Good morning, and welcome to the SPAR Group Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Sandy Martin with Three Part Advisors. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the SPAR Group Inc.'s conference call to review 2023 second quarter results. Joining me on the call today are SPAR's Chief Executive Officer, Mike Matacunas; and the company's Chief Financial Officer, Antonio Calisto Pato. 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, 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 are 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 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 that 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, Sandy, and good morning, everyone. I'm pleased to share our second quarter results. At the end of our prepared remarks today, we will open the line for questions from analysts and institutional investors. The first half of 2023 has been the strongest six months in the history of the business. Revenue, gross profit, and EBIT have all reached new levels. As I've said in the past, revenue can move between quarters, but our client agreements and services are long-standing and have consistently been expanding. But the heart of our business is merchandising and marketing services. This is the legacy of the company and the work we do for some of the world's largest businesses. These services have continued to grow as businesses look to outsource this work to third parties. Our merchandising services grew by 16% in the United States for the second quarter, 18% in Brazil, 9% in Mexico, and so on. Year-to-date, these services in the United States are up 28%, with strong improvement in related gross margin. In short, the core of our business is strong and growing. Our U.S. remodel business, in which we assist retailers in staging, renovating, and repurposing the sales floor and overall improvement to physical stores, has started the year slower than it finished in 2022. Our clients have been delaying projects into future quarters. This is likely a reaction to the rising U.S. interest rates. As a reminder, remodeling stores is a staple of operating a retail business. Every store needs to be cared for and renovated at some level every few years. What has accelerated the need for this work is the growth of online and shift in consumer buying habits. Consumers are looking for a wide assortment of products in their neighborhood retail stores. For example, we are working with a large small-box store with thousands of locations to introduce perishables into their assortment. This requires resetting the floor layout, changing fixtures, etc. Related to the growth of online, the large-box retailers, in particular, are converting space in their stores to pack and ship online orders. We've been doing this work for the last few years with our clients. I expect more to come as we head into the holiday season at the end of this year. While I'm disappointed at the performance of our remodel business year-to-date, I'm confident this work remains ahead of us as the demand hasn't dropped, just the schedule has extended. The last item I'll mention before going through the highlights of the second quarter is the fluctuation in currencies and the impact on our business. Let's use South Africa in the second quarter as a prime example. Our business in South Africa performed well in the second quarter. We grew the top line in local currency by 7%. Our leadership and team in South Africa did a really nice job of staying ahead of the impact of a slowing economy. Many of our clients are consumable clients that are less impacted by inflation, such as Procter & Gamble, think diapers or baby formula. The rising interest rate in the U.S. has increased demand for the U.S. dollar compared to the South African Rand. The impact of the currency exchange rate for us was to turn a 7% growth for South Africa into a 10% decline in U.S. dollars. As we continue to successfully grow our international businesses, I would ask that you note the operational health of these businesses regardless of the conversion of currency fluctuations. Turning to our second quarter results. Our consolidated revenue was $66 million, a decline of 2.7% from the prior year same period. Our gross profit was $13.1 million, up 1%. Operating income was $2 million, and our consolidated net income was $1.1 million compared to $1.6 million for the same period in 2022. On a constant currency basis, our consolidated revenue would have been $68.4 million or up $0.5 million or approximately 1%. The exchange rate impact was a negative $2.4 million. Breaking our revenue results by segment, the Americas, which includes the United States, Canada, Mexico, and Brazil, represent approximately 79% of our revenue in the quarter. EMEA, which reflects South Africa, represents about 12%, and Asia Pacific, which includes Japan, China, India, and Australia, is now 9%. Our second quarter revenue in the United States was a tale of two cities. Merchandising services were up 16% over last year, while remodeling services were down. For merchandising, we continue to see growth in the quarter. We've added new clients, increased our productivity, and improved margins. In our remodeling business, retailers delayed planned products and store remodels, which is shifting expected revenues out of the first half into the second half of 2023 and, in some cases, into the first part of 2024. We have no indication yet that these projects have been canceled, so we believe this is a seasonal shift from prior patterns and a temporary reaction to rising interest rates. A small but important bright spot, we saw an increase in unplanned work in the second quarter related to our U.S. clients, which speaks again to the scope of our relationships and the preference of our clients to reach out to SPAR when they have important work. Canada had an outstanding second quarter. Our Canadian revenue increased 48% compared to the same period last year. This is a reflection of the intentional focus we began to apply on expanding this business as of mid-2022. I expect this trend to continue in Canada under the leadership of Niana Reid with oversight from Ron Lutz, our Global Chief Commercial Officer. Brazil also had a strong second quarter, with revenues increasing 18% over the prior year same period. The team in Brazil has really generated excitement with brands and large clients over the last few years. We based our operations in Sao Paulo, but the impact of services is provided across the country. Mexico had a solid quarter, up 9% over the same period last year. I wanted to make a particular note of this as our efforts to rebuild this business post all of the legislative change in Mexico has taken root. Turning our attention to EMEA, or South Africa, revenue in the second quarter was down 10% from the prior year. This is entirely explained by currency conversion. In constant currency, revenue was up by 7%. While I'm displeased by the exchange rate impact on our business, I appreciate the work and efforts of our team in Johannesburg, Cape Town, Durban, and other parts of South Africa that continue to provide great services for our clients such as Procter & Gamble, Nestle, Woolworths, Rhodes Food Group, and others. Asia Pacific, which includes Japan, China, India, and Australia, increased revenue by 5% and gross profit by 500 basis points. While this is a small part of our business, I want to call out Australia that grew the top line by 28% over the same quarter in 2022. Based on the results, we've established a solid footing after a challenging two years in Australia under the leadership of Craig Zeelie and Dean Nixon. After Antonio covers the detailed financial results, I will come back and share additional thoughts and insights about the business.

