Superior Group of Companies, Inc.

Good afternoon, everyone, and welcome to Superior Group of Company's third quarter 2021 conference call. With us today on behalf of the company are Michael Benstock, the company's Chief Executive Officer, Andy DeMott, its Chief Operating Officer and Chief Financial Officer, Phil Cusett, its Chief Strategy Officer, and Jake Himelstein, BAMCO's President. After the speaker's opening remarks, there will be a question and answer session. Today's conference call is being recorded, and your participation implies that you do agree to this. If you do not, then simply drop off the line. Now I'd like to turn the conference call over to Hala El-Sherbini, Senior Managing Director of Three-Part Advisors, who will turn the conference call over to Hala El-Sherbini, Senior Managing Director of Three- Thank you.

This conference call may contain forward-looking statements about superior groups of companies, the companies, within the meaning of the Securities Act of 1933, the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995, and all rules and regulations issued thereunder. Such statements are based upon management expectations, projections, estimates, and assumptions. Words such as will, expect, believe, anticipate, think, outlook, hope, And variations of such words and similar expressions identify such forward-looking statements, which include statements on the impact of COVID-19 on the company's business, including inventory, supply chain, manufacturing capacity at the company's own and contract manufacturing facilities, service capacity, and customer demand. 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 include, but are not limited to, the following. The effect of the COVID-19 crisis on the U.S. and global markets, our business, operations, customers, suppliers, and employees. general economic conditions in the areas of the United States in which the company's customers are located, changes in the markets where uniforms are worn, where promotional products are sold, and where call center services are used, the impact of competition, the company's ability to successfully integrate operations following consumption of acquisitions, and the availability of manufacturing materials. as well as the risks and uncertainties disclosed in the company's periodic filings with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the year ended December 31, 2020, the quarterly report on Form 10-Q for the quarter ended September 30, 2021, and the eight case filed recently. 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 to conform to actual results or changes in the company's expectations, whether as a result of new information, future events, or otherwise, except as required by law. Please note that all growth comparisons that management makes today will relate to the corresponding period in 2020 unless otherwise noted. With that, I'll turn the call over to Andy.

