Superior Group of Companies Q3 2023 Earnings Call Transcript

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November 6, 2023

There are 6 speakers on the call.

Operator

Afternoon, everyone, and welcome to the Superior Group of Companies Third Quarter 2023 Conference Call. With us today are Michael Benstock, Chief Executive Officer and Mike Kempel, Chief Financial Officer. And as a reminder, this conference call is being recorded. This call may contain forward looking statements regarding how the company's plans, initiatives and strategies and the anticipated financial performance of the company, including, but not limited to, sales and profitability. Such statements are based upon management's current expectations, projections, estimates and assumptions.

Operator

Words such as expect, believe, anticipate, think, outlook, hope and variations of such words and similar expressions identify such Forward looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward looking statements. Such risks and uncertainties are further disclosed in the company's periodic filings with the Securities and Exchange Commission, including, but not limited to, the company's most recent annual report on Form 10 ks and the quarterly reports on Form 10 Q. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward looking statements made herein and are cautioned not to place undue reliance on such forward looking statements. The company does not undertake to update the forward looking statements contained herein, except as required by law. And now, I'll turn the call over to Mr.

Operator

Michael Benstock.

Speaker 1

Thank you, operator, and thanks everyone for joining us today. I'll start by highlighting our consolidated 3rd quarter results along with a discussion around our strategies that are setting us up for continued growth and margin expansion. I'll walk through each of our segments and what we're doing to even more Profitably grow each of our businesses. And then I'll turn it over to Mike to provide additional detail on our quarterly results as well as our updated full year outlook. Will then open the call for Q and A.

Speaker 1

Earlier in the year, we discussed the back end weighted nature of our financial performance this year. And as expected, Our 3rd quarter results were the strongest of the year so far, reflecting sequential improvement across the business. We generated consolidated 3rd quarter revenues of $136,000,000 down only 2% year over year, which was a significant improvement over the 2nd quarter's 13% year over year decline and up 5% from the 2nd quarter. Our 3rd quarter Consolidated adjusted EBITDA of $9,300,000 is the highest quarterly result year to date, down just slightly compared to the prior year's 9 point dollars 7,000,000 but up $1,800,000 from the 2nd quarter. Lastly, diluted EPS of $0.19 was down from adjusted EPS of $0.27 a year earlier, excluding last year's impairment charge, but up $0.11 sequentially from the Q2.

Speaker 1

The effective economic conditions on our business differs customer by customer, market by market and segment by segment. We see conditions slowly improving as clients are starting to buy more, rebrand more and issue more RFPs than past periods. Again, it is really on a customer by customer, market by market basis. While we're feeling Bienstock:] Domistic about the long term outlook, our success will be determined by our team's remaining focus on what we can control. This includes continuing to drive positive cash flow and further strengthening our balance sheet, while also increasing our investments to support longer term growth when conditions normalize.

Speaker 1

Adhering to this focus, year to date, we were able to generate operating cash flow of $59,000,000 through continued reductions in working capital and lower capital expenditures. We ended September with an improved net leverage ratio of 2.9 times covenant EBITDA, a full turn better than at the start of the year after significantly reducing our net debt by $48,000,000 year to date. Let's turn now to our 3 businesses. Our Healthcare Apparel segment, primarily consisting of the Wink and Fashion Seal Healthcare Brands, produced its highest quarterly revenues for the year at $30,000,000 for the Q3, essentially flat year over year and up from $28,000,000 in the 2nd quarter. Adjusted EBITDA of $3,100,000 was up from $2,200,000 year over year and up from $1,900,000 in the Q2.

Speaker 1

The healthcare apparel market remains soft, But inventory equilibrium is getting closer for SGC and we believe for the broader industry. This remains a large and growing addressable market. We intend to expand our market share well beyond the 2,000,000 plus caregivers who already wear our brands every day. Back in the spring, we launched our direct to consumer website And went through an entire rebranding featuring our weak product line and it continues to perform above initial expectations. This new D2C channel He's creating both higher consumer awareness and deeper engagement with our brand.

