SPAR Group Inc (SGRP) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the SPAR Group Inc. third-quarter 2012 update conference call.

During today's presentation all parties will be in a listen-only mode. Following the presentations the conference will be open for questions. (Operator Instructions) I would now like to turn the conference over to Alan Sheinwald of Alliance Advisors.

Thank you. Good morning. I would like to thank everyone for joining us today for the SPAR Group third-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.

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 the 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 US Securities and Exchange Commission, which can be reviewed at www.SEC.gov.

With that I would now like to congratulate management on yet another strong quarter and introduce Mr. Gary Raymond, CEO of SPAR Group. Gary, the floor is yours.

Okay. Thank you, Alan, and thank you, everyone, for joining us today for our third-quarter 2012 shareholder update conference call. Management is extremely pleased with the strong financial results achieved during the third quarter and the first nine months of 2012.

The Company has increased its quarterly revenue by 50%, gross profit by 29%, and net income by 134%. SPAR achieved this significant growth due to achievements in both our domestic and international businesses. We believe this type of balanced growth is vital to our continued success and will be the key to continually increasing our true earnings power.

Our ability to simultaneously and significantly experience growth throughout both business lines was of the utmost importance during the current fiscal year. We have accomplished this goal by maintaining strict adherence to our previously implemented business model of acquiring and efficiently integrating profitable international subsidiaries, while organically growing both our domestic and international earnings via large-scale contracts with Fortune 500 companies, including Staples, Walmart, Family Dollar, Procter & Gamble and many others.

During the quarter we also made a key acquisition in the US marketplace that I will discuss in further detail later in my remarks. Internationally, we recorded strong organic growth via the signing of multiple contracts that will provide strong revenue growth over the next 12 months. Management remains confident that the increased number of contracts, coupled with the increased size and scale of the projects, will continue to propel growth throughout our operations.

Recently, our subsidiary in South Africa entered into a new strategic alliance that will enhance our operations throughout the inland territory of South Africa. This new joint venture expands our capabilities throughout South Africa and makes this market a key growth area for our future. The new JV with CMR Meridian will provide approximately $7 million in annualized revenue.

Also during this quarter we announced the new $3.5 million contract in South Africa with Procter & Gamble.

We continued our expansion in Romania which will deliver approximately $4 million of revenue on an annualized basis. The Romanian venture has numerous marquee clients such as Coca-Cola, Kraft Foods, and Nestle. Working with these new partners will allow us to expand our global footprint and increase our market share.

Our subsidiary in Mexico continues to provide tremendous opportunities in the growing Spanish-speaking market. During the quarter, we announced new contracts with GlaxoSmithKline and Walmart that are expected to deliver annualized revenue of approximately $4.5 million and $2.5 million, respectively. Successfully integrating these clients into our operations in this important market is expected to provide further expansion opportunities throughout Mexico and other Latin and South American countries.

As I have mentioned in the past, Brazil is a target market for SPAR expansion and we are very confident we will be able to expand our effort into South America during 2013.

On the domestic side of the business, revenues grew 26% while our net income was up 119%. This was based on several large contract awards that we received throughout 2012. Based on heading into the busy holiday season, we are pleased with the results generated in the first nine months and expect our success to continue.

To augment our organic growth we completed a joint venture on the domestic side of the business. The company is currently generating approximately $3 million in annual revenue, specializing primarily on in-store merchandising and new store opening and remodeling projects. The acquisition will allow us to strengthen our long-term competitive position in our targeted market and enable us to service a broader range of retailers and manufacturers while expanding our labor force capability.

We are pleased with our global performance during Q3 2012 and we are optimistic that our fourth quarter, traditionally our strongest quarter of our fiscal year, will continue this trajectory. Our store executions were somewhat limited and hampered the last couple of weeks in the northeast by Hurricane Sandy due to obvious temporary store closings. But our hope is that with our strong fourth-quarter seasonality and the relationships that we have in place that we will be able to keep increasing our financial standing for the balance of 2012.

This escalating growth and improved financial strength provides our Board of Directors and entire executive team management with the confidence that we will become one of the top merchandising and marketing services companies in the next few years. Based on this fact, the Board recently authorized a 500,000 share repurchase plan. During the third quarter the Company implemented a stock repurchase just prior to our blackout period and as a result we were only able to repurchase approximately 12,000 shares. However, we are on target to continue our effort in this critical endeavor.

I would now like to turn the call over to Jim Segreto, Chief Financial Officer, who will provide greater detail on our financial results.

Thank you, Gary. As Gary mentioned, we are very excited with the strong financial gains achieved during the three- and nine-month periods ending September 30, 2012. We are especially encouraged with the strong growth in our revenue and operating income.