Thank you, Holla. Good afternoon, everyone. Today, Jake and I are going to discuss financial and operational highlights first. Michael will then cover healthcare apparel and BPO businesses in more detail and discuss how we are navigating through the current macro environment. Phil will then review our strategic initiatives before we take your questions. We delivered solid third quarter 2021 results on the strength of our core offerings and robust demands. Overall consolidated net sales were $123.3 million compared to $127.7 million in Q3 last year. Consolidated sales declined by 3.5%, but reflects impressive performance against a historically high sales comparison in Q3 2020. As expected, crisis PPE sales continued to wane. Q3 2021 sales included $1.2 million of PPE sales, while Q3 2020 included $33.3 million. Excluding PPE sales, consolidated net sales actually increased by 29.4%. We are seeing strong sales momentum that is evident in our current year nine-month results of $395 million as compared to $381.3 million in the first nine months of 2020. This is a strong testament to the execution of our entire team and our ability to take market share. Turning to segment results, Uniforms and related products net sales decreased 15.1% or $11.3 million compared to last year. Excluding PPE, the uniform segment increased 3.9% to $61.6 million compared to $59.2 million in Q3 of 2020. PPE sales normalized to $.3 million versus $13.9 million a year ago. We are seeing an inflection point in demand for uniform apparel across our diversified end markets. showing a progressive recovery that is offsetting this expected decline in PPE sales. Gross margins in our uniform segment increased to 35.8% in Q3 2021 versus 33.5% in Q3 2020, due primarily to lower sales of PPE, partially offset by higher logistical costs in the current quarter. As a percentage of sales, our uniform segment SG&A expense was 31.1%, versus 30% in Q3 last year due primarily to lower sales to absorb overhead. Operating margin for uniforms in Q3 of 21 was 4.7% compared to 3.5% in Q3 of 2020. Jake will review results for BAMCO shortly, so I'll move to the office gurus. The team continues to excel and reported tremendous growth exceeding expectations. Net sales after intersegment eliminations were up significantly by 56.8% to $16.2 million. Our expanded customer base continues to grow through incremental opportunities with existing clients, developing new relationships and onboarding new engagements. Gross margins for the office scoopers decreased to 58.1% in Q3 of 21 versus 60% in Q3 2020 due primarily to costs associated with onboarding of more new customers in the current period. As a percentage of sales, SG&A expenses for this segment was 36.5% versus 33.7% in Q3 last year as we increased investments to support significant growth in this segment. Operating margin for the Office Guru has decreased from 26.3% in Q3 2020 to 21.6% for Q3 of 21. On a consolidated company basis, gross margin for Q3 of 2021 of 37.1% was consistent with our Q3 2020 margins due to higher product and logistics costs, which were offset by shifts in product mix across segments. Our consolidated SG&A expenses remained flat, and as a percentage of sales, our total SG&A expense was 28.4% versus 27.3% in Q3 last year. Income from operations for the third quarter was $10.8 million, compared to $12.5 million in 2020 Q3. Operating margin was 8.7% compared to 9.8% last year and well ahead of our Q3 2019 amount of 6.9%. Net income was $8.2 million or 51 cents per diluted share compared to $9.9 million or 63 cents per diluted share in the Q3 last year. Our effective tax rate for the quarter remained constant at 17.8% compared to 17.7% a year ago. Moving to our liquidity profile, we continue to generate solid cash flows supported by a healthy balance sheet. While net borrowings at September 30th increased by 8.5 million from year end of 2020 to 80.8 million, we were able to reduce debt by $17.4 million during the third quarter with strong operating cash flows generated during the quarter. Our debt to EBITDA ratio remains very good at 1.5 times, which is in line with our desired range and well under our covenant limits. Cash and cash equivalents at quarter end was $6.4 million, an increase of $1.2 million. Through the nine-month period, our CapEx was $14.5 million, with investments primarily related to the facilities and technology enhancements across our distribution and manufacturing locations. We made great progress at our Eudora Arkansas Distribution Center, and we began beta testing this week. There will be a gradual movement of accounts from the current warehouse operating system to the new system. Our plan is to be 100% operational with the innovative technology by the end of Q1 of 2022. We are on target with our CapEx investments in overall automation and efficiencies, including benefits of robotics installed at our CID Dallas distribution center. And our CapEx is tracking well against our plan of $16 to $17 million for 2021. Lastly, we paid our regular quarterly cash dividend of 12 cents during the third quarter. I'll now turn the call to Jake to review BAMCO's performance. Jake?

Thank you, Andy. BAMCO ended the third quarter of 2021 with revenue of $45.2 million, gross profit of $14.2 million, and operating income of $3.9 million. These figures represent a year-over-year increase from Q3 of 2020 of 2.4% in revenue and a year-over-year decrease of 15.5% in gross profit and 43.5% in operating income. However, this doesn't tell the whole story. BAMCO's third quarter had less than $1 million in total PPE revenue compared with $19.4 million in the same period last year. Excluding PPE sales, Q3 revenue benefited from strong demand amongst new and existing clients, increasing by 78.8% year-over-year. 98% of BAMCO's Q3 revenue came from the sale of promotional products and branded merchandise. Operating margin in Q3 was 8.6%, below the same period in 2020. This is due in large part to less PPE sales in 2021, resulting in a lower gross margin than Q3 2020. Impressively, BAMCO grew in Q3 despite a variety of market headwinds, including global supply chain disruptions, the cancellation of most in-person events and conferences due to the rise of the Delta variant, and general market uncertainty that has caused many companies to pause their marketing spend until things normalize. BAMCO's backlog at September 30th was $56.2 million, made up of $2.8 million in PPE and $53.4 million in non-PPE. This backlog is 30.6% higher than the backlog at the same period in 2020, showing continued resurgence in promotional product spend. So we reflected in delivered sales throughout Q4 and the early part of 2022. As we announced in Q2, we began integrating the sales and marketing teams of BAMCO and HPI. Most of our sales representatives are now trained to uncover opportunities and sell both branded merchandise and branded uniforms to clients and prospects. Turning to HPI activity, many of our large retail customers have set goals for significant hiring in Q4 in order to meet consumer demand. We're also seeing increased demand from our airline and transportation customers. Hospitality and entertainment accounts are also rebounding, compared to Q3 2020, while other channels seem to have stabilized to normalized levels. We expect to see increased RFP activity in the coming quarters, as several large prospects are expected to go to bid in 2022. Overall, HPI's non-PPE backlog increased from $8.2 million at September 30, 2021, compared to $7.3 million in the same period last year. Now I'll turn the call over to Michael to review our healthcare apparel business, TOG, and the macro environment.

