SPAR Group, Inc. (SGRP) Q2 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the SPAR Group Inc. Second Quarter 2012 Update Conference Call. [Operator Instructions] I would now like to turn the conference over to Alan Sheinwald of Alliance Advisors. Please go ahead, sir.

Thank you, operator, and good morning. I'd like to thank everyone for joining us today for the SPAR Group's Second Quarter 2012 Shareholder Update Conference Call. Mr. Gary Raymond, Chief Executive Officer; and Mr. Jim Segreto, Chief Financial Officer of SPAR Group, will be your presenters on the call today. Before we begin, I'm going to review the company's Safe Harbor statement. Statements in this conference call that are not descriptions of historical facts are forward-looking statements relating to future events, and 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 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 now like to congratulate management on yet another strong quarter and introduce Mr. Gary Raymond, CEO of SPAR Group. Gary, please go ahead.

Thank you, Alan, and thank you, everyone, for joining us this morning for our second quarter 2012 shareholder update conference call. Our management is extremely pleased with the strong financial results achieved during the second quarter and first 6 months of 2012. The company has undergone significant organic growth of 16% within our domestic business, while successfully integrating accretive subsidiaries throughout our international division. These triumphs have led to strong financial gains across the board. Quarterly revenue increased by 53%. Gross profit grew by 35% and net income increased by 41%. These results are proof positive that our strategic business model of organic domestic growth, coupled with effective international acquisition and integration, is successful. First and foremost, the improved bottom line can be directly attributed to our success within the U.S. marketplace and is reflected in the 66% increase in domestic net income to $928,000. This strong growth was based on SPAR's ability to obtain several potentially large scale contracts with big box retailers. Clients such as these have afforded us the name recognition and references to secure even larger projects with manufacturers and retailers alike. Additionally, we experienced growth in our syndicated services and assembly business, which were both part of our 2012 strategic business plan. Management believes that the increased number of contracts, coupled with the escalated depth of the projects, will continue to propel growth throughout our U.S. operations. In addition to strong domestic growth, management is encouraged with the developments in our international business. Successfully integrating our most recent acquisitions has allowed us to grow our international revenue by 105% in the second quarter. Operations in Mexico, Romania and Turkey continued to drive this division, while South Africa and Japan sustained solid gains, which contributed to an international organic growth of 17% for the period. Recently, in Mexico, we signed an agreement with Wal-Mart to provide in-store merchandising and demonstration services through our Mexican subsidiaries, SPAR TODOPROMO. This is certainly a major client and will greatly increase our presence in the Mexican market. While we were pleased with our global performance during Q2 2012, we have even greater optimism for the international division in the second half of the year. Preliminary forecast for the third quarter indicate that our international division should have growth once again. Management has also identified several potential acquisition candidates for the division. These targets are in line with our previously successful expansion strategy in that the companies are operating profitably in other served markets with business models that can greatly benefit from our systems capabilities and expertise. We are currently engaged in negotiations with several companies and believe we can ink similar deals during the second half this year. The company has become recognizable and trusted within the merchandising services industry as a provider of quality, cost-effective retail execution services, and we are rapidly establishing ourselves as a worldwide leader in this industry. Due to strong second-half seasonality and the relationships that we have in place, we expect to continue expansion of our market penetration and increase our financial standing throughout 2012. With that, I would now like to turn the call over to Jim Segreto, Chief Financial Officer, who will provide greater detail of our financial results.

Thank you, Gary. As Gary mentioned, we are extremely pleased with the strong financial results achieved during the first half of our 2012 fiscal year. We are especially encouraged with the strong growth in net revenues and respective net income. Our management team is especially pleased that we experienced organic growth in both our domestic and our international divisions. With the several large domestic contracts pending, we expect this positive trend to continue into the third quarter and beyond. Net revenues for the 3 months ended June 30, 2012 increased 53% to $24.3 million compared to $15.9 million for the 3 months ended June 30, 2011. Domestic net revenues increased 16% to a total $10.9 million in the first 3 months of June 30, 2012 compared to $9.4 million for the same period in 2011. Domestic revenues increased based on growth from the company's syndicated services and assembly business as well as working with several new clients. International net revenues increased 105% to total $13.5 million for the 3 months ended June 30, 2012 compared to $6.6 million for the same period in 2011. The increase in 2012 net international net revenues was primarily due to incremental revenue of the new subsidiaries in Mexico, Romania and Turkey in addition to strong performances in South Africa and Japan. Gross profit increased 35% to $6.5 million for the second quarter of 2012 when compared to $5 million for the same 3-month period in 2011. The increase in gross profit was equally attributable to our improved margins in our domestic operations and expansion efforts within the international business. The company reported net income attributable to SPAR Group Inc. of $718,000, or $0.03 per diluted share, for the 3 months ended June 30, 2012 compared to net income of $509,000, or $0.02 per diluted share, for the corresponding period last year. The growth in net income was led by a 66% increase in our domestic division. For the 6-month period ended June 30, 2012, net revenues increased 40% to $45.4 million compared to $32.4 million for the 6 months ended June 30, 2011. Domestic net revenues totaled $20.2 million in the 6 months ended June 30, 2012 when compared to $18.9 million for the same period in 2011. The increase in domestic net revenues of $1.3 million was primarily attributable to the continued growth of the company's syndicated service and assembly businesses. International net revenues increased 87% to total $25.2 million for the 6 months ended June 30, 2012 compared to $13.5 million for the same period in 2011. The increase of $11.7 million in international net revenues, as mentioned earlier, was primarily due to incremental revenue for the new subsidiaries in Mexico, Romania and Turkey, as well as the strong performance from our South Africa and Japan markets. The gross profit increased 22% to $12.5 million for the 6 months ended June 30, 2012 compared to $10.2 million for the same period in 2011. The increase in gross profit was directly attributable to our 2011 expansion efforts in our international business. Net income attributable to SPAR Group Inc. increased 35% to $1 million for the 6 months ended June 30, 2012, or $0.05 per diluted share compared to the net income of $762,000 or $0.04 per diluted share, for the corresponding period last year. The net income improvements in the 6-month period ended June 30, 2012 was the result of strong performances from both the domestic and international divisions. As of June 30, 2012, working capital improved to $8.2 million and our current ratio was 1.7:1. Our cash position remains strong. Our debt levels continued to decline, and our borrowing capacity continues to improve. Total current assets and total assets were $19.8 million and $23.5 million, respectively. And cash and cash equivalents totaled $1.7 million at June 30, 2012. Total current liabilities and total liabilities were $11.5 million, $11.9 million; respectively. And total equity was $10.5 million at June 30, 2012. The company remains committed to our strategic business model of growing organically and via acquisitions both domestically and abroad. Management will continue to monitor overhead costs and improve efficiencies in order to increase our earnings and improve shareholder value. I would like to now turn the call back to Gary for closing remarks.

