SPAR Group, Inc. (SGRP) Q2 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the SPAR Group 2015 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mr. Matthew Selinger from Three Part Advisors. Thank you. Mr. Selinger, you may now begin.

Thank you, operator, and I would like to thank everyone for joining us today for the SPAR Group 2015 second quarter financial results conference call. On the call today, your presenters will be Ms. Jill Blanchard, 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 statement. Statements in this conference call that are not descriptions of historical facts 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 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 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 would like to turn the call over to Jill Blanchard, CEO and President. Jill?

Thanks, Matt. Welcome to the call and thank you for your interest in SPAR Group. In looking at our second quarter and year-to-date results, our performance was challenged on two fronts. First, an unfavorable foreign exchange impacted the international business and second, we had inconsistent performance in the business groups both domestically and internationally. Putting aside these results, we did see success in the markets and businesses where we have implemented new strategic initiatives, and while we expect it will take time to adopt these initiatives out across our entire footprint, we clearly have a blueprint for success and are stepping up our efforts, which should provide for more consistent results and long-term profitable growth. Before I get into more detail on our strategies and plans, I’d like to turn the call over to our CFO, Jim Segreto, who will provide greater detail on the financial results and then I’ll be back with more detail. Jim?

Thank you, Jill. I will now give a quick overview of the second quarter financials. Revenue for the quarter was 29.5 million, which was down 5% from the prior year. Adjusting for foreign currency translation, revenue growth year-over-year was actually a positive 3%. Breaking down revenue by geography, our domestic revenue was 11.1 million, a 12% decline from last year, which was primarily related to underperformance with two of our small service offerings. In our assembly business, one of our large customers was acquired and is no longer doing business with us. While this has temporarily affected this business line, we believe there is an opportunity to do business with a new combined entity not only recapturing but growing this business. The nature of the revenue trend in the other domestic service offering that underperformed this quarter is fairly variable and without losing customers can periodically experience significant inclines or declines in revenue. This business is less than 10% of our domestic revenue. However, it did decline 40% during the second quarter, which was enough to move the needle in our overall domestic results. Outside of this relatively small business segment, our core business remained stable and with our seeing success in specific initiatives and customers, which Jill will review later on. For the second quarter, our international revenue at 18.4 million was relatively flat compared to last year. Again, having adjusted for FX, our international sales performance would have shown a $2.4 million increase or 13% year-over-year. Excluding the currency effect, the increase in net revenues was primarily due to incremental revenue from our acquisition in China and continued solid performance from South Africa, partially offset by lower revenue in other countries. Moving on to profitability, our second quarter gross margin performance was relatively consistent with last year coming in at 24.3% of sales, gross margin declined by 57 basis points driven by slight improvement in domestic profitability offset by a 44 basis point decline in international gross margin. While operating expenses remained relatively unchanged from prior year, as a percentage of sales they increased by approximately 1 percentage point to 22.6% of sales. The company reported net income attributable to SPAR Group of $29,000 for the quarter or $0.00 per share compared to net income of $577,000 or $0.03 per share for the corresponding period last year. Moving on to the balance sheet and cash flow. Cash flow from operations for the first six months of the year was a positive 3.6 million. We used approximately 700,000 to reduce debt and spent approximately $900,000 for CapEx. Our accounts receivable balance at the end of the second quarter was 23.4 million, which equates to days sales outstanding of 72 days, which is in line with our historical ranges. Total debt decreased to 5.8 million versus 6.5 million at the end of 2014 and cash was 5.7 million versus 4.4 million at the beginning of the year. Overall, our balance sheet remains strong with plenty of excess liquidity. Besides our cash balance, we have an average of $3 million available to borrow on our lines of credit providing sufficient capital to meet our anticipated organic growth and acquisition plans. I will now turn the call back to Jill.

