SKYX Platforms Q4 2023 Earnings Call Transcript

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March 13, 2024

There are 6 speakers on the call.

Operator

Good afternoon, everyone. Welcome to the Superior Group of Companies 4th Quarter 2023 Conference Call. With us today are Michael Benstock, Chief Executive Officer and Mike Kempel, Chief Financial Officer. As a reminder, this conference is being recorded. This call may contain forward looking statements regarding the company's plans, initiatives and strategies and the anticipated financial performance of the company, including but not limited to sales and profitability.

Operator

Such statements are based upon management's current expectations, projections, estimates and assumptions. Words such as expect, believe, anticipate, think, outlook, hope and variations of such words and similar expressions identify such forward looking statements. 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 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.

Operator

The company does not undertake any oops, sorry, 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. Michael Benstock. Please go ahead.

Speaker 1

Thank you, operator. We appreciate everyone being on today's call. I'll start with our Q4 highlights and some broader perspective on 2023, and then I'll discuss our go forward strategies to sustain and accelerate our momentum in the New Year and beyond before I turn the call over to Mike for additional detail on 4th quarter results and our outlook for 2024, we'll then be happy to take questions. Throughout 2023, we talked about the back end weighted nature of our financial performance and that played out with our consolidated 4th quarter results being the strongest of the year. We generated $147,000,000 of revenues during the Q4, up sequentially and down just 1% versus the prior year quarter, which was our strongest year over year comparison of 2023.

Speaker 1

4th quarter adjusted EBITDA came in at $9,900,000 again, our strongest quarter of the year and up significantly from $3,500,000 last year. We also produced $0.22 of diluted EPS in the 4th quarter, much improved from the adjusted $0.06 net loss per share last year and again our best result of

Speaker 2

the year.

Speaker 1

In addition to improved earnings, as you can see in our results release today, we continue to drive strong operating cash flow while reducing working capital. As a result, we have strengthened our balance sheet, reduced our net leverage ratio by almost 50% during the year. Similar to what we described in our November call, business conditions have continued to slowly improve. Many clients are gradually expanding activities and while demand certainly hasn't returned to full strength, we're cautiously optimistic that underlying trends will continue to move in the right direction and that we'll continue to see a gradual pickup in RFPs and other leading indicators. In this still uncertain environment, we have our teams focused on what we as a company can control, most importantly on quality service that leads to strong customer retention.

Speaker 1

In addition, we are strategically investing to fully capitalize on the very favorable long term outlook for all three of our very attractive businesses. For those of you who need a quick primer on SGC and our three segments, we've released a brand new investor slide deck today that's available on our website and I would encourage you to take a look. Shifting gears, I will provide a high level overview for each business segment and then turn it over to Mike for a deeper dive. Healthcare Apparel, which primarily consists of the Wink and Fashion Seal Healthcare brands, grew both revenues and EBITDA year over year. Market conditions for Healthcare Apparel have been improving with more positive signs emerging.

Speaker 1

Our addressable market for this segment is large and expanding and our aim is to grow our market share well beyond the more than 2,000,000 caregivers who already wear our brands every day to work. We began this process last year with our rebranding efforts under the Wink trademark and the launch of our direct to consumer website, which continues to produce favorable results. To build on this momentum, we'll continue our digital advertising efforts to further enhance customer awareness and engagement with Wink. As with any D2C startup, this required investment is a gating factor on profitability in the shorter term, but one that we firmly believe will establish a foundation for profitable sales growth over time. Combined with the favorable contribution from our B2B website, we also launched last year and is adding efficiency to the wholesale process and the strengthening of our relationships with the other digital channels that we service, we see a compelling longer term outlook for healthcare apparel.

Speaker 1

Moving on to branded products. During the Q4, we drove our strongest revenue and EBITDA results of the year. The gradual expansion of demand that began in mid-twenty 23 that I referenced on our November call continued through year end and we ended the year with a stronger pipeline than a year earlier. Our booking trends have remained favorable so far in the Q1, albeit with the normal seasonality. Our focus within branded products is on strong customer retention and increasing share of wallet, as well as driving RFP activity and sales rep recruiting, while maintaining stronger margins.