Speaker 1

We also launched earlier this year our B2B website, which is now helping wholesale accounts more efficiently engage with us. Overall, we see the improvement in our year over year growth rates continuing in the 4th quarter and we're optimistic about the longer term outlook. Turning to Branded Products, which is our largest segment, We're seeing the back end weighted nature of the year playing out along with stronger profitability as our supply chain costs have normalized. We produced 3rd quarter revenues of $84,000,000 while down from $87,000,000 in the prior year, the 3rd quarter result represents our highest quarterly And it's up from $80,000,000 in the 2nd quarter. Our adjusted EBITDA of $7,000,000 was up from $5,600,000 year over year and about flat to the Q2.

Speaker 1

We've seen an upward demand trend now for over 5 months and have no reason to believe This won't continue. So while the growth in this segment appears subdued, our pipeline and booking trends look very, very favorable, particularly with respect to the 1st part of next year. While this segment is generally related to HR and marketing spend and has surely been impacted by the ongoing macro environment, our confidence is bolstered by what we have consistently seen over the past months. I should mention that similar to our other business lines, our client retention remains strong, Truly indicating it's a matter of seeing stronger economic conditions for us to further accelerate our growth potential. In the meantime, within branded products, we're focused on managing expenses and further expanding our margins, such that will be ready to fully capitalize on even stronger demand ahead.

Speaker 1

Longer term, our aim is to significantly grow our branded products market share, now at less than 2% of this very, very large $26,000,000,000 market. Our 3rd segment to review is contact centers, which continues to generate our highest EBITDA margins as we push towards the high teens goal that we mentioned on our prior earnings call. Our 3rd quarter revenues Q2. While we've incurred higher costs related to labor and talent, we're continuing to increase prices whenever possible and employ technology To create more efficiency as reflected by our higher gross margin for contact centers, which expanded nearly 2 percentage points from the Q2 to 55.5 percent. As a result, the 3rd quarter EBITDA margin sequentially improved to 16.8% from 14.3% in the 2nd quarter.

Speaker 1

Overall, we continue to add to our pipeline of new business for the office crews and we see compelling longer term opportunities to grow this segment at attractive margins. With that, I'll turn it over to Mike for a closer look at our financial performance and our updated outlook for the year before we take your questions. Mike?

Speaker 2

Thank you, Michael, and thanks everyone for joining the call. Our Q3 results were the strongest so far in 2023, reflecting the back end weighted pattern we described earlier in the year. Our quarterly revenue reached $136,000,000 up about $7,000,000 from the Q2, and importantly, we recorded stronger margins as well. Our gross margin came in at 39.1%, which is up 2 60 basis points versus a year ago and up 220 basis points from the Q2. The margin expansion from last year was primarily led by our Branded Products Business segment, which drove a 4 50 basis point improvement due to favorable pricing and customer mix and lower supply chain Our 3rd quarter SG and A costs of $47,000,000 were up $3,400,000 from last year, an increase as a percent of sales the 34.7% for the quarter compared to 31.6% for the Q3 of 2022.

Speaker 2

The increase in SG and A was driven by a $1,800,000 fair value benefit on written put options in the Q3 of 2022, combined with current quarter increases in acquisition related earn out liabilities, bad debt expense and professional fees. Our interest expense for the 3rd quarter was $2,500,000 up from $1,800,000 in the prior year quarter due to higher Rates. Interest expense did improve slightly from the 2nd quarter, reflecting lower debt outstanding as I'll discuss in a moment. 3rd quarter net income of $3,100,000 or 0 point $12,700,000 or $0.80 per share. In the prior year Q3, the company recognized pre tax non cash impairment charges related to goodwill of $21,500,000 or $17,100,000 Net of tax or $1.07 per diluted share.

Speaker 2

On an adjusted basis, which excludes impairment charges made in the prior year Q3, This quarter's net income of $3,100,000 or $0.19 per diluted share was down from $4,400,000 or $0.27 per diluted share in the prior year, but up significantly from $1,200,000 or $0.08 per diluted share in the 2nd quarter. Turning to our balance sheet, we continue to make meaningful improvements. We continue to drive significant free cash flow, enabling an additional $19,000,000 reduction in our debt outstanding during the quarter, while maintaining our cash and cash equivalents balance of $18,000,000 about flat with the start of the year. Since the beginning of the year, our focus on reducing working capital And generating strong operating cash flow has resulted in $59,000,000 of operating cash flow, as Michael mentioned. Therefore, as of September 30, our total debt outstanding of $108,000,000 improved from $156,000,000 at the start of the year, representing a 30% reduction.