Thanks, Jake. Good afternoon, everyone, and thank you, Andy, too, for starting this off. As reflected in the numbers, we're tracking well against our guidance goals outlined last quarter. Let's begin with healthcare apparel. The CID product development design team continues to innovate, shaping trends and connecting fashion-forward healthcare uniforms with function, comfort, and fit. Just last week, the team was recognized for the best fabric garment innovations from the North American Association of Uniform Manufacturers and Distributors for our Wonder Wink Indie Laundry Collection and our fall season new release of the sustainably focused Wonder Wink Renew Fashion Scrub Line. In fact, these two submissions tied for first place among a crowded group of submissions. Our Wonder Wink Indie offering is moving in the right direction and gaining more fashion seal healthcare fans as groups and laundries see Indie Fashion Scrubs as an essential product for the future. We are working through our increased commitments and strengthening our stocking position to accommodate the expected future sales growth in this product line. From a manufacturing standpoint, our near-shore factories in Wanamint, Haiti, are driving higher efficiencies and increasing production volumes, particularly for our CID offerings. We are fortunate that our facilities are far removed from weather events, earthquakes, and unrest in other areas of the country and operate with significantly less disruptions. For our healthcare brand, Fashion Seal Healthcare, sales have lagged during 2021 as compared to 2020. This is a result of frenzied buying during the earlier periods of the pandemic in 2020. We anticipate demand will increase in 2022 as stockpiles diminish and increased demand for hospital stays improves. Additionally, we're taking all necessary steps, staying ahead of what will be a continuation of increasing supply chain disruptions. We've taken stronger inventory positions in our best-selling products to ensure that disruptions are largely mitigated. We are also proactively reengaging with many of our prospects who may not be adequately serviced by our competitors. Our long-established redundant manufacturing strategy positions us well to handle the anticipated increased demand better than most. Turning to the office gurus, their rapid expansion is exceptional. Through a strong pipeline fueled by increased demand for nearshore outsourcing and our reputation for excellent service, TOG is positioned incredibly well to capture future market share. Businesses are comfortable with work being done remotely, and as labor challenges persist in the United States, we are rapidly growing existing accounts and adding new customers. TOG currently employs nearly 3,400 highly motivated team members who serve as the voice of our customers. We built a culture at TOG that attracts and retains the best talent. We were honored to be recently named by Employers for Youth as the number one best place to work in the call center industry in El Salvador for the second consecutive year. To meet the robust demand of this highly profitable business, we signed leases for additional in-center capacity in both El Salvador and Jamaica, adding a total of 800 seats. We are working hard at every turn to manage what we can control. But the current operating environment is certainly creating headwinds for us and much of the U.S. economy. Logistical capacity constraints, staffing issues, and reduced work hours at factories worldwide are causing increased costs and delivery delays. The energy crisis in China is affecting deliveries of what were already inflated textiles from a pricing standpoint. Our mill sources are seeing working hours reduced by 10 to 30 percent, while yarn prices for both cotton and polyester are up considerably in the past months. As we have discussed on prior calls, we have not had many opportunities over our 100-year-plus history to raise prices, relying more on our diverse supply chain and other efficiency strategies to mitigate rising costs. However, we are operating in an unpredictable environment of converging issues. To combat this, we instituted price increases effective at the end of Q4 2021, that are designed to offset the impact as higher-priced products begin shipping from our warehouses. Overall, we closed another strong quarter, and I must thank our entire team for their hard work and dedication. On a separate note, we are deeply proud of Phil Cousett, who was recently named the number one most influential person in the entire promotional products industry by ASI's Power 50 list. Every year, the Advertising Specialty Institute ranks the most influential figures in the industry, and it's no surprise to us that Phil topped that list for 2021. This is a huge accomplishment that will serve Banco and SGC well in our recruiting efforts, as well as be a strong validation point for clients looking to work with us. We appreciate Phil's passion and strategic vision as he embraces his new responsibilities as our CSO. With that, I'll turn the call over to Phil for his remarks. Phil?