Thanks, Jim. For those of who that maybe a little less familiar with our company, I’ll just spend a few minutes going over our strategic plans. There are three key elements to our plans. The first element of our strategic plan is to realign the value that we deliver to our customers. The world of merchandizing involving evolution requires us to be more of a strategic partner with our customers and not just a traditional lender. In the end, this is going to provide us with stronger relationships and a more measurable and predictable revenue stream. The second element calls for us to leverage our existing competencies and footprint to do more business with our current customers and new customers in existing markets. And our third elements calls for us to extend our service offering to capitalize on industry growth areas and enter into new markets. Now, I’d like to get into more detail on each element. The first element, which is the most critical for our success and where we have been spending the majority of our time, is working to change the value that we delivered to our customers and prospective customers. As our industry evolves, it is imperative that we deliver value beyond our base service and be recognized as a strategic partner with our customers better than just a service commodity. By putting the focus on delivering greater value for our customers, not only do we garner more customers and do more business with existing customers but be more profitable and more sustainable. To accomplish this goal, we need to constantly improve our value proposition and make adjustments with how we are going to market. The first step in improving our value proposition is to change our position with our customers and prospects. We need to protect against being a commoditized service chosen mostly based on price and deliver strategic value leveraging our global retail experience, and we need to deliver that value to more senior level contacts with more influence over larger portions of their sales and marketing plans and budgets. We have had many recent examples of this that lead directly to more new business and more profitable business. In one country, one of the concept of retailers taking over merchandizing as new, we have recently met with three of the four largest retailers in this country to provide counsel at the more senior levels of this organization. Instead of waiting for RFPs to come our way, we are proactively consulting at a top of these organizations about the benefits of merchandizing and what we have deemed worth and not worth. And as a result, we have significantly broaden our pipeline of new business in this country. One of the retailers even told us that they were going to completely change their plans based on this session and we are actively in discussions with all of them on our go-forward plans. This is a good example of how we are changing our go-to-market effort and creating new business opportunities for SPAR. In a different part of the world, we are providing counsel to our franchised retailer by connecting them with two other franchised retailers with whom we do work in different countries today on the ins and outs of implementing merchandizing in a franchise world. Hereto, we are consulting at the highest levels of these organizations and this proactive go-to-market initiative helps us to create value-added strategic relationships with our customers, which ultimately translates into stronger customer relationships and more revenue opportunities. One last example is a work session that we’ve recently conducted with one of our top customers between the senior levels from both our organizations. Together we brainstormed ideas about how we could improve merchandizing across more stores. In this meeting, we identified a plan and recently began executing with great success. Not only did we experience a double-digit business gain from this effort but we have also strengthened our long-term relationship with this new client. These are just a few examples of the value that we’re delivering to our customers and the benefits of that value. And these examples give us confidence in our plan. We have recently made investments in the talent necessary to takes these anecdotal examples and apply them across all our top customers. Putting those success stories aside, there are always going to be customers in every industry that will buy solely on price, and for some customers the lowest priced they were. But on the other hand, as is the case in most businesses, one often gets what they paid for. We have recently had a handful of customers come back to us after having chosen the lowest price and been dissatisfied with the service. Our strategy is to deliver a valuable partnership to our clients that tangibly benefits their business with greater efficiencies, productivity and profits. Another key to improving our value proposition is to continue to invest in technology that increases efficiency and productivity. Our SPARtrac retail operations system today provides differentiation for us and increased value to our customers. A recent study by EKN Research shows that even though one of the main issues for shoppers is that retail staff isn’t helpful enough and the main goal for retailers is sales, retailers still spend 70% of their time on non-sales and customer service tasks. Of this, merchandizing is a primary element. SPAR supported by the most advanced retail operations system in the world provides greater efficiencies and increased productivity in conducting front and backend services so that the retailers can concentrate their staff on their number one goal, increased customer service and sales. SPARtrac makes it exponentially more efficient to manage the merchandizing process, because unlike most other systems that manage only a handful of tasks, SPARtrac manages hundreds from [indiscernible] merchandisers to tracking and reporting [indiscernible]. SPARtrac has many other advantages over competitive systems and we continue to develop more such as the image recognition software that we’re currently testing in a real world merchandizing project that we’ll greatly speed up and improve the accuracy of in-store audits. We’re also currently offering a service that combines cloud for store audits with targeted merchandizing based on those audits to increase our value proposition. It’s imperative than we continue to support and develop this part of our business with our industry evolvement of new technologies and as manufacturers and retailers continue to look for more ways to optimize merchandizing efforts in their stores. The second in-store major elements of our strategy are our key growth initiative. As we continue to demonstrate success in becoming strategic partners with our customers, we do plan to invest the internal profits from our success in these new both initiatives. First, we are planning greater investments in client services, marketing and sales talent to expand the amount of business that we’re doing with existing customers and in industry markets. And second, our growth plans called for investment in new services that target key industry growth areas and new market growth areas, which are conjunctional to our existing offerings and footprint. Last, I’d like to look at our outlook for the next several quarters. As I said earlier, our strategic initiative will demonstrate success and I’m confident that they will provide for better consistently in financial performance and long-term profitable growth. Near term, our results are likely to be inconsistent until we can adopt these initiatives across our entire footprint, which is going to take time and investment. We will focus our efforts near term across our top domestic customers and selected international markets that are underperforming as these provide the biggest opportunities for near-term improvement. We are making progress with our strategic plan although it appears that this year will likely be a transitional year for SPAR Group, I’m confident that we have the right plan in place and that we’ll exit this transitional period poised for profitable growth and greater returns for our shareholders. On behalf of the entire team here at SPAR Group, we would like to thank you for being on today’s call. This ends our prepared comments, and we are now available to answer any questions. Thank you. Operator, can you please open up the call for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first question is from Ben Rubenstein of Robotti. Please go ahead.

