Good morning and welcome to the SPAR Group Second Quarter 2022 Financial Results Conference Call. All participants will be in listen-only mode. Please note today's event is being recorded. I'd now like to turn the conference over to Phillip Kupper with Three Part Advisors. Please go ahead.

Thank you, Operator, and good morning, everyone. We appreciate you joining us for the SPAR Group's conference call to review second quarter results for 2022. Joining me on the call today are SPAR's Chief Executive Officer, Mike Matacunas, and the company's Chief Financial Officer, Fay DeVriese. This call is also being webcast and can be accessed through the audio link on the events and presentations page of the Investor Relations section at investors.SPARinc.com. Information recorded on this call speaks only as of today, August 16, 2022. So please be advised that any time-sensitive information may no longer be accurate as of the date of any replay or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements, or expectations, or future events, or future financial performance, or forward-looking statements, made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements by their nature are uncertain and outside of the company's control. Actual results may differ materially from those expressed or implied. Please refer to the earnings press release that was issued today for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management may also refer to non-GAAP financial measures and the reconciliations to the nearest GAAP measures can be found at the end of our earnings release. SPAR Group assumes no obligation to publicly update or revise any forward-looking statements. Finally, the earnings press release we issued earlier today is posted on the Investor Relations section of our website at SPARinc.com. A copy of the release has also been included in an 8-K submitted to the SEC. And now I would like to turn the call over to the company's CEO, Mike Matacunas. Mike?

Thank you, Phillip and good morning, everyone. I am pleased to share our second quarter results and comment on a number of exciting achievements and work that is underway at SPAR. At the end of our prepared remarks today, we will open the line for questions from analysts and institutional investors. We filed our second quarter 10-Q yesterday and this morning distributed our earnings press release. Total revenue for the second quarter was $68 million. This reflects a 1% increase year-over-year. As a reminder, we'll report in three segments Americas, EMEA and Asia Pacific or APAC. I will comment on each one individually. Our America segment reported a record revenue of $53.3 million, an increase of 3.9%. Within this segment, the United States division grew by 16% and delivered a record 31.6 million in revenue. Our core merchandising services business grew by 27% in the second quarter with the addition of new clients. Our resets and remodels business in the United States has increased our client portfolio by 30% year-over-year and is now operating in multiple countries. Our Brazil joint venture revenue grew by 25% in the second quarter as we won new business and expanded client agreements. In addition, we measure the satisfaction of our clients in Brazil and all of them continue to have excellent scores demonstrating the value of our services and relationships. Our EMEA segment, representing our joint venture in South Africa, delivered revenue of 9.1 million, an increase of 7.2% over the prior year. We've won new clients, renewed large multi-year agreements and increased EMEA net income by 211%. Our Asia Pacific segment revenue was 5.4 million. This was a decline of approximately 2 million or 27% in our APAC segment. 1.6 million of this was due to the 60-day pandemic lockdown in China. While the top-line impact was relatively minor, we carried expenses during the lockdown for the government mandate. Perhaps another way to look at the second quarter revenue for us is without the lockdown in China, and our cycling of the labor law change in Mexico that we noted in 2021, revenue would have grown by more than 10%. With a strong revenue performance, let's turn our attention to gross margin. Our second quarter gross margin grew to a solid 19.1% compared to 17.9% last year. This reflects a 120 basis point improvement on a consolidated basis. Our America segment, which represents 79% of the total business in the second quarter, improved gross margin by 260 basis points. This is the result of our continued focus on pricing, merchandiser productivity and internal leverage. Our EMEA segment reported a 120 basis point improvement in gross margins while continuing to grow. I've communicated over the last few quarters that we are focused on gross profit. I'm pleased with the results to date. I believe there's more opportunity to improve margins and we will continue our pursuit of this. Relative to net income, we reported a net income of 1.15 million. This is an increase of 123% over the prior year. The improvement is both a result of our improved profitability and the increase in attributable net income to our wholly-owned business. In total, our business is growing, our gross margins have improved, our consolidated net income is up and our pipeline is strong. After Fay covers the detailed financial results for the second half of 2022, I will come back and share key strategic wins and then speak about my view on our opportunity pipeline and progress. With that, I will turn the call over to Fay DeVriese, our Chief Financial Officer to review our results. Fay?