Thank you, Michael. I'm really humbled and incredibly honored by the recent recognition from ASI. We've built a special team over the years, and it's a privilege to continue to collaborate, innovate, and grow with them. Before I touch on our strategies and initiatives for growth, I'd like to take a step back and put our impressive performance in context. To provide that context, let's look at our performance by putting aside the unusual year of crisis PPE sales comps in 2020. Looking back at our baseline during non-COVID times in 2019, net sales for Q3 2019 were $89.5 million. For the current quarter, excluding PPE, total net sales increased 36.5% to $122.1 million. On the bottom line, diluted EPS increased 96.2% when compared to Q3 2019. We achieved this remarkable growth by leveraging our outstanding sourcing capabilities to win and support existing and new customers who turned to us in a critical time of need. By coming through when they needed us most, we earned the business of many of those customers, converting them into longer-term clients and strengthen our relationship with our existing customers. Looking ahead, we are energized about the future. We are deep into some very strategic initiatives that will be transformative. Leveraging technology to better serve our customers and elevate our omnichannel presence continues to yield positive results. Automation and robotics will increasingly drive efficiencies, and we will continue to differentiate through technology to further elevate our customer-centric focus. International expansion is another key strategic element that will help to accelerate our long-term growth plan. Our new distribution center in Poland that opened in August is now servicing an ever-expanding customer base in Europe. We continue to build our talent pool and are pleased to announce a new director of sales for Europe. We believe our in-country resource will help us better serve existing customers and pioneer new opportunities. To close, we have built a strong foundation, and we have a clear strategic vision for the future. With that, we'll open the line for questions.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the numbers to ensure the best sound quality. Once again, in order to ask a question, please press star and one. We'll pause momentarily to assemble the roster. And our first question today comes from Kevin Steinke from Barrington Research. Please go ahead with your question.

Hey, good afternoon, everyone. I wanted to start off first by talking about, I believe you mentioned, you know, kind of an expected pickup and RFP activity and, you know, what's kind of driving that market activity and, you know, how you're positioning yourself to kind of respond and compete for that business?

Yeah. Hey, Kevin. This is Jake. So, look, in regards to the increased RFP activity, I think it's just a natural progression of what we see in the marketplace, right? A lot of companies were probably a little bit anxious about going out to RFP, changing their providers during the peak of COVID. And look, there's been a lot of companies, our competitors, that have been struggling through this in terms of logistical problems, warehousing problems. And so now that they feel more comfortable going out to RFP, we're seeing increased opportunities. I mean, companies we've been talking to for years and years that have said, like, just stand by and we'll be out to RFP soon are now coming out. So we expect to see increased activity in 2022. And, you know, we're excited about the prospects of winning some of those larger programs. Okay, great.