Speaker 1

We're confident in our ability to capture share, currently less than 2% of this large attractive and growing market. Next up is our contact centers business segment, which also grew revenue year over year. Increased costs related to labor and talent that first took hold in early 2023 weighed on quarterly profitability, but we will begin to anniversary these higher costs this Q1. Our focus for contact centers is on increasing seats with existing customers and building the pipeline of new customers. We will continue to utilize the latest technology to enhance efficiency and take advantage of our ability to increase prices when possible to improve margins during 2024.

Speaker 1

Our pipeline of new business remains strong for the office gurus, and we're bullish on the outlook for this high margin business. I'll now turn the call over to Mike, who will walk us through our Q4 financial performance in greater detail and provide our outlook for 2024. We'll then take your questions. Mike, over to you.

Speaker 3

Thank you, Michael. Rounding out a back end loaded year as we first referenced a year ago, our 4th quarter results were the strongest of 2023. Our quarterly revenue reached $147,000,000 which was up 8% sequentially from the 3rd quarter and down 1% from last year. As compared to last year, 4th quarter sales increased in the Healthcare Apparel segment by 6% to $28,000,000 and in the contact center segment by 5% to $23,000,000 These increases were more than offset by a 4% 4th quarter sales decline in our branded product segment to $98,000,000 While branded product sales were down, the 4th quarter results sequentially improved from the prior quarter and represents the strongest quarter of the year. Our gross margin rate climbed significantly over the past year, up 7 60 basis points.

Speaker 3

The margin increase was primarily due to last year's inventory write downs of $7,800,000 primarily within our Healthcare Apparel segment and a favorable shift in the mix of pricing and customers and lower supply chain costs within our Branded Products segment. Our SG and A for the Q4 came in at $49,000,000 relative to $44,000,000 a year earlier. While the SG and A rate improved on a sequential basis by 130 basis points, the year over year rate increased by 360 basis points, primarily due to expense deleveraging from the sales decrease in our Branded Products segment, employee related costs and depreciation in our contact center segment and lapping unrealized gains of $1,600,000 recognized in 2022 on written put options. Our interest expense for the Q4 was $2,100,000 a slight improvement over the past year despite higher interest rate due to our successful efforts to reduce debt outstanding by $62,000,000 during the year. Net income for the Q4 was $3,600,000 or $0.22 per diluted share, up from net income of $2,000,000 or 0.14 dollars per diluted share in the year ago quarter, which included a onetime pretax non operating gain of $3,000,000 or $0.20 per share.

Speaker 3

Therefore, excluding last year's gain, our 4th quarter result of 0.2 $2 per diluted share was up significantly from last year's adjusted result of a $0.06 loss per share. The improved result was driven by the aforementioned increase in gross margin for the quarter. Consolidated EBITDA for the Q4 was $9,900,000 compared to $3,500,000 in the year ago quarter, including last year's gains that I previously mentioned. The EBITDA increase was primarily driven by the Healthcare Apparel segment, whose EBITDA improved significantly to 1 despite a sales decrease in the Q4, the Branded Products segment EBITDA improved to $11,700,000 in the 4th quarter from $10,800,000 a year ago due to higher gross margins. These improvements were partially offset by an EBITDA decline in our contact center segment to $2,300,000 in the 4th quarter from $3,800,000 a year ago, primarily driven by labor increases earlier in the year.

Speaker 3

Turning to our balance sheet, we've continued to successfully reduce leverage, ending the year just under 2.0 times trailing 12 month covenant EBITDA, a significant improvement relative to 2.9 times just 3 months earlier in September and 3.9 times at the end of 2022. In other words, we've cut our leverage ratio effectively in half over the past year. We also ended 2023 with cash and cash equivalents of $20,000,000 benefiting from our continued strong free cash flow and our focus on reducing working capital. Our operating cash flow for the year was $79,000,000 I'll wrap up with our full year 2023 will have a back end loaded cadence due to the underlying nature of the markets we serve. Our outlook calls for full year revenues in the range of $558,000,000 to $568,000,000 up from 2023 revenues of $543,000,000 We also expect earnings per diluted share in a range of $0.61 to $0.68 up from $2023,0.54 And I'll reiterate that similar to last year, we expect a back end weighted pattern.

