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SPAR Group, Inc. (NASDAQ:SGRP)

Q2 2014 Earnings Conference Call

August 13, 2014, 04:30 PM ET

Executives

Valter Pinto - Investor Relations, Capital Markets Group, LLC

Jill Blanchard - Chief Executive Officer, President and Director

James Segreto - Chief Financial Officer, Treasurer and Secretary

Analysts

Operator

Good day, and welcome to the SPAR Group Incorporated 2014 second quarter conference call. Today's conference is being recorded. At this time, I would like to turn the call over to Valter Pinto of Capital Markets Group. Please go ahead.

Valter Pinto

Thank you, operator, and good afternoon. I'd like to thank everyone for joining us today for the SPAR Group 2014 second quarter earnings conference call. On today's call the presenters will be Ms. Jill Blanchard, Chief Executive Officer and President; and Mr. Jim Segreto, Chief Financial Officer.

Before we begin, I am going to review the company's Safe Harbor statement. Statements in this conference call that are not descriptions of historical fact are forward-looking statements relating to future events. As such, all forward-looking statements are made pursuant to the Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties, actual results may differ materially.

When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to SPAR Group, are such a forward-looking statement. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated by SPAR Group at this time. In addition, other risks are more fully described in SPAR Group's public filings with the U.S. Securities and Exchange Commission, which can be reviewed at www.sec.gov.

With that, I'd like to congratulate the SPAR Group team on their 2014 second quarter and first six months financial results. And turn the call over to Jill Blanchard, CEO and President of SPAR Group. Jill, the floor is yours.

Jill Blanchard

Thank you, Valter. And thank you everyone for joining us today for our 2014 second quarter earnings conference call. As previously mentioned, as I'm coming on board as the new CEO, one of my major goals was to implement a strategic plan and culture within SPAR Group that focus on five corporate objectives, growth, customer value, employee development, efficiency and productivity and earnings per share.

I am happy to say today that we've made much progress on all fronts, which I believe is critical to what has driven our year-over-year double-digit organic revenue growth in both our domestic and international operation during the second quarter of 2014.

Our revenue for the 2014 second quarter increased 13% on a year-over-year basis and grew $30.9 million as compared to $27.4 million in the prior year. Domestic revenue increased 11% and international increased at 14% year-over-year.

The revenues for the first six months of this year grew 13% to $59 million as compared to $52.4 million in the prior year. Our domestic revenue grew 12%, international grew 13% on a year-over-year basis.

Let me now provide some specifics related to our efforts and outcomes that result from our strategic plan. First, we are focused on building more senior level relationships with each of our key customers. Recently we announced the expansion of our partnership with Somerset Group into the U.S.

We have been working closely with Somerset for over eight years in Canada. And the expansion into the U.S. will add approximately 6,400 retail doors, while executing 30,000 site visits each year to provide merchandising other marketing services, such as ensuring integrity display and updating the graphics on the interactive displays.

We also expanded our relationship with Staples through the launch of eight new categories in their retail space nationwide, while continuing to support their merchandising servicing across a variety of product categories, and supporting their furniture division both in-stores and in-home.

And as previously announced, we reached a two-year contract renewal with Family Dollar. We've been servicing them. They're a multi-billion dollar self-service discount and variety store chain for the past two years in over 8,000 stores, completing a variety of merchandising service programs such as schematic resets, revisions, item cut-ins, returns, audits and recalls across almost all categories, including grocery, pet, party, household and chemical and paper goods.

This is an example of a customer with whom we continue to build our trust and strengthen our relationship and we look forward to leverage and increasing the value that we delivered to the important customers during their pending integration.

We also focused on growing internationally. As a percentage of our total revenue, international revenue for the second quarter of this year as well as the first six months continues to be strong, accounting for approximately 60% of SPAR's total revenue. Our top-three revenue generating regions were Mexico, South Africa and Japan.

For the 2014 second quarter, Mexico accounted for 15.7%; South Africa was 13.3%; and Japan 8.6% of total revenue. Mexico was doing extraordinarily well. We have successfully expanded our relationships there with Fortune 500 customers. And in South Africa we had implemented the same strategy of building our global customer portfolio.

In China, we recently announced our expansion in this critical territory through the acquisition of certain assets and services from a group of three companies that we collectively call Unilink. Their established merchandising teams executed more than 300,000 in-store visits each year, currently covering almost all hypermarkets, supermarkets and convenience stores in Shanghai and East China, Beijing, Guangzhou and Shenzhen.

This is an excellent compliment to our existing client base, which includes customers such as Coca-Cola, Apple, PUMA and Johnson & Johnson. Combining the business, resources and expertise of SPAR Shanghai with those from Unilink team is expected to expand our revenues by $7 million on an annualized basis, and increase the profitability for SPAR Shanghai through its increased client base and realized operational synergies.