Thank you, Mike and good morning, everyone. As we noted last quarter, we changed our second reporting to better align the business with the company's growth strategy effective January 1, 2022. We operate under three segments: Americas, APAC and EMEA. Americas is comprised of the United States, Canada, Mexico, and Brazil. APAC is comprised of China, Japan, Australia, and India. And finally, EMEA is comprised of South Africa. Now turning to our financial results. Second quarter 2022, net revenues totaled $67.8 million, which included $53.3 million from the Americas, $9.1 million from EMEA, and $5.4 million from APAC. As Mike mentioned, the strength of our Q2 revenues was adversely impacted by the lockdowns in the APAC segment. Compared to the prior year quarter, consolidated revenues increased by just 0.9%. However, the Americas increased by 3.9%, EMEA grew by a strong 7.2%, and weakness in APAC revenues almost completely offset growth in the other segments down due to the pandemic. We also had solid revenue growth in EMEA. Organic growth contributed 7.2% along with a small acquisition last year that we cycled in July, but downward pressure from APAC was due entirely to pandemic-related lockdowns in both China and Japan. Gross profit was $12.9 million, or 19.1% of revenues, compared favorably to $12 million, or 17.9% of revenues in the prior year quarter. Gross profit margins increased by 120 basis points due to strength in the Americas, up 260 basis points, and EMEA up 120 basis points, largely offset by the APAC negatively impacting margins by 750 basis points due to the prolonged pandemic lockdown. Margin improvements were due to initiatives both in the U.S. and EMEA, as well as favorable mix-shift in Brazil. Selling, general and administrative expenses were $10.1 million, or 14.9% of revenues, compared to $9.6 million, or 14.3% of revenues in the prior year quarter. The increase from the prior year quarter was the result of additional expenditures needed to normalize operations following the pandemic versus the same period last year, as well as continued investments in growth. Operating income was $2.4 million versus $1.9 million from the prior year quarter, which resulted in operating leverage of 70 basis points, primarily driven by strong gross profit. Net income attributable to SPAR Group Inc. was $1.1 million, or $0.05 per share, compared to $514,000, or $0.02 per share in the year-ago quarter. Adjusted net income attributable to SPAR Group Inc. in the quarter was $1.3 million, or $0.06 per share, compared to $714,000, or $0.03 per share in the year-ago quarter. Consolidated adjusted EPS in the 2022 second quarter was $3 million, compared to $2.7 million in the prior year. After adjusting for the non-controlling interest, adjusted EBITDA attributable to SPAR Group Inc. in the 2022 second quarter was $2.1 million, compared to $1.8 million in the prior year. You can find the GAAP to non-GAAP reconciliations or management financial measures at the end of today's press release. First half of 2022 results: Total revenues were $226.8 million, down 1% from the year-ago period. Year-to-date strength for the segment was in EMEA, with revenue up 13% to total $18.3 million. First half revenues for the Americas were $96.3 million, flat versus last year, and APAC reported revenues of $12.2 million, down 22% compared to the year-ago period. Gross profit for the first half of 2022 was $24.8 million, or 19.1% of revenues, compared favorably to $24.3 million, or 18.9% of revenues in the prior year period. Gross profit margins increased by 20 basis points due to strength in the Americas, up 120 basis points, and EMEA up 210 basis points due to successful margin improvement actions and favorable mix-shift in certain markets. Despite these trends, APAC negatively impacted margins by 380 basis points due to the pandemic lockdowns throughout the period. SG&A expenses were $19.3 million, or 15.3% of revenues, compared to $18.6 million, or 14.5% of revenues in the prior year first half of 2022, primarily due to the rebound of business from the pandemic. Operating income was $4.4 million, or 3.5% versus $4.6 million or 3.6% in the year-ago period, resulting in operating leverage for the first half of 2022. For the first six months, net income attributable to SPAR Group Inc. was $1.8 million, or $0.08 per share, compared to $1.4 million, or $0.07 per share in the year-ago period. Excluding the non-controlling interest, adjusted net income attributable to SPAR Group Inc. was $1.7 million, or $0.08 per share, compared to $1.8 million, or $0.08 per share in the year-ago period. Consolidated adjusted EBITDA for the first half of 2022 was $5.4 million, compared to $6.2 million in the prior year, excluding the non-controlling interest, adjusted EBITDA attributable to SPAR Group Inc. was $3.6 million compared to $4.2 million in the prior year. You can find the GAAP to non-GAAP reconciliations, management financial measures at the end of today's press release. Turning now to SPAR Group's financial position, cash flow, and balance sheet at the end of the second quarter. The company's total worldwide liquidity at the end of the second quarter was $16 million with $12.4 million in cash, cash equivalents, and restricted cash and $3.3 million in availability as of June 30, 2022. The company's working capital as of June 30 was $23 million and the accounts receivable balance was $64 million. Our gross balance sheet remained strong. For the six months ended June 30, 2022, net cash from operating activities was $3.5 million, impacted by changes in working capital, primarily due to lower accounts payable and accrued liability balances, and capital expenditures, including capitalized software were $794,000. On May 24, 2022, the Board authorized a 500,000 shares buyback program for SPAR Group Inc., and today 74,000 shares have been repurchased.

