SPAR Group's (SGRP) CEO Scott Popaditch on Q3 2016 Results - Earnings Call Transcript

| About: SPAR Group, (SGRP)

SPAR Group, Inc. (NASDAQ:SGRP)

Q3 2016 Earnings Conference Call

November 21, 2016, 08:00 AM ET

Executives

Dave Mossberg - Investor Relations

Scott Popaditch - Chief Executive Officer and President

Jim Segreto - Chief Financial Officer

Analysts

Dave Mossberg

My name is Dave Mossberg, Investor Relations representative for SPAR Group. On this recording, we will be discussing SPAR Group’s Third Quarter 2016 Financial Results. Joining me will be comments from Mr. Scott Popaditch, Chief Executive Officer and President; and Mr. Jim Segreto, Chief Financial Officer.

Before we begin, I’m going to review the company’s Safe Harbor statements. Statements in this conference call that are not descriptions of historical facts are forward-looking statements related to the 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 and actual results may differ materially. When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and other similar expressions as they relate to SPAR Group are such forward-looking statements.

Investors are cautioned that 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 sec.gov.

With that, I’d like to turn the floor over to Scott Popaditch, CEO and President. Scott?

Scott Popaditch

Thanks Dave. Welcome everyone and thank you for your interest in SPAR Group. This is my first earnings recording as CEO of SPAR and I like to start off by saying that I'm excited to be here. I spent the bulk of my career in merchandising and marketing services for the consumer packaged goods and retail industries, and I have a broad experience in evaluating various strategic and operational positions.

I can tell you that SPAR is a great foundation in multiple opportunities to enhance growth, profitability, and shareholder value. Coming into the job, I have found that SPAR has a lot of positive momentum based on the strategic initiatives that are already in place. I believe we have a lot of untapped potential to take advantage of and build upon that momentum.

I was attracted to SPAR based on the fact that it is one of the largest independent merchandising service providers in the U.S. and has a foundation for expansion into other service channels that can be supported by its unique technology. Effectively, SPAR’s strategic independence makes us directly align with the interest of both the manufacturer and the retailer, eliminating conflicts that our major competitors experience.

I was also attracted to SPAR based on the quality of its people, as well as its global footprint. In my eyes, these are significant differentiators that will allow us to take advantage of untapped opportunities. Before I elaborate on these opportunities, I’ll now turn the call over to our CFO, Jim Segreto, and he will provide greater detail on our financial results and then I’ll be back with more detail.

Jim Segreto

Thank you, Scott. Before I review our financial results, I would like to officially welcome Scott to the SPAR team. The entire organization is excited with the recent changes in management, and we are committed and supportive to Scott's vision for growth and profitability. So again welcome.

Moving on to a review of our financial results for the third quarter and nine months year to date. Revenue for the third quarter was $33.4 million, which was an increase of 18% over the same period last year. Adjusting for foreign currency translation, the year-over-year revenue comparison would have been a positive 22%. For the nine-month period, revenue increased 3% to $89.8 million, compared to $87 million for the same period last year.

Adjusting for foreign currency translation, the year-over-year revenue comparison would have been a positive 11%. Breaking down revenue by geographic area, our domestic revenue for the third quarter increased 6% to $11.3 million compared to $10.7 million last year. And for the nine-month period, domestic revenue was relatively flat at $32.3 million. While our domestic gross profit margin continues to trend slightly below last year, our revenue has increased in the third quarter, reversing prior quarter trends.

As we had mentioned in our last call, our domestic revenue growth is entirely organic and we expect this growth trend will continue through the balance of 2016 and into 2017. Our international revenue continues to face headwinds with unfavorable foreign currency translation. For the third quarter, international revenue increased 26% to $22.1 million compared to $17.6 million last year.

Our recent acquisition in Brazil contributed $1.9 million in revenue or 11% of the increase, and adjusting for foreign currency translation, the increase in revenue would have been a positive 33%. For the nine-month period ended September 30, international revenue increased 6% to $57.5 million compared to $54.2 million last year. And again adjusting for foreign currency translation, the increase in revenue would have been a positive 18%.

Third quarter international revenue comparisons primarily benefited from solid performance in Mexico and South Africa and the Brazil acquisition, partially offset by lower revenue in China. For the nine months, the revenue growth was primarily delivered by Mexico, Brazil, and Japan, little offsets by lower revenue in other areas of the world.