Speaker 2

Wrapping up on the balance sheet, Our net leverage ratio ended the quarter at 2.9 times trailing 12 month covenant EBITDA, much improved from the net leverage ratio at the beginning of I'll conclude with our updated full year outlook, which as we've indicated throughout the year, remains back end loaded. We expect a full year revenue range of $538,000,000 to $545,000,000 relative to the earlier range of $550,000,000 to $560,000,000 which continues to reflect back Half improvement, albeit at a lower growth rate. However, for earnings per diluted share, we're tightening our outlook range from the first half of the year. For Healthcare Apparel, we expect to finish 2023 with low single digit sales growth for the year as inventory levels and customer demand begin to normalize. For Branded Products, while we look to finish the year stronger With sequential sales improvement in the 4th quarter, we expect a low teen sales decline for the total year, primarily driven by the 1st and second quarter results.

Speaker 2

Lastly, for contact centers, we expect to achieve full year sales growth in the high single digits. With that, operator, we can now begin the question and answer session. If you would please open the lines.

Operator

We will now begin the question and answer session. At this time, we will pause just momentarily to assemble our roster. And our first question here will come from Kevin Steinke with Barrington Research. Please go ahead.

Speaker 3

Good afternoon. Congratulations on the sequentially improved results. Just as we look to the full year outlook, You adjusted the revenue range a bit. So just wondering, this still Again, represents a stronger sequential quarter. You mentioned the upward demand trend in branded products.

Speaker 3

Well, I guess the outlook came down just a bit. So I don't know, I'm just trying to put my finger on maybe what changed Relative to your last outlook as this quarter progressed.

Speaker 2

Sure, Kevin. This is Mike. I'll take that question. As you said, we obviously we pulled the sales guidance down A little bit. It still reflects continued growth in the Q4 within that range.

Speaker 2

Within branded products, as we said in our prepared remarks, they had demonstrated growth in the Q3. We expect to see that growth continue into the Q4. I think part of what plays into the range, particularly in branded products, we have A fair amount of volume in the back half of December, which we plan to deliver on, but could create some variability in the Q4. And as it relates to our contract business, we're also as we manage our cash flow and manage inventory tightly, We're managing the build of our contract assets, which ultimately turns into revenue as well. So as we've been tightening more on the working capital front, That's also had a little bit of a pullback on revenues.

Speaker 2

But again, I think as we look to the Q4, We still see growth in the business, again, as I said, albeit at a slightly lower rate than we originally expecting, But again, still anticipate that growth coming in the Q4.

Speaker 3

Okay, good. Thank you. And touching on Healthcare Apparel, you mentioned there the market still remains a bit soft, but You did have some pretty good sequential growth there In that segment, and I believe you mentioned that the market appears to be approaching inventory equilibrium. Do you think end of 2023 is still the way to think about the inventory coming back into balance? Maybe it's harder to read a note of the overall market, but just for you internally, how are things trending on the inventory side.

Speaker 2

Kevin, from an internal standpoint, we are trending toward our goal by the end of Here, we see you could see in the aggregate, our inventories across the peer group were down about $20,000,000 from the beginning of the year, And that would obviously include our healthcare inventories coming down. So we're happy with the progress we've been making. We've got a little bit yet to go here in the Q4. And again, our intent is to end the year in a much cleaner position than we did last year and entering 2024 in a way that we can really focus most of our energy forward rather than looking to Yes, reduce inventories and liquidate inventories. I think we're seeing the market in general improve to some extent, But I can only at this point speak for ourselves.

Speaker 2

And again, we're satisfied with the progress we've made and feel good about where we'll end the year from a healthcare perspective.

Speaker 3

Okay. Thank you. Also following up on Healthcare Apparel, You mentioned the B2C e commerce initiative continuing to trend well Head of Expectations. Maybe just any update on The outlook there and it starts becoming a more meaningful part of the business and potential growth in 2024 and beyond.