How much do you think you've been able to competitively differentiate in this challenging market environment given supply chain issues? You know, you mentioned some other competitors kind of struggling to serve their customers well. Do you think your ability to serve customers better is starting to resonate in the market or is that kind of something that was already you know, well-recognized?

Well, I think it was well-recognized, Kevin, Michael, but greatly accentuated during this period of time. You know, our customers, I can't say that we've been without our issues, but what we hear out in the marketplace, there are those suffering a lot more than we are. You know, we're very fortunate that we have people on the ground in China, While they've had restrictions from time to time, they've been able to move freely between our mills, making sure that our fabrics get completed when they're supposed to, or at least within a reasonable time after they're supposed to. Same thing with getting space on container ships or trucks in China. Having people on the ground makes a whole lot of difference. We're not dealing with an agent who's got an agent who's got a broker who's got a friend who has a relationship with a factory. In most of these instances, we have the direct relationships with the factory. So that's helped us a great deal. The problem, the biggest part of the logistics nightmare comes about once things are put on a ship and they sit out in the water for extended periods of time. And even after they're unloaded finally, getting transportation, whether it's rail or truck, has been challenging. But we've got a pretty good logistics department. We've got a lot of people, you know, low-cost people who follow up on all these shipments at any given time. I think our customers appreciate us for what we've done. I think in the early part of the pandemic, customers couldn't understand how could somebody who was in the business of serving food in a restaurant, you know, a casual dining restaurant, understand that there's a supply chain problem. But certainly the media has spoken a great deal about this. And some of these people have had bigger problems than not being able to get their uniforms. It came later with not being able to get some of their paper goods, not being able to get some of their printed goods, and not being able to get the things they needed on a day-to-day basis in their restaurant that comes from offshore. Even some things that come from the United States, because the trucking situation in the United States is pretty tight. So we're We're in a better position because of our redundant manufacturing and having people on the ground. And I guess you could say we're in a better position because we've been doing this for 100 years too.

Right. Yeah, that makes sense. And, you know, obviously, you said you're better positioned relative to most competitors in this current supply-constrained environment. But, you know, obviously, You're not immune to it. No one is. I mean, if you've been able to identify or measure any meaningful impact on your sales from the supply chain issues just, you know, because there wasn't product available, I mean, that wouldn't be surprising if that has been the case. But just curious if you've seen anything or measured anything meaningful from that.

Not because product wasn't available because it's been available. You just have to wait longer for it. we haven't had any instances where we simply couldn't get the product. Sometimes it was a week late or a month late, but we've been able to get it. Yes, and of course there has been an impact on our sales. There's two sides to that. There's the sales we take that we can't ship because we don't have the product, which is our backlog, which is higher than it's been in some time. And then there Are there lost sales? Now, among our contract customers who only buy from us, I don't believe we've lost many sales, but that would impact more CID and fashion seal healthcare who buy more off the shelf than our HBI customers do. Jake, you want to comment on that?

No, I think you covered it well.

Okay.

Okay, thanks. That's understood. So you mentioned marking up prices in the fourth quarter, near the end of the quarter, and you haven't had much opportunity historically to do that. Are you detecting any pushback on price increases from customers, or is it pretty well accepted and known in the current environment that some of these higher costs need to be passed through.

Well, the good news is their competitors are raising prices too, so are their other suppliers. So, no, we haven't had much pushback. I mean, if there's been any pushback with some customers, it's that they need more time to cycle through the inventory we have. And in some cases, we've given some of them more time where that was appropriate. But no, very little pushback.

Okay, good. What's left in the crisis PPE pipeline right now? I think you called it out for BAMCO, but we dropped down to, what, a little over a million, a million two here in the third quarter. what should we think about kind of a similar level in the fourth quarter for PPE, or, you know, how are you thinking about that for fourth quarter and, you know, maybe in the next couple quarters?