Consolidated net income for the three-month and nine-month periods ended September 30, 2012, increased 50% and 44%, respectively, when compared to the same periods in 2011. The increases in net revenue were primarily driven due to our new subsidiaries in Mexico, Romania, and Turkey, and strong performances in South Africa, China, and Japan.

Combined with continued growth in our domestic operations, driven primarily by new client work in addition to continued growth in the Company's syndicated services, assembly businesses, and increased project work in the third quarter of 2012 when compared to a year ago. Consolidated gross profit for the three- and nine-month periods ended September 30, 2012, increased 29% and 25%, respectively, when compared to the prior year, primarily due to our expansion in the international community.

Net income attributable to the SPAR Group increased 134% and 59% for the three- and nine-month periods ended September 30, respectively, when compared to the same period a year ago. The increase in net income for the three-month period ended September 30, 2012, was driven by a 119% increase in domestic operation. The improvement in net income for the nine-month period ended September 30, 2012, was attributable to the improved performance in both domestic and the international division.

As of September 30, 2012, our working capital improved to $8.2 million and our current ratio was 1.7 to 1. Total current assets and total assets were $20.5 million and $25.7 million, respectively, and our cash and cash equivalents totaled $1.9 million at September 30, 2012.

Total current liabilities and total liabilities were $12.3 million and $12.7 million, respectively, and total equity was $11.6 million at September 30, 2012. It is important to point out that while we increased our cash position, we also lowered our debt and borrowings by approximately $3 million for the period. We expect this trend to continue in 2013 as we continue our efforts to improve our profitability.

I would now like to turn the call back to Gary for closing remarks.

Okay. Thank you, Jim. SPAR's strong financial results and market expansion during the first nine months of 2012 have positioned us as a viable market leader within the retail merchandising industry. We have continued to expand our market footprint while constantly bolstering relationships with some of the world's largest retailers and manufacturers.

We expect to continue to record financial gains throughout the fourth quarter, which is historically our strongest quarter. Our current project pipeline coupled with the typical seasonality of the retail merchandising business is expected to propel our impressive growth trajectory, and we are very confident in our ability to beat our previously stated revenue guidance of $90 million for 2012.

During the fourth quarter the Company will focus its domestic business on servicing large scale retail outlets in time for the pending holiday season. Our international business will remain focused on the task of identifying and acquiring profitable acquisitions in underserved markets. We currently have targeted several potential locales in South and Latin America which would significantly bolster our revenue and profit production.

SPAR's suite of service offering, combined with a strong local knowledge of the area, have provided strong name recognition and provided a competitive advantage when seeking new subsidiaries.

Management is extremely pleased with the wide array of opportunities that lay ahead during the fourth quarter and beyond. So on behalf of the entire team at SPAR Group I would like to thank everyone for joining us on today's call. We are now available to answer any questions from any of the participants on the line.

(Operator Instructions) [Antonio Nunez], Nunez Capital.

Congrats on the earnings. Can you please elaborate on your plans for Latin and South America based on the success of Mexico?

Yes, we have been looking at numerous markets, not just in South America, frankly, but around different markets around the world. We have been investigating this one now for probably going on about eight months, and we have -- the primary target market that we have looked at first is Brazil.

We actually talked to probably somewhere between 10 and 12 companies originally. We narrowed the focus to four, and now we are in the process of trying to negotiate with the one that we think is the best fit for us and trying to get that done and set up, hopefully, sometime during 2013.

Also, are there any other geographic regions that you're looking to augment your international division, except for South America and Brazil?

Yes, probably the biggest one is we were looking at is over in Asia. We currently have a footprint there between Japan and China and India, and we are trying to look at what are the other best potential markets to go pursue.

Based on the client information -- the clients that we work with and their recommendations on where they think would be the next best market to go to, they have given us a few recommendations and probably at the top of the list would be South Korea over in Asia. We are also looking at other Eastern European markets to see if we want to expand there as well.

And those are just what would be our new markets. We are also looking quite extensively in markets that we are already in and acquisitions in those markets. So similar to what we did in South America -- excuse me, in South Africa, where we just started on October 1, we are going to look to see if there are other companies that fit into our model that we could bolt on to our current businesses. The primary market that we are looking at for those are Canada, South Africa, and Australia.

Okay. Also, you said you guys acquired a small company in US during the quarter. Are there any other plans to further acquire companies in the US on the larger side?

Yes, there is. We do not have anything today that is what I would call imminent, but we just came out of a Board meeting yesterday. I was going through with them kind of what my next initiatives and plans are trying to find a -- what I would describe is I would like to find a sizable acquisition in the US for us to be able to go after.