Speaker 1

Hey, Kevin, this is Michael. Good question. We're excited about the progress We've made even when you take it one step further and say the broader digital market, which includes all those wholesale customers that we sell online as well like Amazon.com, walmart.com and target.com and so on. Obviously, inclusive of both the direct to Consumer and the B2B channels. We're very, very excited about the whole what's happening to us digitally.

Speaker 1

More people are buying online than ever. And while store traffic is still down and certainly the smaller retailers are struggling more than the larger retailers, Our emphasis on at least on the investments we've made in our digital capabilities certainly has paid off somewhat this year. We'll continue to pay off in 2024 as we spend more on marketing, rebranding and To realize the full potential for 2024, we're learning as we go. We're testing and learning. We're gathering key customer insights.

Speaker 1

Our goal is to better inform our strategy to spend more carefully and more in a more targeted manner. We see this town becoming a larger portion of our business over time. Will it be significant enough in 2024 that we'll start reporting on it Separately or giving more color separately, I don't think so. I believe that there's a competitive advantage to not doing so at this point as we're trying to grow it and we're testing out different strategies. I would hope In the following years, it will be enough of a portion of our business that it would be meaningful to speak about.

Speaker 3

Okay. Thank you. And then a couple of more here. Yes, Nice gross margin expansion that you had both year over year and sequentially driven by Branded Products. You mentioned supply chain normalizing, I think some favorable mix.

Speaker 3

But Just trying to get a sense as to how sustainable these higher levels are or if you anticipate some quarter to quarter variability, I know that can just kind of vary based on customer mix. But just any thoughts on the margin gross margin profile going forward?

Speaker 2

Sure, Kevin. As you said, there will be some variability in the margin mix, particularly branded products Where we're really pricing on an order by order basis. We're obviously very happy with the margin that we had in the Q3, just given the mix of orders that we had in the branded product space combined with we're starting to see some of the, what I will call, lower supply chain cost inventory now coming through the system, particularly in that segment. So obviously, as we look ahead, we expect in the 4th quarter margins to still be up to last year, Probably a little bit more consistent with the 1st part of the year than I would say the Q3. We'll monitor the 4th quarter As we talked about on the healthcare side, as we work toward hitting The end of your inventory target may determine how more or less promotional we might need to be in the 4th quarter.

Speaker 2

That kind of plays into the range of guidance that we've given. But we still expect good margins again, as I said, Probably more consistent with the first half of the year than I would say the 3rd quarter margin.

Speaker 3

Okay. Great. Thanks for the color. And just lastly, just looking at the selling and from the administrative expense line, a sequential increase there on an absolute basis. Looks like that was driven by branded products.

Speaker 3

Just wondering if there's anything to call out there in terms of the Increase in the expense base, if there's something more non recurring in there or some investments or perhaps Just trying to get some color on what's going on there and what it might look like going forward.

Speaker 2

Sure. In the case of branded products, A big portion of the increase really related to commission. So in the branded products business, the commission is based on margin. So given The improvement in margin and the growth in margin despite sales being down single digit really drove an increase in commission expense and for a larger piece of SG and A for the Q3.

Speaker 3

Okay. Thanks for taking the questions. I'll jump back in the queue.

Operator

And our next question will come from Jim Sidoti with Sidoti and Company. Please go ahead.

Speaker 4

Hi, good morning. And so Good afternoon and thanks for taking the questions. Just to follow-up on the SG and A question. Can you talk about headcount? Are you Did you add salespeople in the Q3?

Speaker 4

And do you plan to add any more in the Q4?

Speaker 1

Are you speaking about a particular segment or are you speaking about overall for all SGC?

Speaker 4

I guess primarily for branded products.

Speaker 1

Brand Products, we have added people. We will continue to add people. It's one of our revenue growing strategies. It's right up there with the best of them, including other sales strategies that we have, Tim, including some inside sales strategies to try to go after smaller accounts, Appointment setters, all kinds of things that we're doing right now differently than we've done before. But it is our intention to continue to grow branded products.