Yeah, and we had mentioned in the opening that BAMCO's backlog at about $2.8 million of PPE. We expect that to deliver over the course of Q4 and Q1. Yeah. maybe a touch of pickup here and there, but it's going to be pretty similar to what it's been the last couple of quarters, which is, I think we had a little less than a million dollars, uh, within BAMCO the last two quarters and the uniform division contributed a little bit more. I wouldn't expect it to be substantially more than that, Kevin.

Right. Okay. Yeah. Makes sense. Um, you know, as you, as you made progress towards, um, more robotic distribution system anchored by the Eudora facility. Are you planning for just any normal disruption as you transition to a new distribution model? I think you commented that you're transitioning at a measured pace, but do you think that's something that the organization is prepared for? It's just Sometimes with new technology or new systems, it's just there's kind of a learning period or a digestion period. Is that something we shouldn't even be thinking about?

You know, we put in the CID robots, the Chuck system. We had a couple of days of shortfall, you know, working out bugs. And even though we had some continued debugging to do over the coming months, we were able to get out and meet our standards in the following months. And that's been, I believe, since January or February. So, you know, that had no disruption. In Eudora's case, you know, we learned our lesson in 1994 when we went big bang and we shut off one system and we turned on the other one. And that didn't go so well for us. I don't think you were following us back then, Kevin. But That creates major disruptions. So we have learned a lesson. We will actually be beta testing this while the rest of the warehouse works just as they've been working. We have different levels of beta testing that we will do. We're absolutely certain that it will not have impact on our customers. We will not flip the switch.

All right. Good, good. Always good to learn from experience, even if it's not the best experience. So you mentioned that Fashion Seal has lagged just in part due to difficult comps. When do we start moving past those more difficult comps in terms of the surge in health care sales related to the pandemic?

I think, you know, what we saw was the buying we saw last year, and you remember, I think we reported it on previous calls and in conference calls about being wiped out completely of all of our scrubs and isolation gowns and barrier coats and all these items. And we worked very, you know, we didn't have the logistic issues then that we have now. We worked very, very hard to bring product in, making it in all of our redundant facilities, air freighting when necessary to take care of the needs. And because there wasn't anybody else out there who was taking care of our customers' needs, and sometimes even some of our competitors' customers' needs, they all overbought at the time. They just didn't know what to anticipate from a pandemic standpoint. And those, you know, the cycle through the laundries in particular is they will introduce those into the laundries. They will launder them, depending on the product, 50 to 100 times. and then they'll pull it out of service. And a lot of these products are in service already, being rented out, and then it's got backup product to that. Once they've cycled through all of that, that should bode well for us. We're expecting that will come back a little bit in fourth quarter, and even more so next year.

All right. Got it. You mentioned new director of sales for Europe. Was that specific to CID? Can you elaborate on that a little bit more?

Yes, that is CID, and she is based in the Netherlands and will sell all over Europe as we build out our team there.

All right, good. So as we're into the fourth quarter here now, you talked about last quarter for your sales approaching $525 million. Do you think we're still on course for that?

Yes. That's the shortest answer. All right.

Okay. Now that answers the question. All right, well, I think that's all I had at the moment, but thanks for taking all the questions. Thank you, Kevin.

Our next question comes from Mike Hughes from SGF Capital. Please go ahead with your question.

Good afternoon. Thanks for taking my questions. Just wanted to start with the remote staffing solutions business. You've had really impressive sequential revenue growth in that business over the last few quarters, I think onboarding some new customers or a customer. Can you just speak to what's left in the pipeline as far as the ramp is for new customers?