Thank you, Fay. I am pleased with the financial results. But I'm really enthusiastic about our momentum. We've developed a pipeline that is 2x greater than it was last year at this time. We have won several new multimillion-dollar agreements including our first large multimillion-dollar win in the distribution staffing services business that we announced we were entering only nine months ago. And our focus on margins continues to produce results. We won our first large remodel project in Canada that has opened up a pipeline that is 100% greater than the total value of Canada business today. We've continued our push into advanced analytics leveraging our low-cost structure in India, completed a global rebranding effort and more. Our clients are turning to us for more work and expertise. In one example, a large multinational retailer recognized our expertise in recruiting and hiring talent in Mexico. While we continued to provide merchandising and marketing services across all of Mexico, this client asked us to help them recruit on a national scale. This enabled us to overachieve on our internal plan from Mexico and position us for more growth. This is not an exception. We are seeing more clients turn to us as they struggle to find people. The great resignation has impacted retailers and consumer goods companies worldwide. For SPAR, we rolled out part technology, text to hire, daily pay programs to empower people with their money, and most recently expanded with a casting application to increase the number of applicants by 600% since this time last year. We turned our focus on this challenge last year, and it is really beginning to pay off. We hired more people in the second quarter than the company has ever hired in a single quarter. Clients are also asking us to take a larger share of the pie. One large consumer goods manufacturer was unhappy about the merchandising service provider they were required to use in a large discount retail chain. They reached out to us to ask if we could help. Working with the CPG executive, we created a program to improve the presentation of their product, and we are now in 50% of this large retailer's locations instead of the other provider. To be clear, this means we are now working in thousands of locations that we were not in at the beginning of this year. Again, this is not an exception. We recently completed a cosmetics reset in a general merchandise and pharmacy retail with thousands of locations. As you may know, cosmetics are a specialty to SPAR. There is a challenging and time-intensive program to reset cosmetics on the retail shelf. Because of our relationship with the retailer, we were asked to take on this work valued at more than $1 million from one of our competitors, and we completed it with high client satisfaction scores. As a result, they've asked us to plan on continuing this into 2023. More than taking a larger share of the pie, our clients or prospects are asking us to provide expanded services. And during all my recent trips to Japan, Brazil, and Canada, I spent the majority of my time with clients. We talked about market conditions, P&L challenges, and strategy. But we also discuss doing more to enable their business to succeed. The result is that we are constantly piloting progressive and innovative ideas with clients that have the potential to disrupt the marketplace and drive tremendous growth. In one example, we are piloting the use of crowdsource story images to identify sales and promotion opportunities for our clients. We use an application to review pictures taken in remote locations to determine if our client can be better served. The idea is simple: If their product is not on the shelf or presented poorly, we can take action. This approach to virtual merchandising services has the potential to disrupt the traditional broker model that has developed over the last 30 years. If we can provide our clients insights to every store and every channel, we can drive their sales profits and efficiency. This is only one of the programs we are piloting. I believe in test and learn. I want SPAR on the forefront of changing the industry. Looking forward, we recognize the larger economic challenges facing the consumer goods and retail markets. Governments are enacting programs to combat regional inflation. We're all hearing about consumer confidence on a daily basis in the news, and the rising interest rates make it more expensive for our clients who are carrying debt. From my chair, this presents an opportunity for SPAR. Based on our relationships with some of the best companies in the world, such as Reckitt Benckiser, Motorola, Walmart, Dollar Tree, Nivea, Cargill, McKesson, Home Depot, and many more, we are perfectly positioned to hire faster, execute more efficiently, share costs across locations, and provide them leverage on their P&L. We bring ideas, we have experienced resources, we provide advanced technology, and we enable them to transform. Relative to our future opportunity, at SPAR our pipeline is excellent. As a reminder, most of our client agreements are for a year or potentially longer. In the second quarter, we closed more than $10 million of net new business across the company, and our pipeline is valued well over $100 million U.S. The majority of this pipeline is net new, in addition to our ability to renew and extend our current agreements. As I hope you can sense from my comments, I am bullish on our future and the work ahead. We have a great team, incredible clients, and significant opportunity. The future is bright. With that, I'd like to open the line for questions. Operator?

