mike Matakonis. Mike?

Speaker 2

Thank you, Sandy, and good morning, everyone. I'm pleased to share our Q4 and full year 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 4th quarter revenue was $65,100,000 up 0.7% over the prior year. Our gross profits rose by 11%, reflecting a 210 basis point improvement in profit percentage and our EBITDA for the quarter was 3,100,000 dollars compared to a $250,000 loss for the same period last year.

Speaker 2

Our consolidated net income for the quarter was 795,000 dollars compared to a loss of $1,840,000 last year in the same quarter. In short, revenue was up, margins were up, EBITDA was up and net income, the bottom line, was up materially. But the core of our revenue performance for the quarter was our U. S. Owned merchandising business that increased revenue 9%.

Speaker 2

Our Canada business was up 66% and our small business in Japan that increased top line by 8%. This growth was offset by a decline in Brazil, South Africa and our U. S. Joint ventures. I will comment more on joint ventures later in this call.

Speaker 2

Within the United States, our remodel business began to recover nicely and our distribution services business had an excellent quarter as we provided services to one of the country's largest, most successful big box retailers and a large sortation center. Combined with our growth in merchandising in the U. S, I'm pleased with how quickly we pivoted and responded to client project delays in the 4th quarter and delivered strong top and bottom line results. While I am pleased with the revenue, the compelling story of the 4th quarter is our profitability, net results and cash improvement. We increased gross profit dollars by 11% with a 2 10 basis point improvement in gross profit percentage.

Speaker 2

On a consolidated basis, we achieved gross margins of 22.8 percent by focusing on terms, rates and productivity. This is a 430 basis points higher for the Q4 than 2 years ago, Q4 of 2021. This, while many of our competitors have experienced declining margins. Our consolidated EBITDA was 4.8 percent of revenue or $3,100,000 for the quarter. This included a one time net loss on the sale of our joint ventures of $408,000 Year over year, our EBITDA improved by 61%, adjusting last year's numbers for the one time goodwill impairment and this year for the one time loss on sale.

Speaker 2

I am pleased with these results. Net income attributable to SPAR for the Q4 was $2,130,000 or 3.3 percent of revenue. Again, I am pleased with the results and I want to thank my team and our team members across all parts of our business for a great quarter and strong results. For the full year, our revenue was $262,700,000 up 0.6 percent. While this is modest top line consolidated growth, the results in our core business are compelling.

Speaker 2

Our U. S. Merchandising division revenue was $52,500,000 up 20% over 2022. I shared the continued double digit growth of our merchandising business over the prior quarterly calls and I am really pleased with the full year performance. We developed more work with brands in grocery, specialty and discount to drive these numbers.

Speaker 2

In addition, our distribution, assembly and insulation business was up more than 50% and our Canadian business top line was up 52% in U. S. Dollars. Especially in Canada, the launch of our remodel business in 2022 has delivered outstanding results. Our Canada remodel business is up 423% for the year, and we believe there is much more to come in this market.

Speaker 2

Our headwinds in revenue growth came from Australia, Japan, Mexico, India, South Africa and China. Each of these international businesses declined in revenue. Our gross profit dollars for the full year were up 8.8% and our gross profit margin was up 160 basis points over 2022. As I've stated before, this is purposeful work and I continue to be pleased with those results. Our consolidated EBITDA for 2023 was $11,400,000 compared to $7,400,000 last year or a 54% improvement.

Speaker 2

And finally, our net income attributable to SPAR for 2023 was $3,900,000 compared to a $732,000 loss last year. After Antonio covers more 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.

Speaker 3

Thank you, Mike, and good morning, everyone. Q4 2023 net revenues totaled $65,100,000 an increase of 0.7% over Q4 2022 reported numbers. Net revenues included $49,200,000 of revenue from the Americas, dollars 8,800,000 from EMEA and $7,100,000 from Asia Pacific. Reported revenues by segment for Q4 versus prior year grew by 1.4% for the Americas, 5.9% for APAC and declined by 6.3% for EMEA. As Mike mentioned earlier, our Americas segment reflects strong merchandising revenues and we saw a sequential recovery in the U.

Speaker 3

S. Client store remodels as 2023 progressed. Similar to the 2nd and third quarters, we continue to see strong sales momentum for the 4th quarter related to merchandising services in our U. S. Owned business and Canada.

Speaker 3

4th quarter gross profit was $14,900,000 or 22.8 percent of revenues compared to $13,400,000 or 20.7 percent of revenues in the prior year quarter. This 210 basis points improvement from the prior year was based on improved contract terms and pricing, system enhancements and other containments and service mix shifts in the quarter. Selling, general and initiative for the Q4 totaled $11,300,000 or 17.4 percent of revenues compared to $11,200,000 or 17.3 percent of revenues in the prior year quarter. SG and A costs include non recurring legal costs of $149,000 during the Q4. The 4th quarter operating income was $2,700,000 compared to an operating loss of $760,000 in the prior year quarter.