Moving on to profitability, our gross margin performance was 21.8% of sales for the third quarter, which is 200 basis points lower than last year. For the nine months our gross margin performance was 22.8% or 110 basis points lower than last year. The reason for the decline in gross margin performance is driven primarily by our domestic operations, which is due in part to our mix of business.

Operating profit for the third quarter increased 88% year-over-year to $430,000, primarily driven by our international operations. For the nine-month period, our operating profit increased 26% to $1.4 million compared to $1.1 million for the same period last year. We continue to keep a tight control over our cost. However, for this reporting period, the company was negatively impacted by one-time expenses related to the change in management, legal, and accounting fees.

Net loss for the third quarter was $58,000, compared to a net loss of $92,000 last year. For the nine-month period ended September 30, we generated net income of $84,000, compared to a net loss of $137,000 for the same period last year.

Moving on to the balance sheet and cash flow, cash from operations for the year was a positive $2.3 million. We used approximately $1.2 million for CapEx. Our accounts receivable balance at the end of third quarter was $30.8 million, which equates to day sales outstanding of 83 days, which is trending slightly higher than our historical range. Our total debt was $8.2 million versus $6.2 million at the end of 2015, and our cash was $7.5 million compared to $5.7 million at the beginning of the year.

I would now like to turn the call back to Scott. Thank you everyone.

Scott Popaditch

Thank you, Jim. Upon arriving at SPAR, it was clear that we needed to turn our attention to making improvements to our domestic operations. We have great people and systems, but our operational and financial performance has been inconsistent. With some realignment, we can make significant improvements.

For our domestic business, we have identified five key areas where small changes can lead to significant improvement over time. First and foremost, we need to start with our employees in field network. We will be making improvements to our operational workflow to improve overall execution and drive efficiencies throughout the system.

We will be placing a greater emphasis on developing a performance based culture by defining performance metrics throughout the organization to drive superior execution and to help identify areas of inefficiencies to improve.

The second key area is change in our organizational structure. Where possible, we will centralize our strategic leadership and operational roles where synergies are evident. Having centralized strategic leaders makes it easier to build trust, improves collaboration, and supports a strong corporate culture.

At the same time, we will continue to maintain a decentralized field operation to penetrate local markets and be closer to our customers. Being deeper in our territory coverage will help us improve the consistency of our service delivery as well as improve efficiency. The third change is assessing and updating our go to market strategy.

Over the past couple of years, our sales team have had great success supporting existing clients in reaching out to more global clients. This strategy has worked, but domestically we need to develop new customers and increase our pipeline of new business. To address this, we will be re-aligning our sales team to drive new revenue and specific retail channels.

The fourth key area will be to continue to improve our technology, internally to drive efficiencies and reduce operating costs, and then client facing to provide fast flexible client reporting. And fifth, is to focus. We will focus and solidify our four core services; merchandising, assembly, audit, and major store resets.

Greater focus will clarify our offerings to our customer base and support better execution and allow our sales team to provide clear solutions to the domestic market. The result of all these changes are to increase domestic revenue and creating more profitable business, not as a result of cutting cost, but by improving efficiencies, then surgically trimming or redirecting the resources to more profitable areas.

In addition, we should be able to provide a more consistent and stable growth profile for the domestic business. Moving on to our international business, we have a lot of positive momentum in our international operations. As Jim mentioned earlier, for the third quarter, international delivered a solid 26% growth in topline and showed nice improvement in profitability.

Steve Adolph has joined us this summer to head up our International Division. Steve is a very capable and experienced international professional. I have full confidence in his abilities to lead continued growth and profitability in this segment. Significantly, we also formed SPAR Brazil. By making an acquisition that will provide a beachhead for growth in the country as well as a foundational growth in the rest of South America.

Moving on to our outlook, we're reviewing many small changes to our domestic operations with the anticipation we will have improvement in domestic financial results, as well as greater consistency in performance. In addition, we are investing in our international operations to create the foundation for growth in South America.

The strengthening dollar and international currency instability could impact financial performance. As a result, our international finance performance is likely to be sub-optimal for the next few quarters on a comprehensive income basis. Nevertheless, I am optimistic about the future and expect to see a significant improvement by the end of 2017.

On behalf of the entire team here at SPAR Group, we would like to thank you for listening. This ends our prepared comments. Thank you.

Question-and-Answer Session

Q -

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