Speaker 3

This concludes our prepared remarks. And operator, if you could please open the line, Michael and I would be happy to take questions.

Operator

Certainly. We will now begin the question and answer session. Today's first question comes from David Marsh with Singular Research. Please go ahead.

Speaker 4

Hey, guys. Congratulations on the quarter. Looks really, really good. Thank you. Just if we could start, I want to talk about the contact center segment a little bit.

Speaker 4

It was looks like it was down a little sequentially. And I know you guys had mentioned there were some seats that had been lost, maybe some contracts that hadn't been renewed. But it looks like you've had some pretty good backfill. Just talk about kind of the general cadence of that business and kind of what your expectations are for the year in that particular business?

Speaker 1

Sure. Thanks for joining us. We're feeling good about the business. I mean last year was a little bit strange in that we had a lot of long term customers cut back on the number of new agents that they had. And it was tough to make that up as the year went on.

Speaker 1

But we did make it up. And in the end, we ended up with a net gain of agents that we were able to bill out. In addition, last year, we were a little late in putting price increases in, which certainly impacted the first half more than the second half of the year. We're feeling strong about the business. It's growing.

Speaker 1

We the infrastructure is all in place for it to grow. The sales efforts are yielding our expectations for the business, and there's really nothing holding us back. There's still strong demand, pipeline strong. 1st quarter should be pretty good and we expect that momentum will continue to build throughout the year. Q4 is usually the softest quarter in terms of growth for that business.

Speaker 1

People don't tend to put on new seats as they're ending the year and looking at their budgets. Usually, that's when they're cutting back the most for the holiday season. And so Q4 is always kind of a little bit tenuous what's going to happen, but we're feeling strongly going into this year that we should see some pretty good growth.

Speaker 3

And Dave, just to build on that, if you look at the de build, if you will, from Q3 to Q4, you'll see it's fairly consistent last year versus this year, to Michael's point, just around the holidays that we experience and the fewer hours worked in the month of December in Q4.

Speaker 4

That's really helpful. Appreciate that. And then just turning to the healthcare apparel business, you guys talked consistently about inventory and getting it right sized. I saw that inventory did tick down a little bit again sequentially in the Q4. Just wondering if you could give us an update there, just kind of overall feel for your inventory levels, the demand and if you feel like you're pretty close to equilibrium and at a point where you could start to build again?

Speaker 3

Sure. Sure, Dave. This is Mike. I'll take your question. Yes, we talked at the beginning of the year about it would take us about a full year to get to what you referred to as equilibrium and we feel like we've reached that point here at the end of the year.

Speaker 3

So I think with the obviously the significant charges that we took in 2022 that proved to be the right decision in terms of helping us to clear through inventory through various channels. And so we've worked the inventory down significantly by the end of this year and are shifting our focus really toward new product launches and new introductions as we get deeper into 2024. So from a working capital perspective and inventory, we've really driven a lot of value there. I think that will certainly normalize as we go forward and we'll look to invest in inventory where we see the opportunities and growth in certain categories.

Speaker 4

Got it. And then just lastly from me, on the SG and A side, a little uptick in the quarter. I'm guessing that's just typical year end kind of accruals for incentive comp and things of that nature and I'm sure we expect the reversion back to a level kind of more similar to the prior couple of quarters going forward?

Speaker 3

Dave, I didn't quite catch your full question,

Speaker 1

the very last part in particular.

Speaker 3

Could you repeat that, Dave? Sorry.

Speaker 4

Sure, sure, sure. SG and A, it just it upticked a bit in the Q4. I just wonder if that was just a typical kind of 4th quarter seasonal kind of incentive comp accrual type action and if we would be right to expect a reversion back to kind of I mean 1Q, 2Q, you guys really had things in check. I just wondered if where should we expect the level of trend?