The ramp continues as we discussed on the last call. We had projected when we did our budgets this year that we would put on approximately 30 seats a month. We were running well over 100 into 200 at different points, and it's a little choppy. It runs between 100 and 200 now. We expect that to tail off a little bit, and that's already built into our five-year guidance. The demand that we're seeing is both from existing customers who were using multiple centers who other centers failed them, and they're wanting to bring that work to us because we didn't, as well as other people, you know, first-time outsourcers mostly, who are finding it harder and harder to find employees in the United States. And when they do, their turnover is extremely high, so they're constantly training and retraining. And I think they've gotten used to the fact that, you know, my employees are going to be remote. Why can't my employees be in a center in El Salvador, Belize, or Jamaica? So we're very encouraged by that. We're going to do all we can to keep the momentum going. Certainly some of this could be, you know, post-COVID hangover to a certain extent. But, you know, with the amount of activity that we're seeing, We believe that numbers higher certainly than the 30 per month that we projected at the beginning of this year are sustainable. And when we get into our budget in November, the end of November, we'll certainly be finalizing those numbers.

Okay. So it's reasonable to expect that that business will continue to grow the top line into the fourth quarter from the $18 million level? Yes. Okay. And then the 10Q calls out some onboarding costs, which kind of surprised me, given the margins of that business strike me as very high to begin with. So can you quantify kind of steady state what the margins would look like without those onboarding costs?

Well, I mean, when you're growing at a 56% rate, you know, I mean, there's a lot more onboarding within your numbers than there is when you're growing at a projected 18% rates. I can't really give you a fixed number, but if you look at the numbers really where they were probably at the start of this year where the operating margins were running, that's more in line with normal, both from a gross margin perspective. And the onboarding cost on the gross margins really is more training where we typically do charge customers for the time training, but it's at a reduced rate. And so that ends up bringing your margin down a little bit in the short term. But longer term, we still expect to be in that 24, 25% operating margin or EBITDA margin, sorry, on an ongoing basis.

Okay. And then turning to the promotional business, I think you indicated the revenue in the current quarter was 44.3 million excluding PPE versus 26.5 in the September 19 quarter. Does that contain any acquisition-related revenue?

Sorry, the question was acquisition-related revenue? Correct. Yeah, you know, certainly we made an acquisition in February of this year with Gifts by Design. So there is a portion of that revenue included in there.

Can you quantify it, ballpark?

Yeah, I mean, it's the run rate for the business of Gifts by Design is about $15 million a year. So it's, you know, the quarterly impact of that is pretty consistent across all of our quarters.

Okay, it's not that material. So here's my question. The backlog was 41 million there in the first quarter, 68 million last quarter, 56 million this quarter. As an outsider, it looks like maybe there was, you know, the vaccines rolled out in the spring. There's a flurry of activity, and now it's starting to pull back a little bit just to From your prior comments, that sounds like that's incorrect, but just kind of tie the backlog decline to your more positive outlook for that business.

Yeah, I mean, look, I think Q3, we had an outsized impact of the Delta variant, right? That kind of hit end of June. So July, August, September, we saw a lot of uncertainty around what people were going to do with their marketing budgets and how they were going to go back to events. In Q2, there was a lot of exuberance, right? Vaccines had rolled out. Events were starting to come back. So we saw some pullback there. We're finally starting to see that come back now into Q4 where events are coming back. People are realizing they need to use marketing budgets before the end of the year. So we're seeing some of those tailwinds come back within the business that have kind of pulled back a little bit due to the Delta variant in Q3. Okay.

Okay. And I would assume that that business uses resins and has other raw material price increases. So how does the pricing work there, and has there been compression of margins from those higher raw material costs?

Yeah, so on the branded merchandise side, every order we do is sort of price to order, right? The vast majority of our product is made to order. So any individual order, we're pricing in price increases or cost increases into that order. Said another way, if someone orders mugs six months ago and the price of ceramic was X, and today it's X plus 20%, we're just adding that 20% into the price of the order. So it kind of filters through both our revenue and our cost, keeping margin pretty consistent. We'll just charge more for products as they become more expensive for us to source.

Okay, and then just one last question on that business. What's the normal seasonality there? Is it stronger in the fourth quarter or weaker?

Not a ton of seasonality. Last year you saw a lot of strength in the fourth quarter because there was a lot of at-home gifting. That was a COVID thing, right? People were doing gifts at home. Typically, if you look back, 2019 and prior, not a ton of seasonality. If you were to say there's any, maybe Q4 is a touch stronger and Q1 is a touch weaker, but not materially.