Speaker 3

Net income attributable to Star Group Inc. For Q4 was $2,100,000 or $0.09 per diluted share compared to a net loss of $2,500,000 or $0.11 per share in the year ago quarter. Adjusted net income attributable to Spar Group Inc. In the quarter was $2,600,000 or $0.11 per diluted share compared to $420,000 or $0.02 per share in the year ago quarter. Consolidated adjusted EBITDA in the 2023 Q4 was $3,700,000 compared to $3,500,000 in the prior year.

Speaker 3

Q4 adjusted EBITDA attributable to Spar Group Inc. Was $3,900,000 up from $2,300,000 in the prior year quarter. For the full year 2023, sales were $262,700,000 with gross profit of $55,000,000 or 21.1 percent of sales, an increase of 160 basis points over 2022. Operating income was $9,400,000 up 75%. Excluding the 2022 non cash goodwill impairment charge, the 2023 operating income increase was 19.8% versus the prior year.

Speaker 3

Net income attributable to SPA for the year was $3,900,000 $0.17 per share or $0.16 per diluted share. On an adjusted basis, non GAAP net income attributable to SPAR for 2023 was $5,100,000 or $0.21 per diluted share, up significantly from $0.09 per share in the year ago period. Finally, 2023 adjusted EBITDA attributable to Spark in 2023 was $9,900,000 up 62% from 2022. Now turning to the company's financial position as of December 31, 2023. The company's balance sheet remains strong and total worldwide liquidity at quarter end was $19,300,000 with $10,700,000 in cash, cash equivalents and restricted cash and 8.6 $1,000,000 of unused availability at year end.

Speaker 3

The company's net working capital as of December 31st was $27,500,000 and the accounts receivable balance was $59,800,000 We continue to make progress with improvements in our day sales outstanding each quarter. With that, I would like to turn back to Mike.

Speaker 2

Thank you, Antonio. As we look at our business, there are a number of macro trends that are shaping our industry and opening up opportunities. This is especially true in the U. S. And for those familiar with global market influences, the U.

Speaker 2

S. Typically leads and other countries follow, albeit at different paces. I want to spend a few minutes on what is changing the landscape. According to the National Retail Federation, retail sales for 2023 were up 5.6 percent. In the world of retail, anything over 3% to 4% provides in retail sales material opportunity.

Speaker 2

This number is an indicator that product is turning faster and there's more work for Spar. As a reminder, we are the last person to touch the product, place it on the shelf before the customer buys. We are also changing promotional materials, adjusting clip strips, resetting end caps and more. Higher sales means more work for us. When sales are up, retailers and brands need more of our services.

Speaker 2

2nd, unemployment was 3.9% in February for the United States. When unemployment is low, this means businesses must compete for labor, and this typically drives up prices. For retailers and brands that have their own field services organization, this can quickly become a critical financial challenge. For Spar, we solve it. We have thousands of individuals trained and positioned to help.

Speaker 2

We can dedicate people or we can provide syndicated service. Those retailers and brands who are struggling with labor, we can offer shared resources at a lower cost while maintaining service levels. You may have noticed less and less employees in your local retail stores. A report from Yahoo! Finance in February noted that retailers had cut more than 5,300 jobs just in the 1st 5 weeks of 2024.

Speaker 2

The economy is changing more part time, more transactional, and our model is well placed to capitalize on this shift to variable resourcing and value added services. 3rd, the economy seems to have digested the 5 25 basis point interest increases from the Federal Reserve since March 2022. From my vantage point, this slowed the deployment of capital in the first half of twenty twenty three, while our clients and prospects monitored this. By the second half of twenty twenty three, the deployment of capital related to what we do has begun to return to normal rates. You may have seen the announcements from Target that they plan to open 300 more stores in the next decade.

Speaker 2

Walmart announced in January this year, an ambitious 5 year store plan. Aldi is planning to open more stores in the U. S. This year, etcetera. Based on the demand for our remodel services in both the U.

Speaker 2

S. And Canada, the capital appears to be flowing again at normal, if not accelerated rates. In total, the macro trends and shifts in the economy is moving towards SPAR. This is exciting for us. The other topic I want to comment on is the divestitures we've announced in the last few months.

Speaker 2

We announced selling our 51% interest in Australia, China and national merchandising services in the United States. And today, we are announcing our agreements to sell the company's joint venture positions in Brazil and South Africa, which should close sometime during the 2nd fiscal quarter of the year. These divestitures simplify our portfolio, financial structure and operating model. This simplification provides more focus on our core business is growing by double digits and our ability to capitalize on the shifting macro trends. In working through the strategic alternatives analysis over the last 18 months, it became clear the structure of our organization was wide and thin versus narrow and deep.

Speaker 2

Growing through JV partnerships is a complex is complex and the process of repatriating our cash is even more complex. In order to create long term value for our shareholders, we have to simplify the organization, harvest our cash for further growth and use our brand equity and marketing dollars on a strategy that best utilizes our people, process and technology. We're confident that simplifying the operations of Finances at Spar will allow us to accelerate our growth and generate significantly more cash flow for our shareholders. Lastly, I want to thank all of the employees and associates of Spar, our Board of Directors, our clients and our business partners for their contributions, counsel, partnership and passion for the business. I'm grateful to lead this outstanding group of people and I look forward to building shareholder value, generating revenue, profitability and incremental cash flow.