Speaker 1

So We're going to have to have more muscle behind us to do it, and it's going to take more people to do it. We're recruiting actively And even added some talent to our recruiting pool to help recruit more people faster.

Speaker 4

And then with regard to capital allocation, I mean, you did a great job generating cash and paying off debt in the 3rd quarter. Should we see a similar trend in the 4th quarter or are there opportunities out there, inorganic opportunities that You might pull the trigger out.

Speaker 2

For the balance of the year, Jim, we're going to remain focused on working capital. There's I would say you can tell from the 1st 9 months we drove significant improvement. I think obviously our working capital is starting to normalize, So I would not anticipate a similar result in Q4. But with that said, we're going to remain focused on that for the balance of the year. As Michael and I have said previously, we really are targeting a net leverage ratio in the range of 2 to 2.5 times.

Speaker 2

We're obviously getting closer and so that's our focus here through the balance of the year. And then obviously, We'll begin to continue to look at our allocation priorities going forward once we achieve that net leverage objective. All right.

Speaker 4

And then you look at your 3 businesses, you think they're pretty definite growth drivers in All three businesses, different drivers of the different businesses. But out of the three businesses, which one do you think are you most you You feel best about at this point in this current environment?

Speaker 1

That's a hard question because I'm feeling pretty good about all of them. It's like asking me which kid I love more. But Look, long term, I believe health care has tremendous potential, and it's one of the smallest of our businesses. It's right there in the middle, but it has 2 segments, a wholesale And a retail and now a consumer segment portion to it. But if you look at the growth of healthcare workers in the coming years, You look at the fact that it's not as price sensitive a business.

Speaker 1

Most of it isn't. The wholesale side is but the retail side is not. You look at our capability to grow direct to consumer in the coming years, and the continued shortage of healthcare workers is going to have to be built At one point, we're going to get we're all going to get old and not have anybody take care of us. So the schools are going to have to fill that gap, whether it's Through the schools or through immigration or wherever they solve it, and that will bring millions of more health care workers into the workforce. Some feel great about that, but it's I would say that our call center business is basically in its infancy, if you want To know the truth, I mean we're a small call center business doing right now under $100,000,000 that has great opportunity.

Speaker 1

It provides great free cash flow for us to invest more in it as time goes on. And we've invested greatly in new strategies. We put on our 1st sales executive This year putting on a second one, building out a sales team around that. First marketing dollars we've Really ever spent will be this year and more so into next year and not be so reliant on others to bring us We've

Speaker 5

never actually had

Speaker 1

a sales force. We've grown the business from $0 to $80,000,000 without a sales force. And what Jake's done and Phil had done prior to him in branded products was no short of amazing to To take a business that was doing $32,000,000 7 years ago, that's doing if you just take the merchandise side of that, over $250,000,000 a year. So Why should I not be equally as excited about all these three businesses? So I didn't answer your question Because I don't want any of my children to be angry at me after this call, but I'm excited about it.

Speaker 1

I think we're in 3 great businesses that we do not have enough market And I don't think it's going to be that hard to take market share away from our competition in the coming years with all that we're doing internally To make our business stronger.

Speaker 4

All right. Sorry. Well, thank you.

Operator

And our next question will come from David Marsh with Singular Research. Please go ahead.

Speaker 5

Thank you guys for taking the questions. First, I wanted to touch on the GAAP income tax expense in the quarter, which was extremely low as a Percentage of income from continuing ops, could you just touch on that and give us some idea of what to expect In the next quarter and in the coming year, were there some tax loss carryforwards That benefited you in the quarter and that will continue to benefit you as you roll forward.

Speaker 2

Yes, Dave. It's really in the quarter and so far this year, it's Really been the mix of our profit domestic versus international. And obviously, we have a large Amount of profit through our contact center business in Central America. So we benefit from that mix, which He's driven a lower rate this year in the, I'll call, high single digits. And we would Expect that to be the case through the balance of the year.

Speaker 2

And then obviously next year as we look The plan next year, we'll relook obviously at the mix of where, again, our profit is from a foreign and domestic perspective. But that's really been the driver of the rate this year. We haven't had this year As many discrete items as we did last year, which drove the rate higher last year, again, due to the discrete nature of what we had. At this point, it's really a reflection of our foreign versus domestic profit.