Thank you, Mike, and good morning, everyone. Second quarter 2023 net revenues totaled $65.9 million, a decline of 2.75% on reported numbers with a growth of 0.8% on a constant currency basis. Net revenues comprised $52.1 million of revenue from the Americas, $8.2 million from EMEA, and $5.7 million from Asia Pacific. Reported revenues by segment for Q2 versus the prior year included a decline of 2.2% in the Americas, while EMEA declined 10.3% and APAC revenues increased by 5%. As Mike mentioned earlier, our American segment revenue softness was the result of U.S. client store remodels that have been pushed out, offset somewhat by strong U.S. merchandising services, as well as momentum in Brazil and Canada. Second quarter gross profit was $13.1 million or 19.9% of revenues compared to $12.9 million or 19.1% of revenues in the prior year quarter. Mike discussed this 80 basis point improvement from the prior year, which was based on improved contract terms and pricing, system enhancements, and other containment, as well as service mix shifts in the quarter. Selling, general and administrative expenses for the second quarter totaled $10.6 million or 16.1% of revenues compared to $10.1 million or 14.9% of revenues in the prior year quarter. SG&A costs included non-recurring items, primarily associated with the project with strategic alternatives, which totaled $111,000 as well as other corporate costs during the second quarter. The second quarter operating income was $2 million, which is down 15.2% versus operating income of $2.4 million in the prior year quarter. Net income attributable to SPAR Group for Q2 was $639,000 or $0.03 per share compared to a net income of $1.1 million or $0.05 per share in the year-ago quarter. Adjusted net income attributable to SPAR Group in the quarter was $696,000 or $0.03 per share compared to $1.3 million or $0.06 per share in the year-ago quarter. Consolidated adjusted EBITDA in the 2023 second quarter was $2.6 million compared to $3 million in the prior year quarter. Q2 adjusted EBITDA attributable to SPAR Group was $1.6 million compared to $2.1 million in the prior year quarter. Now turning to the company's financial position as of June 30, 2023. The company's balance sheet remained strong, and total worldwide liquidity at quarter end was $19.8 million, with $10.9 million in cash, cash equivalents, and restricted cash, and $8.9 million of unused availability at quarter end. The company's working capital as of June 30 was $27.2 million, and the accounts receivable balance was $63 million.