Good afternoon. I was just curious, can you give any sort of break down or can you talk at all about what percent of your revenue is new business versus recurring business from previous quarters?

Sorry, Jim I’ll hand it over as soon as I can. We’re talking over each other, sorry about that, Ben. Thank you for the question. Yes, I’ll just start and then I’ll hand it over to Jim. The majority of our revenue is a new business revenue versus project, but I think that might be a portion of your question but I’ll hand it over to Jim to talk about new business versus existing customers. Also adding before I hand it to him that a good portion of our growth on a year-over-year basis comes from existing customers. And so we are getting some new business from existing customers as well as new business from new customers. Jim, I don’t know if you have some more to add to that.

Yes, the only thing – I think that’s absolutely correct, Jill. There’s a good solid mix from both and this probably a couple of million dollars of revenue in the quarter year-over-year that came from the acquisition that we did in China, which was in the second half of 2014. Hopefully that helps you.

Yes. Thank you. And then I guess just in terms of M&A, I guess can you talk a little bit about the environment in terms of what multiples if you are looking at companies, like what type of multiples do you have to pay?

We are looking at acquisitions and do have a strong pipeline whether it’s on the domestic front or abroad. And it varies by country, U.S. versus outside the U.S. But the benefit to us is that when we look to partner in the locals outside the United States and we’re looking at 51-49 opportunities. And so we bring a lot of value to the companies in our software, in marketing and global clients that we bring to the venture environment. So the multiples, I’m not going to get into the specific ones, but it’s very favorable. On our behalf, it’s a good blend for us and adds a lot of strategic value for the partners. So it’s really not a multiple environment more than it is a strategic relationship with the targeted companies.

And if I could just add to what Jim said, another one of the values that we bring to the other countries as we look at these new partnerships that helps with the value of the multiple is the cache of being part of a global company and these companies are trying to work with big Fortune 500 global company is the ability to be part of a global company and be assured things like compliance with the Foreign Corrupt Practices Act has a huge advantage to them. So that in addition to our global clients and technology that we bring to those is of great value.

Thank you.

Thank you.

[Operator Instructions]. Thank you. We have no further questions at this time. I would like to turn the conference back over to management for any closing comments.

Okay. Thank you. So, again, thank you for joining us on today’s call.

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.