Speaker 3

Yes. No, no. Thanks, Dave. I would probably call it a couple of things. I wouldn't it wouldn't be driven by incentive comp control.

Speaker 3

It would I call it a couple of things. 1, just as a reminder, in the branded product segment, the commissions that we pay, which obviously roll through SG and A are based on margin. And so recognizing that the Q4 was the biggest quarter for branded products, we've got a larger commission expense in the Q4, obviously, for good reason. And then one of the things I called out in the script is last year, we had favorability with respect to revaluing a stock put that we have. And actually in the Q4, we had an expense driven by the fact that our share price did appreciate.

Speaker 3

So that was an incremental expense, if you will, in Q4. So we wouldn't expect that to be normalized going forward per se, but those were a couple of things that drove the uptick here in the Q4.

Speaker 4

Got it. Thanks. I will yield to some of the folks who have questions. Again, congrats on the quarter. The job guys.

Speaker 3

Thanks, Dave.

Operator

Thank you. The next question comes from Kevin Steinke with Barrington Research. Please go ahead.

Speaker 5

Hello. Good afternoon. So just wanted to discuss your 2024 outlook. You mentioned expecting the year to be back end loaded again. What leads you to expect that and how much improvement in the demand environment might you be factoring into that?

Speaker 5

I know you said business conditions continue are gradually improving, but maybe not back to full strength yet. So maybe any thoughts on that, please?

Speaker 3

Sure. I'd say a couple of things, Kevin. First of all, in terms of the back end loaded nature, I think a lot of that's driven by the fact that what we do see in our branded products business is they typically do have a strong Q3 and partially Q4 just as it relates to some degree to the holiday season, whether that's gifting for associates or for our customers' customers. And then also with our contact center business, typically what we see is, as we just mentioned before on the results for Q4 for the contact centers, we typically see that business come down a little bit in Q4 as our customers pull back and we have holidays. We start to add new customers in Q1.

Speaker 3

And then as we add them and onboard them, that drives more volume toward the back half of the year. So those two segments can tend to drive a little bit more performance toward the again, the back half of the year. I would say that we wouldn't anticipate to be as back end weighted as it was this year, but back end weighted nonetheless. Looking at the businesses and our guidance implicit in our guidance, our sale is sales growth across all three of our segments. I would say for our branded products and healthcare apparel segments, our guidance assumes low single digit growth.

Speaker 3

And then we would expect larger growth in our contact center segment, anywhere from high single digit to low teen growth. And you put that together and that kind of speaks again to the range that we just provided.

Speaker 5

Okay. Yes, fair enough. That's helpful. I was going to ask about the segment growth expectations. So I appreciate that.

Speaker 3

All right. So again, I mean,

Speaker 5

I just so it doesn't sound like you're necessarily assuming some dramatic improvement in the demand environment, but it's just kind of your regular cadence of new business ramping up and you mentioned strong pipelines. So it sounds like you're just kind of basing that outlook based on what you kind of see today and that should lead to a stronger second half of the year. Is that fair?

Speaker 1

Yes. I'll jump in too. Yes, that is fair, Kevin. Thanks, Michael. I think we're seeing more predictability than you've seen over the last few years.

Speaker 1

2020 to 2023 were pretty crazy for us, 'twenty to 'twenty two certainly because of the pandemic, but then 'twenty three with the overhang of inventory. We finally feel like we've gotten to a place where our results are more predictable, and we certainly are going to work really hard towards exceeding the expectations. But I think we've set the expectations pretty well where we believe things will land right now and have very high confidence in those expectations.

Speaker 5

Okay, great. And you mentioned the direct to consumer effort in healthcare apparel continue to be pleased with the results there. I don't know any more color you can provide there. And I assume it's still too small to really move the needle, but maybe any comments on just again how that's ramping and what you might expect in 2024?