We will now begin the question-and-answer session. Our first question is from Theodore O'Neill with Litchfield Hills Research. Please go ahead.

Thank you very much. My first question is about the labor law change in Mexico. I understand you've talked about this in the previous quarter. But is this related to the change in personnel outsourcing and subcontracting last year? Or is it something else?

Theo, thank you for the question. Good morning. Yes, it's a law that was enacted by the federal government in Mexico, mid-spring in 2021. That effectively states if the work being done in your store is the same as other work being done in your store, meaning it's a basic function for your business, then you must do it yourself. We were a large merchandising services provider to a multinational retailer, and we were in thousands of locations in Mexico. As a result of that labor law change, they were required to bring that work in-house. So I appreciate the question. It's not something that we have a great influence on, and we will be cycling a little more of it this third quarter, but then it will be behind us.

Okay. My other question is, can you address the rise in accounts receivable? Your quarterly revenue from Q4 to Q2 is up to $6 million, but the accounts receivable is up $9 million. And I understand this is due to strength in Brazil and South Africa. So could you give us a little more detail on that, please?

Yes. Fay, would you mind maybe sharing a little more detail?

Sure. So the receivable has grown in the Americas segment in general. However, there is a DSO issue on the foot because the China pandemic did remain. Obviously, we were balanced a little bit longer than we had expected. So DSO was impacted by China.

Okay. Thanks very much.

Theo, Fay has put a fine point on that. The payment terms in China are traditionally very long, and as we were required to stop work, the accounts receivable continued to build. Now we're back to work and frankly, doubled the time of our payments from our clients in China. But as you know, that's a very small piece of our business. But great question. Thank you.

Our next question is from Michael Kay with Kay Associates. Please go ahead.

Thank you, gentlemen. And congratulations on the excellent quarter. Unlike many companies that were negatively impacted by inflation and higher labor costs, it seems that SPAR was not. And I thought if you would elaborate on that. And also, it's really a nice little company, and I was wondering, what if anything, are you doing to publicize the company to both retail and institutional investors? Thank you very much.

Thank you, Michael. Good morning. Thank you for your question. A couple of comments on the impact of rising wages. As we know, that's happening in almost all of the countries around the world. For us, the first is that we don't pay a low wage. So we're already paying a very competitive wage in the business we're operating. While you're watching a 5%, I think it was a little over 5% increase in the middle of the second quarter, that's not a wage that directly impacts us. Our improvement in gross profit has a lot more to do with our focus on contract pricing, long-term agreements, competitive pricing, and frankly, doing work in more profitable parts of the business, like resets and remodels in some cases. All of those are contributing to our improvements in gross profit. I'm pausing, thinking about your second question, what are we doing to gain exposure? Thank you for that. We're actually engaging a research analyst firm—an outside firm—to begin to get more coverage. So that can be shared more broadly, with institutional investors in particular. I'll be presenting and have presented recently at a virtual conference, and I'll be presenting at a conference for analysts in Chicago on the 24th of this month. So we are continuing to put the time and energy behind getting exposure for the company because as I hope you can sense from my comments, I agree with your point. It is a great small company that needs more exposure.

And it seems there aren't too many other companies in this space. Is that correct?

Yes. We are uniquely positioned as a global company, meaning we're in nine countries. There are competitors that are regional. So there are companies in Brazil that we compete with in our Brazil business. There are companies in the U.S. that we compete with, for our U.S. business. But we have been able to carve out a niche that's unique, especially with the portfolio of services we're offering that makes us different.

Yes, that's very impressive. And do you give any guidance in terms of revenues and earnings for the future?

We're not giving guidance at this point, Michael.

Thank you. I really appreciate it and continued success.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mike Matacunas for any closing remarks. Well, again, thank you to everyone who listened and participated in today's call for your interest in the company. As I've just mentioned, in the Q&A, we will be presenting to investors at the Midwest IDEAS Conference in Chicago on August 24 at 9:30 a.m. Central. We are also available for one-on-one meetings with investors that day. If you'd like to participate, please reach out to Three Part Advisors if you'd like to attend and potentially meet with us. Beyond that, I look forward to providing an update on our progress when we report third quarter results. Thank you for participating today.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.