Speaker 5

Got it. Thank you. And then secondly, just with regard to the call center business, I know in the last quarterly call, you had Talked about maybe some customers that had refreshed at quite its high levels, but obviously some nice sequential growth this quarter. Just trying to kind of parse through the guidance for the year that you gave. I'm trying to figure out, are we are you guys thinking sequentially kind of flattish for the 4th quarter?

Speaker 5

And could you just talk, I guess, more generally about how your renewals have been in the Q3 maybe versus the Q2 and maybe the beginning of the Q4 Versus the Q2, have you seen improvement there? And just kind of general overall tone of the segment?

Speaker 1

We are seeing some improvement. I spoke about last quarter the fact that to date we have lost a few 100 through the end of June, we have lost a few 100 and 300 and some odd seats of existing customers who would just scale back because of the macro environment and they have not since Grown the number of seats that we have with them, but we have replaced all of those, and we spoke about that again Last quarter, they had all been replaced by new seats, and we continue to put on new seats. We're putting on new seats at a clip that we haven't done before. But again, we're still trying to we've got the deficit of 300 some odd seats that we're fighting against all year in the comps. The good news is we're working on more larger opportunities than we've ever worked on.

Speaker 1

We put on more customers than we've ever put on. Quite frankly, we're working on more opportunities than That, when realized, will bring us greater degrees of revenue in future periods. We continue to put on seats in the month of November, and we'll put on a few in the month of December. December is not traditionally A period where we put on a lot of seats. Everybody kind of holds back and says now they want to get going in January.

Speaker 1

But The quarter should turn out well in our guidance with respect to that quarter. I'll let Mike speak to that with respect to the call centers Where we're headed with

Speaker 2

that? Sure. Yes. I mean, we expect to continue to see growth In that segment in the Q4, I think as we touched on, there's been sequential growth Throughout the year, certainly from an EBITDA perspective, given that we started at a pretty low point in the Q1 with some of the cost Increases and being a little late in terms of increasing pricing, but the pipeline is strong As we've had before, we're onboarding more new customers, and it's looking strong for the Q1. So we feel, again, like the contact center business is picking up momentum throughout the year and into 2024.

Speaker 5

Great. That's really very helpful. And then just lastly for me, with With regard to free cash flow, I mean, fantastic job on debt repayment year to date. Would we expect that there would be A little bit more sequential debt repayment in the Q4 or do you start to kind of fight against some working cap trends a little bit? I mean, I guess just if you could just kind of give us a holistic picture of what Q4 free cash flow looks like and where it's going?

Speaker 2

Yes. As I mentioned, I think we've made a lot of progress, I think, through for the 1st 9 months. So I would expect here in 4th quarter things to normalize a bit. And of course, as we look to the level of volumes in Q1, Depending upon our inventory levels, we may need to start making some investments as we plan for Q1 depending upon what those revenue levels So I would say, Dave, in Q4, we would still look where there's opportunity with Free cash flow still look to again continue to bring the debt levels down to get toward that targeted ratio we're looking for, But certainly not at the level that we've been generating over the last three quarters. If you look at our If you had a chance to look at our cash flow statement, we've already brought inventories down pretty significantly so far this year.

Speaker 2

Receivables have been coming down. So I think we've made a lot of progress there. Again, there's still some opportunity there, But not to the extent that we've seen over the 1st three quarters.

Speaker 5

Benstock.

Operator

And this concludes our question and answer session. I'd like to turn the conference back over to Michael Benstock for any closing remarks.

Speaker 1

Okay. Thank you, operator. I jumped the gun on there a little bit. I want to thank everybody for joining our call. We're looking forward to finishing the year strong.

Speaker 1

Our intention is to continually I'll grow SGC's market share across all of our 3 attractive markets and to do so profitably, the ultimate goal, obviously, of further enhancing shareholder value. We're confident that we can do so even during uncertain times. We look forward to updating you on our full year results, And please don't hesitate to reach out with any questions before then. Enjoy the evening, and thanks again.

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Earnings Conference Call
Superior Group of Companies Q3 2023
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