Speaker 1

I think what's really exciting and I don't have any hard data that I can share on this, but the awareness of our brand Wink and Carhartt, which we're a licensee of, is much greater than it has been in the past as a result of a lot of our efforts. We're making a huge marketing investment to support that. And so while it's not a huge part of what we do, it's getting bigger and it's not only helping the marketing efforts, it's not only helping the direct to consumer, but it's helping us really across all the different channels that we're selling. You have the digital channels where we're selling into Amazon and walmart.com and so on, target.com and many others. And that's been very helpful as well as selling to retailers.

Speaker 1

I think we're creating a demand for our products that we haven't in the past. And I've spoken about our marketing team in the past. I think they're second to none. And I'm hoping that sometime in the not too distant future, we'll be able to start reporting more on the results and it will have a bigger impact on our healthcare apparel business than it has today.

Speaker 5

Okay, great. Lastly, I wanted to ask about gross margin. It was quite strong in 2023. I know you had some of the larger inventory write down charges in 2022 that made that comparison a little easier. But even without that, those charges, still some pretty healthy gross margin expansion.

Speaker 5

So I'm just wondering if you could talk about what's driving that and speak to the levels of sustainability in gross margin or opportunities for improvement or pullback or how you think that might trend going forward?

Speaker 3

Sure, Kevin. This is Mike. Yes, I think consistent with what we've mentioned in prior at least the prior quarter, if not the previous 2, we continue to see strong margins in the branded product segment. With sales down, we've been able through pricing and customer mix as well as some favorability in supply chain costs to drive improved margins. You certainly see that happening again in the Q4.

Speaker 3

Margin rate in the branded products business is 35% as compared to about 31% the year before. I think as we look forward, we look to sustain those margins. We think there's still a little bit of upside in the margin rate as we even get into 2024. But again, I think for the most part, certainly able to sustain that margin, which is implicit in our guidance. And as we talked about, we've taken some measures in the contact center business with price changes that we made earlier this year, and we'll continue to look for opportunities there where we can perhaps drive some rate improvement where we kind of took a step back this year.

Speaker 3

We'll look to see how we can grow that margin in 2024.

Speaker 1

Yes. I'll jump on that too a little bit. We are laser focused on gross margins, both at the factories that we manage in Haiti, creating better factory efficiency and looking at all kinds of means through process and improvement to gain more gross margin from what we produce ourselves. But outside of that, we're also looking at shifting as much as we possibly can to countries that we have free trade agreements where goods can be brought without duty into the United States at all. And that's a very important part of our strategy as well.

Speaker 1

Along you know we have a redundant manufacturing strategy, Kevin. So we still have to keep that in place because there are events in the world that we can't necessarily control all the time. But we are laser focused on gross margins, and we would be very disappointed not to see some improvement in our gross margins.

Speaker 5

Okay. Thank you. If I could just sneak one last one in because you mentioned Haiti and I've read recently about some unsettled political conditions down there and just wondering if that's having any impact on your production down there? What's the state of that effort today?

Speaker 1

Sure. As you know, it's a good question. As you know, our the factories that we manage are on border with Dominican Republic and there was some earlier noise towards the end of last year with respect to the water rights and water rights are being cut off to the Dominican by the Haitians and that all got settled pretty quickly. So we lost a little bit of time. Typically what happens in those situations where we lose a couple of days because of countrywide strikes or even some violence in different areas of Haiti, we'll lose a couple of days where people will stay home.

Speaker 1

And then because they have to eat, they have to support generally 10 to 12 people and their families by working for us. They do come to work and we'll work weekends to make up for the days that they lose during the week. So we've been lucky and fortunate that we haven't lost a lot of time yet. The situation in Port au Prince is terrible and even other cities near the port. Fortunately, we're far enough away from most of that noise that it doesn't greatly affect us yet.

Speaker 1

And we're watching it very carefully. The people who we operate in their industrial park where there are many people like us, even some of our competitors are watching it very carefully as well to ensure that there's as least amount of disruption as possible. We do have always a plan B and a plan C as you know with our redundant manufacturing strategy. So should there be any kind of disruption that actually affects our supply beyond our we carry safety stocks, as you know, for all the different eventualities, but we do have other places we can manufacture as well. And we're obviously focused on that with the situation in Haiti.