Thank you, Jim. We believe that SPAR Group is well positioned to capitalize on recent achievements and future opportunities, in order to establish itself as a leader within the retail merchandising and marketing services industry. We have posted strong financial results during the first 6 months of the calendar year, thanks to our disciplined approach and successful acquisition model. We expect to continue and record financial gains going forward in the second half of the year, which is historically our strongest. SPAR's current project pipeline, coupled with the typical seasonality of the retail merchandising business, will allow us to continue our impressive growth trajectory, and we are confident in our ability to meet our top line guidance of $90 million for 2012. During the remainder of the year, we will continue to reduce several acquisition candidates. We will be looking to make additional acquisitions in certain international locations that we are currently operating in that have produced strong results in the past 12 months. Additionally, we are targeting South and Latin America to augment our international division. This seems to be an area with great growth opportunities, which is proven by the recent success that we are experiencing in Mexico. We have demonstrated that our products and service offerings, combined with the local knowledge of our partners, have proven our ability to greatly increase revenue in those markets. On the domestic side, our sales team has done a great job of signing new contracts and up-selling our existing clients on additional services. Our assembly services with Staples and others have been consistently growing and we expect this trend to continue throughout the year. Additionally, syndicated services provided growth and led to an increase in our bottom line. Our in-store services will continue to grow as consumers continue to make more choices for product purchases at the retail shelf, and companies are spending a higher percentage of their dollars on these shopper activities. We are excited with the opportunities that lay ahead in 2012 and beyond, and we look forward to providing additional information on our financial success. Lastly, as you may have seen this morning, our Board of Directors has authorized a share buyback program of 500,000 shares. This decision was based on the strong financial performances we have delivered over the last few quarters in combination with our strengthened balance sheet. On behalf of the entire SPAR team at SPAR Group, I would like to thank all of you for joining us on today's call, and we are now available to answer any questions from participants.

[Operator Instructions] You have a question from the line of Thomas Raymond [ph] with Lauren Capital [ph].

Can you provide more insight on Q3 and Q4, which are typically your better quarters? And additionally, what are you doing to improve margins in the near-term?

Yes. I mean, we're not going to comment too much on third and fourth quarter other than what we already talked about. I think, if you look at history, you'll see that both of those quarters are typically pretty good for us, particularly the fourth quarter, where we get a lot of different work that comes in and our profitability generally in the fourth quarter, if you look back across the last -- I don't know, maybe 3 to 5 years, generally speaking, is one of the better ones. But we do have a lot in the pipeline right now for both quarters from a revenue perspective. And like I said, we're pretty comfortable. If you look at our 6 months to-date where you -- you added about half of what we had put in for our revenue guidance for calendar '12. So we're pretty comfortable we're going to jump up over that number.

Okay. Additional question. On the international side, it's ramping up very nice. Do you expect to be profitable in the second half of the year from this division?

Yes, that would be our expectation. I mean, we are -- you almost need to look at this from a ground-up market-by-market basis. And as you look at the different markets that we've got, we're trying to make sure that we are profitable in each of these markets. Today, there are numerous markets that are actually doing a very good job from a profitability perspective, so we want to continue those and the ones that have not been pulling their weight, at least, for this quarter, we're hoping that, that will be turned around in the next couple of quarters. So the answer is, yes, we're trying to get us to the point where we will show profitability in totality for the international division.

[Operator Instructions] I'm showing no further questions. Please continue.

Okay, thank you very much. We appreciate everyone listening in this morning and hearing what we've had to say in terms of the story about SPAR Group and as well as our results. And I want to thank all of our employees who just did a tremendous job for both the quarter and the first 6 months of the year. And we look forward to not only a tremendous finish to this calendar year, but also to continue into the next couple of years in the future as well. So again, thank you very much for everybody. If you have any questions subsequent to this, you're welcome to contact Alliance Advisors. I think all of that information is available to you, okay? Thank you very much.

Thank you. And that does conclude our conference for today. Thank you for your participation. You may now disconnect.