Our global client base continues to expand. We currently do businesses with over 65 global customers and 17 in more than one country. We recognize that that there is room for growth, as we focus on leveraging our knowledge of and the relationship with each of these clients. We strongly believe that there is tremendous value, especially, service that we provide to each customer enabling their global growth.

With that, I would now like to turn the call over to Jim Segreto, our CFO, who will provide greater details on the numbers. Jim?

James Segreto

Thank you, Jill. A summary of our financial results for the three and six month periods ended June 30, 2014, are as follows. For the three months ended June 30, 2014, as Jill mentioned earlier, the company reported 13% increase in net revenue for the three months ended June 30 to $30.9 million compared to $27.4 million for the same period in 2013.

Domestic net revenue totaled $12.6 million compared to $11.4 million for the same period in '13, an increase of $1.2 million or 11%. The increase was primarily due to incremental revenue from project work compared to the same period last year.

International net revenue totaled $18.3 million for the three months ended June 30, 2014, compared to $16 million for the same period in 2013, an increase of $2.3 million or 14%. The increase in net revenue was primarily driven by increases in Mexico, Japan, Canada, with partially offset lower volume in China, Australia and Turkey.

The company's gross profit margin for the three months ended June 30 improved by 0.9 percentage points to 24.9% compared to 24% for the same period in 2013.

For the second quarter, domestic gross profit margin was 31.4% compared to 30% for the same period in 2013. The increase in gross profit margin of 1.4 percentage points was due primarily to a favorable mix of project work compared to last year. The second quarter gross profit margin does not reflect improvement from our first quarter results by 3 percentage points.

Our international gross profit margin for the three months ended June 30, 2014, was 20.4% compared to 19.7% for the same period in 2013. The increase in gross profit margin of 0.7 percentage points was primarily driven by margin improvement in China, Canada, South Africa and Australia, partially offset by lower margin business in Turkey and India.

The company reported net income of $577,000 for the three months ended June 30, 2014 or $0.03 per diluted share compared to a net loss of a $130,000 or $0.01 per diluted share for the corresponding period last year.

For the six months ended June 30, 2014, the company also reported a 13% increase in net revenue for the six months ended June 30. to $59 million compared to $52.4 million for the same period in 2013. Domestic net revenue totaled $23.6 million compared to $21.1 million for the same period in 2013. Domestic net revenue increased approximately $2.5 million or 12%, primarily due to the favorable project work that we had compared to last year.

International net revenue totaled $35.4 million for the six months ended June 30, 2014, compared to $31.3 million for the same period in 2013, an increase of $4.1 million or 13%. The increase in net revenue for the six month period was primarily due to incremental revenue from the integration and acquisitions in India and the increased revenue in Mexico, Japan and Canada, partially offset by lower revenue in China, Australian, and again in, Turkey.

The company's gross profit margin for the six months ended June 30 remained flat at 23.6% for both 2014 and 2013. For the six months ended June 30, 2014, domestic gross profit margin was 29.7% compared to 30.7% for the same period in 2013. The decrease in gross profit margin of 1 percentage point was due primarily to unfavorable mix of project work that incurred in the first quarter of this year compared to last year.

Our international gross margins for the six months ended June 30, 2014, improved by 0.7 percentage points to 19.6% compared to 18.9% for the same period in 2013. The international gross profit improvement was primarily driven by favorable margin mix of business in Mexico, South Africa and Japan, partially offset by lower margin business in Turkey again, and India.

The company reported net income of $208,000 for the six months ended June 30, 2014 or $0.01 per diluted share compared to a net loss of $87,000 or $0.00 per diluted share for the corresponding period last year.

Our balance sheet remained strong. As of June 30, 2014, cash and cash equivalents totaled $4.7 million, working capital was $16.6 million and our current ratio was 2.2 to 1. Total current assets and total assets were $30 million and $38.9 million, respectively. And current and total liabilities were $13.4 million and $19.3 million, respectively. Total equity was $19.6 million at June 30, 2014.

With that I would like to turn the call back to Jill for closing remarks.

Jill Blanchard

Great. Thanks Jim. Going forward we will continue to focus on our strategic relationships delivering value to our customers, continuing to grow our existing talent and attracting new talent and expanding our existing customers globally. On behalf of the entire team here at SPAR Group, I would like to thank you all for joining us on today's call.

This ends our prepared comments and we are now available to answer any questions.

Question-and-Answer Session

Operator

(Operator Instructions) With no questions in queue, I would like to turn the call back over to management for any additional or closing remarks.

Jill Blanchard

Great. Thank you. So thank you to everybody for taking the time to join us on today's call.

Operator

Once again, that does conclude today's conference. We do thank you for your participation.

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