Speaker 2

This is a great time to be spar. With that, I would like to open the line for questions. Operator?

Operator

Thank you very much. We will now begin the question and answer Today's first question comes from Theodore O'Neil with Litchfield Hills Research. Please go ahead.

Speaker 4

Thank you very much and congratulations on a great quarter. So my first question, Mike, it's a couple of part question. On the South Africa, Brazil, NMS, Australia and China, can you give us an approximate percentage of revenue that represented those represented in 2023? And it says in your press release this transaction will raise cash levels. It will raise cash on top of what you already have.

Speaker 4

We're looking at it maybe being $30,000,000 in the next couple of months and that would exceed your current market cap. I was wondering if there's any plans for a dividend or stock buyback with that?

Speaker 2

Good morning. Thanks for the question in 2 parts. On the first, as a contribution of revenue, the businesses that we've divested from or in the process of divesting from, we're sort of in the neighborhood of 25% to 30% of total revenue and a smaller percentage of actual EBITDA and bottom line sort of impact directly to the shareholders. Maybe a context the way to think about these divestitures is as we look out the windshield of the car as opposed to the rearview mirror, we look at sort of the road in front of us for the U. S.

Speaker 2

And Canada and some other markets is really wide open. So when we looked at what will might be holding us back and how we could potentially capitalize on some of the value for our shareholders, These businesses look like good businesses, but we could do more with capital in pocket and investments, potentially accretive acquisitions or other investments, potentially giving value directly back to the shareholders. To your second question, Theo, the Board and I are discussing a number of options. There are always 3 or 4 categories when you have a material amount of cash in a business. The first is to look for organic growth where you can do things that accelerate the growth of the business that you have today.

Speaker 2

The second is to look for accretive opportunities that expand what you can offer, do more for clients that also then deliver direct results quarter by quarter. And the third are alternative ways to then give that cash directly back to shareholders. All of those are being looked at by the Board. Nothing to announce this morning. But you're right, we will be in short sitting on a large amount of capital, which I think is exciting because it gives us a number of choices for our future.

Speaker 2

I appreciate that, Theo.

Speaker 4

Okay. And on margins, margins were much stronger than expected. And I'm wondering, is this the new normal? And if there was a contribution in a particular geographic area or industry that made that so positive in this quarter?

Speaker 2

No. Some of it was mix. In other words, our merchandising business, which continues to grow really, really quickly in the U. S. Is our most profitable business and that affects the margins each quarter as it gets bigger and bigger.

Speaker 2

And as we've shared over last year, our remodel business was slowing in the Q2, but began to come back, but not yet enough to offset some of that. So there wasn't anything one off in the quarter in the margin number. It's continued focus on the terms and also on the backside of productivity. So how much work we can do for each dollar that we get from clients. So we'll make sure we're being as effective as possible for them.

Speaker 2

It's hard to say the quarter margins were so strong. I am looking at this year expecting remodels to grow quite quickly given the capital that seems to be available to us from the clients and the demand that's coming into the Q1 for us. So I think we're at a good place. I'm not sure after 2 years of 4.30 basis points, there's another 400 basis points. We'll keep focused on it, but we're sort of at a normal at this point, I think.

Speaker 4

Okay. My last question is, what's driving the strong demand in Canada?

Speaker 2

A couple of things. 1, when we took remodel of the business, well, there are 2 things. 1, our merchandising business has grown as well. And that was a shift, a couple of brands in Canada, large global brands had field merchandising organizations and determined in 2022 and into early 2023 that they wanted a 3rd party partner to take over that work for them. And we were very successful and used our relationships in the United States to win that work.

Speaker 2

So that grew our merchandising business and we're going to have another strong end merchandising business, I believe, this year. But the second point is remodels in Canada. There's a lot of store growth going on in Canada, certainly not at the scale of the United States given the market in Canada. But as we sort of raised our hand and said, we know how to do this and we want to be part of this. We you may recall, I've discussed in the past, we had a pilot program in late 2022, but that became very successful for us.

Speaker 2

And we had a few clients that then quickly came to us and threw a lot of workouts. And we're finding ourselves to be one of the preferred providers for remodel services in Canada now. And that's why I commented, I think there's a lot of room in front of us for this business given there are very few other players that we can see in the market of our scale. And I think that gives us a good opportunity.

Speaker 4

Okay. Thanks very much.

Operator

Thank you. This concludes our question and answer session. I would now like to turn the call back over to Mike Matyukunich for any closing remarks.

Speaker 2

Operator, thank you very much. Just broadly speaking, I just want to thank everyone who was listening, who participated in the call today. I look forward to providing an update for the Q1 coming in the next few months and going from here. So thank you again everyone.

Operator

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.

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