Thank you, Antonio. As we updated you last quarter, management and the Board are still running a process to evaluate potential strategic alternatives to maximize shareholder value. This includes a full range of options that we have shared, including a sale, strategic M&A deal, or a going-private transaction to name just a few options. The management team and I are fully engaged with the Board on exploring ways to unlock value for our shareholders of SPAR. We've not completed this process yet, and I do not have an update today. We'll now be answering questions related to the company's strategic alternatives process after our remarks. Beyond the current financial results, I'd like to provide our shareholders more insight into the extraordinary effort and commitment of our team. First, I want to highlight the diversity, equity, and inclusion initiative that we launched at the start of the year. We formed a committee of professionals from different levels and all parts of our company to enhance our business, expand our thinking, and ensure SPAR is a place for everyone. I believe embracing diversity of all types makes us a better organization and enables us to create more value for our shareholders. I'm proud of this team and committed to this effort. In addition, members of our organization have won or are currently a finalist in a number of competitive industry awards, and I couldn't be more proud. Recently, Tom Knight, our Head of Talent Acquisition in the U.S., received an award as a Top 50 Talent Acquisition Professional. Danealle Craft, our Head of Marketing and our team are finalists in a Top 100 Marketing Organization Competition, and this is just a sample. As a shareholder, I'm proud of the people in the organization, and the level of talent that is committed to SPAR makes a difference every day in our performance, and ultimately the value we deliver to our shareholders. With a few other comments, let me provide a brief update on the growth of our fulfillment services business. This is a business we launched in late 2021, and I'm pleased it's on track to deliver nearly $5 million of net new revenue for 2023 in our U.S. business. We expected this to take 12 months to 18 months to get off the ground, and we are exactly where we want to be. We provide resources to support online delivery distribution centers, resources to test and prepare new facilities, and we provide fulfillment services for point-of-purchase materials for a number of our clients. As the demand for online shopping remains stable or grows, this positions us to grow with it. Based on our legacy of being the last person who touched the product before the consumer in stores, we are growing our business to be the last person who touches the product as it goes in a box to be shipped. I also want to touch on the subject of technology. One of the ways we win is with our SPARview portfolio of applications and software. We have software that enables field merchandising work, remodel work, training, scheduling, geo-fencing, image recognition, and much more. I've shared before that we invested great effort over the last two years to move the backbone of this technology to the cloud, and I'm pleased to report that this work is done. We captured more than 19 million photos last year, and the growth of our business was outpacing our technology. We solved this by partnering with Amazon Web Services across all of our business in all countries. As a reminder, unlike any competitive tools in our space, SPARview is in multiple languages, including Japanese, and used across eight of our nine countries. Beyond the application itself, we've made great strides in expanding the analytics we provide clients. I stated a few quarters ago that this was an important area of focus, and I'm pleased with the progress to date. We have leveraged the resources in our business in India to build out a standard set of dashboards and reporting for clients to give them insight into demand, potential out-of-stock situations, and more. Lastly, before we open the call to questions, I want to thank each of our team members, managers, leaders, and joint venture partners. Because we have the privilege of working with some of the most successful companies in the world as our clients, we need to perform at a world-class level. Our mantra is every client, every day. This can be exhausting and invigorating at the same time. Thank you for your commitment, passion, and dedication to SPAR. I am grateful that I get to lead this outstanding group of people and look forward to building shareholder value and generating revenue, profitability, and incremental cash flow. With that, I would 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.

Thanks very much. Mike, I appreciate your comments here about the stores adding perishables and big-box stores adding pack and ship. I was wondering if you're seeing any changes driven by the sort of high level of retail theft that's going on like we saw in Los Angeles last week?

First, can you hear me okay?

Yes.

Thanks. Just checking. Thanks for your question. We are having discussions with retailers. And I can't say two years ago, we had the same. So because you've seen a lot of this in the press where the shrink number has gone up dramatically. What we've been tasked with is to have our team who's doing analytics look for any indicators or data that might suggest shrink is rising. So for example, looking at stock outs to using our images in a creative way. So when we take an image of a 4-foot span of shelf, does it give any indication of an area that looks like it has more stock than it should have, even if we're not touching that particular product? So we are having some very interesting creative discussions about that because I think that will continue to be a challenge for retailers in the next six to twelve months. It's a great question. Thanks.

All right. And I asked the question because I was in a large supermarket — national supermarket chain that had added a whole bunch of things to the shelves that make it more difficult to grab products and put it in your cart. And I was wondering if that's the sort of thing that would be part of a remodel for you?

Yeah. We haven't seen a lot of the devices that retailers put in as part of our remodels yet. We're seeing it more as an indicator, like can we get a sense of whether shrink is happening? The retailers can shrink two different ways; they count it once a year, which means it's very hard to get your arms around it in real time. You don't see it coming into, you count it, or you cycle count it. So you look at a certain department, for example, as we all know, as consumers, we haven't been able to buy razor blades in years without getting somebody with a key or some authority to help open the space up for us. So they cycle count the things that are typically high theft in that case. So now retailers are asking us to look at lots of other categories more regularly than we used to when we're doing merchandising. But we haven't had a lot of the remodel because that's an incremental cost to the retailers that I don't think they've yet determined as a return on investment for.

That makes sense. Are you seeing any trends in stores trying to remove cashiers and go sort of use your platform to do automatic checkout?

We haven't yet. I would say over the last year, a few forward-thinking retailers have asked us about whether we could take the idea of image capture, the same tech used for the bar codes or the packaging itself, and use that for self-checkout. But we haven't had anybody who's ready to take that leap. We're where you are; there are businesses that are testing customer self-checkout by picking it up, putting it in your basket, and walking out. But I haven't really seen any tailwinds behind it yet. I think there are still plenty of technology hurdles to get over before we're all walking out without checking out.

Okay. Thanks very much.

Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Michael Matacunas for any closing remarks.

Well, again, operator, thank you for turning it back just for those who are listening and those who may listen to recording. I just want to thank you for your interest in SPAR and for listening to our earnings conference call today. I look forward to providing an update on our progress when we report the third quarter results and thank you again.

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