Speaker 1

But I would say right now, we've been very fortunate for it not to have impacted us really greatly yet.

Speaker 5

Okay. I appreciate the insight. I will turn it over. Thank you.

Operator

Thank you. The next question comes from Jim Sidoti with Sidoti and Company. Please go ahead.

Speaker 2

Hi, good afternoon and thanks for taking the questions. It seems like you expect the operating margin to expand about 50 basis points next year to just over 4% from just below just under 4% in 2023. Is that do you think that's more on the SG and A line you get the leverage or on the gross profit line?

Speaker 3

I think Jim we would expect again a little bit more expansion on the gross margin line. And obviously, as we add sales, we'll get a little bit of leverage. We'll get a little bit of leverage in G and A, but I would attribute any operating income improvement largely through some expansion in margin.

Speaker 2

And how many sales folks do you think you'll add in 2024?

Speaker 3

How many sales

Speaker 2

folks? Yes, you said that one of the reasons you're not going to get the leverage on SG and A is because you're adding sales people.

Speaker 3

No. What I meant to say, Jim, just to clarify is, I would expect as we're adding sales dollars, we'll get a little bit of leverage in G and A. But again, I'd say it would be more driven by margin expansion, just to clarify.

Speaker 2

On the gross margin line?

Speaker 1

Correct.

Speaker 2

Got it. Got it. And you seem to have really turned the corner in terms of cash generation and leverage ratio, what do you think the uses for cash will be in 2024? Is the first priority going to be bolt on acquisitions? Or do you think you could increase the dividend?

Speaker 2

Or are there other priorities?

Speaker 3

Sure. I mean, our priorities will be consistent with what they have been sort of pre this focus on the debt. We'll of course with our Board revisit the dividend on a quarterly basis. The other thing that we will do, Jim, this year, we will increase our capital spending this year. I mean, if you look at we just spent over $4,000,000 in 20 23, it's a very low number.

Speaker 3

So we'll be investing a little bit more in CapEx, still not quite to what I would call the historical levels, but certainly more than we did in 2023. And from an M and A perspective, where I think we said before, we clearly have put that to the side. I think that's something that we'll certainly consider as we move forward. As we said before, even though we weren't actively looking to do any M and A transactions, we obviously keep the pipeline open and we'll certainly continue to evaluate whether there is potential accretive opportunities. And we're certainly in a position where if there were, we could take advantage of that.

Speaker 3

And so that will be something that we'll evaluate throughout the year as a potential opportunity.

Speaker 2

All right. Thank you.

Operator

This concludes our question and answer session. I'd like to turn the call back over to Michael Binstock for any closing remarks.

Speaker 1

Thank you, operator. Firstly, I would like to publicly thank Phil Cusick for selling Vamco to us almost 8 years ago. And Phil, thank you for your leadership as well as your time in the CEC suite as our Chief Strategy Officer. We've accomplished a great deal during your time with SG and C and are more diverse and stronger than ever. Personally, it's been an incredible experience for all of us who had the privilege to work side by side with you for these 8 years.

Speaker 1

We're in a much better place than ever to succeed, in part due to your having a voice in our future. We wish you and your family continued success in all that you choose to pursue. Secondly, I want to welcome our 2 new Board members, Sue Lattman and Loreen Spencer. We're excited to have you join us. Your combined business and governance experience will be a great asset to SGC as we navigate our continued growth and success.

Speaker 1

Thirdly, we want to welcome Doctor. Kelly Richmond Pope as our 1st Board observer in our brand new observer program. This very unique and innovative program was conceived as an effort on our part to provide valuable public company board experience for people who, for reasons outside their control, historically have struggled with gaining entree to seats on public company boards. We're proud to be trailblazing in this initiative and setting an example for others by working to create a more diverse community of board members for us and others in the future. With that, I'll close by saying we're excited about 2024 and again, we'd encourage you to have a look at our new investor deck on our website.

Speaker 1

Look forward to participating in upcoming investor conferences and presenting our Q1 results in the spring. Until then, be safe.

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SKYX Platforms Q4 2023
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