Prior to this small one that we just did, the last one in the US goes back to I think it is almost like the last month of 2009 or beginning of 2010. So the organization is clearly ready to take on another acquisition and we would like to find something that is relatively sizable.

Okay, thank you. Congrats on your growth again.

No problem, thanks.

(Operator Instructions) John Curti, Singular Research.

Good morning, gentlemen. I am new to the story; got a couple of questions here. Maybe you can help me understand just kind of the business model.

It looks as though there is a fairly sizable difference in gross margins being reported between domestic and international. My first question is is there anything structural that would keep that differential where it is, or can it narrow in the sense that international gross margins come up?

The primary thing -- and the international ones are obviously a collection of all the different markets, so there is a pretty wide range of margin percentages that are in there. There is one market that is probably close to the US, there is others that are kind of in the middle, and then we have had a couple, frankly, that have been about breakeven or even losing a little bit.

So what we are trying to do market by market is we have given them -- as we move into the new year we have assigned them EBITDA targets to go hit and gross margin profits to go hit so that they can keep moving the needle up as it relates to that. Part of the other issue we have had over the past year in particular is as we took on Mexico, Mexico is a market that we make a better margin than we did in some of the other international markets. And because of the weight of what Mexico brings as a percentage of the international business, it was really driving the international margins down.

So I think there are things that we are going to do to improve the international margins, or at least attempt to. I would probably doubt that we are going to get to the point that we are going to be at what the US profit margin is, but we are certainly going to try to close the gap.

And with respect to profitability, beyond the differential in gross margin, do you have a fairly sizable difference on the SG&A side? In other words, you have built up, got an infrastructure for international and you just need to add more revenues on top of that to improve profitability.

Or, again, are the expenses on the international side relative to domestic at a level such that they will always be at a higher percentage than domestic? You have got pretty good revenues there.

Yes, part of it is growing -- market by market growing the bandwidth in all of these markets. So as an example, we are trying to use right now is South Africa as our model, because if you went back a couple of years ago it was a relatively small revenue joint venture. Was doing between a couple at a million, a few million dollars in revenue and they were able to obtain some rather large multinational contracts with both Nestle and Procter & Gamble. And with that were able to build on the business along with those contracts.

Then subsequently, as I just mentioned, we had another acquisition that we did in the inland region of South Africa that actually build them up to that. So these guys are going to be up now -- going into 2013 you are talking about them being in the probably $16 million, $17 million, $18 million range, where they were at $2 million.

And when you start getting to the heart of your question, which is around the expenses and the SG&A and all that, well, all of a sudden if you can start building some big businesses and big contracts it makes a lot of those things with the SG&A look relatively minor. But when you are in some of the other markets where you have not built up that base to the point that we all hope then all that stuff kind of sticks through a little bit.

So I think, again, we are probably going to get to the point where we are going to get better as we keep building up our bandwidth in those markets. I don't know if you are really though ever going to see it as good as the US.

Then the investments that you are making in these joint venture companies agreements, how are they handled on the balance sheet? Where do they show up?

Either as in other asset, as the investment component, or as an intangible asset based on the purchase price accounting.

They are just backing out the noncontrolling amounts on the income statement?

Correct.

All right, thank you.

No problem, thank you.

[Damian White], (inaudible) Capital.

First off, let's say congrats on the strong quarter. My question relates to international, the international division. You guys have undergone some impressive growth there and I am just curious as to when we can expect the net income there to follow suit.

Well, I would say probably I said, I think, last quarter and the quarter before I was hoping it would be this year. I would say right now, based on where we are and where we will probably finish, we will probably be close but certainly in 2013 as we move into full year cycles on the new business in South Africa, full year with Mexico with some of their new contracts.

Some of the markets that drag this, frankly, a little bit in 2012 has turned the corner a little bit this quarter, so I am hoping that their performance this quarter is going to carry into fourth quarter and into 2013. So if we can get all those up I am pretty confident it should happen by next year.

Great, thank you.

No problem.

Thank you. There are no further questions. I will turn it back over to management for any further comments.

Again, in summary, just wanted to thank everybody. From our perspective we were really pleased with obviously where we finished the quarter, the nine months, and probably more importantly we feel that we are on a very good track to carry us into 2013 and beyond.

So on behalf of SPAR we just wanted to thank all of our management in our company and all of the people that we've got that have just done a tremendous job for us. Look forward to talking with everybody again next order.

Anybody has any other questions, you are welcome to contact Alliance Advisors and set up a call with me if you would like if you have individual questions you would like to ask.

Okay, thank you very much.

Ladies and gentlemen, this does conclude the conference call. You may now disconnect and thank you for your participation.