Okay, so... Tying those comments to your comments you made about kind of protecting margin and how the pricing works, the margins for that business in the fourth quarter should be at least consistent with the September quarter?

Yeah, that's what we'd expect.

Okay, okay. And then moving to inventory, in the 10Q there's an indication that I think there's some inventory that's in transit, which is understandable given what's happening with ocean freight. But of the increase you've seen year to date, what portion of the inventory is actually in transit now versus the number, where that number's been historically?

A lot more. we don't have that number for you but I can tell you it's significantly more much more than it usually is only because of the extra you know 30 to 60 days that it's taking to get product into us from a transportation standpoint it's not only in transit but some that's sitting on our vendors docks waiting for a truck to for it to be picked up in whatever country it's in

Did I lose you? No, we're still here.

Okay. I apologize. I wasn't sure you were done speaking. Yeah, just my last question then. I think if you're reiterating your ability to do 525 on the year, it implies 131 for the fourth quarter. And if the promo business doesn't have much seasonality and the call center or the staffing business can be up a couple million dollars, you're implying that your core uniform business is going to have pretty nice growth into the December quarter. Is that a correct read on it?

That's a fair expectation, as well as, you know, TOG certainly quarter over quarter should do even better.

Okay. One last one. I apologize. Do you have an early look on what the 2022 CapEx will look like?

More likely, you know, we were winding down all the major projects. The warehouse in Eudora will continue just a little bit in the next year, but we expect to be more in that one, one and a half percent of our revenue range.

Okay, great. Thank you very much.

Once again, if you would like to ask a question, please press star and then 1. To remove yourself from the question queue, you may press star and 2. Once again, that is star and then 1 to ask a question. And our next question comes from Michael Dissler from AMNX. Please go with your question.

Good afternoon. I'm Michael, Andy, Jake, and Phil. As usual, I just want to thank you for your crystal clarity in your presentation. As you know, I'm a 3, 5, 10-year thinking person, and I know you guys are always on the prowl for acquisitions. My quick question for you is, are folks, you know, in the last three, six months and to the current time, are folks more willing, do you think, to talk to you due to the current supply chain constraints that they are facing, in terms of, you know, you guys being receptive and they being more receptive to listening to you? Thank you.

David Lamont Wilson And that's a great question. David Lamont Wilson Yeah, I think when it comes to acquisitions, you know, we're constantly in conversations, we have a really robust pipeline, and we're always talking to folks. I do think that when Times get challenging, particularly for kind of individual business owners. Those conversations tend to get a bit more serious, particularly when we have answers for the problems they have. And I would say that on the supply chain side, a company like ours has vastly more resources to deal with current supply chain issues than some of the smaller companies that we look to acquire. So, yeah, I would say that the conversations get a bit more serious as a result of it.

Okay. Thank you. I look forward to next quarter and your continued success as always.

Thank you very much.

And ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Michael Benstock for any closing remarks.

Thank you all. And thanks for your great questions. We always enjoy your curiosity about our business and certainly enjoy your support as well. We've proven once again our ability to execute through a myriad of challenges and opportunities. Our reach at HPI has been extended greatly, as you've heard, by turning over their sales and marketing functions to PAMCO's leadership. Our combining many of the product offerings of Fashion Seal Healthcare and CID under the Superior Uniform Group Healthcare umbrella now drives a parallel broad product offering to all of our healthcare customers. Capitalizing on the macro environment, we've grown TOG as a world-class offering to BPO customers in a very underserved niche of the market. We're proud of what our team of nearly now 6,100 associates has accomplished. To them, I offer my sincerest gratitude. We thank you for your continued support and appreciate this time you spent with us today. And that will end the call.

Ladies and gentlemen, with that, we'll end today's conference call. We do thank you for attending. You may now disconnect your line.