Superior Group of Companies, Inc.

Good afternoon, everyone. Welcome to Superior Group of Companies' second quarter 2022 conference call. With us today are Michael Benstock, the company's chief executive officer, and Mike Temple, the chief financial officer. As a reminder, this call is being recorded. This conference 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 revenue. Such statements are based upon management's current 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. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by forward-looking statements. Such risks and uncertainties include, but are not limited to, the following. The effect of 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, where call center services are used, the impact of competition, the company's ability to successfully integrate operations following consummation 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 but not limited to the company's annual report on Form 10-K, for the year ended December 31, 2021, 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. With that, I'd like to turn the call over to Mr. Benstock.

Thank you, operator. Good afternoon, everyone, and welcome to our second quarter 2022 earnings call. This afternoon, I will share SGC's performance highlights and touch on the current operational and macro environment. After that, Mike will provide our financial update. For the Q&A session, we will be joined by Chief Strategy Officer Phil Coussid, Andy DeMott, our COO, Jake Himmelstein, President of our branded product segment, as well as Catherine Valdotti-Donlan, the new president of our healthcare apparel segment. Superior Group of Companies continues to perform well despite the slowing economy, inflation, rising interest rates, excessive supply chain and logistical costs and challenges. Across our core businesses, just as others are experiencing, we are seeing a more challenging operating environment. SGC has a long operating history and we have shown resilience through various economic cycles due to our ability to provide innovative products valued by our customers, abroad product, and geographical market reach, and a strong focus on improving market share and profitability. During the second quarter, as part of our long-term focus on future success, the company began the transition of key leadership positions as previously communicated with the addition of Catherine Valdari-Donlan, President of Healthcare Apparel, and Mike Kempel, our Chief Financial Officer. The transitions have been seamless with the support of Peter Benstock, serving as Healthcare Apparel Advisor, and Andy DeMott, former Chief Financial Officer, continuing to serve as Chief Operating Officer until both of their retirements. We also added management expertise in supply chain and distribution to support future retirements and our long-term growth objectives. This strategic review of our businesses and the current alignment of our business segments will enable us to better optimize the efficiency of our resources. We've positioned SGC in a more focused manner, thereby creating a more effective framework to serve our customers, increase our revenues, and maximize shareholder value. After a thorough review, we have reorganized the business along three business segments, healthcare apparel, branded products, and contact centers. Notably, we invested in our technology across all of our businesses. Our state-of-the-art robotic system at our Eudora Arkansas distribution facility is already showing a return on investment in the form of lower operating costs and quicker order fulfillment. Our unified backend for all of our customer-facing websites is now in place for all of our Uniform customers, creating better future efficiency in implementing technology enhancements. Just a couple of examples that demonstrate the opportunities of further technology-led savings across our organization. Turning to our results, second quarter consolidated revenues grew 13% to $147.9 million versus the second quarter of 2021, while our gross margin declined during the quarter due to higher cost of goods sold. We also reported higher SG&A costs primarily due to higher employee costs related to headcount and sales commissions, along the rise in depreciation and amortization. Due to non-cash impairment charges, we had a net loss in the quarter. These results certainly fell short of our expectations, but are not reflective of SGC's true long-term potential. Let's take a closer look at the quarterly results for each of our businesses. Starting with our healthcare apparel segment, our sales were $26.3 million off 30% versus the prior year quarter. Beyond the carryover effect of accelerated purchases resulting in customers stockpiling inventories and PPE during COVID-19 and the deteriorating economy, our customers have taken a more cautious approach towards ordering, seeing a reduced need for inventory replenishment, and we have experienced a slowdown in order flow as a result. We therefore opted for the prudent approach of marking to market the value of our inventory and are right-sizing our segments as well as greatly increasing our sales and marketing initiatives to mitigate the impact of the current conditions. We expect that this change in demand will be temporary, but the timing of the turnaround is difficult to predict. For now, we are aggressively enhancing our omnichannel approach to sales and marketing through the addition of new and experienced leadership, as well as technology for the healthcare apparel segment. Additional sales initiatives will better position the segment to broaden its market access, and as the economic headwinds dissipate, we anticipate our revenue growth will turn toward historic levels. Concurrently, we are focused on creating a leaner, more efficient business by identifying areas to save operating expenses in order to improve margins. Our branded products division grew 29% over a prior year as we generated record second quarter revenue of $102 million and a gross profit of $29.1 million. Our SG&A expense was up as we increased our investment in this business to support future growth. including expansion of our sales force. The segment had an operating loss of $4.7 million, primarily the result of one-time charges related to goodwill and training impairments, PV-related inventory write-downs, as well as higher amortization expenses related to past acquisitions. From an operating perspective, the global supply chain for branded products continues to be a challenge. While many in-person events and conferences have returned, Higher interest rates and recession concerns have led many companies to pause or reduce their marketing spend until there is more clarity with respect to the future. We have seen this manifest itself in reduced bookings by existing customers in recent months, which we expect to impact their revenues for the remainder of the year. Acquisition-wise, we acquired Guardian products during the quarter. Guardian represents a continuation of our external growth strategy and aligns well with our acquisition of Sutter's Mill last year. Guardian and Sutter's Mill serve similar end markets, and we have already started to see the benefits of leveraging in-house decoration and production capabilities at Sutter's Mill to better serve Guardian's expanding client base. It is important to know that we have recently completed most of the integration of HBI and BAMCO. The integration of sales and marketing in particular, completed last year, has already resulted in a robust pipeline of more RFP opportunities. Given the time it takes to close branded uniform opportunities and deliver products within the segment, We would not expect to see revenues associated with these efforts until the middle of 2023. Our third segment, contact centers, known as the office gurus, is recognized as a leader in providing near-shore customer contact management to smaller and mid-sized companies, many of whom have not previously outsourced these services. Our contact centers offer customized outsourced services and a technology offering that provides seamless representation of a client's organization, at a more favorable cost versus in-house solutions. It is an attractive business with very strong growth rates, a significant total addressable market, and very attractive margins. During the second quarter, we added 486 billable agents, 74% of them from existing customers. We had originally anticipated adding 600 billable agents for all of 2022, but have already put in place over 850 during the first half of the year. a reflection that demand for our near-shore value proposition continues to be at all-time highs. We onboarded multiple new clients as well during the quarter that we believe will result in significant revenue growth over the balance of this year and next. Our contact center segment recorded revenues of $21.5 million in the second quarter, up almost 40% year-over-year. Our gross margin of 59.5% reflects the attractiveness of this business. and we are laser-focused on adding to our portfolio of customers. We're excited about adding another contact center facility to the successful business model in Q3 at the Dominican Republic. We understand we have a lot of work ahead of us, but believe many of the initiatives we have put in place will enable us to enhance our results as we move ahead and the economic challenges begin to abate. With that, I'll turn the call over to Mike to take us through the financial highlights.

Thank you, Michael, and good afternoon, everyone. Turning to the financial highlights of the second quarter, SGC reported consolidated revenues of $147.9 million versus $130.8 million during the second quarter of 2021, an increase of 13 percent. Our gross margin was 32.5 percent for the quarter compared to 36.1 percent in the second quarter of 2021. The gross margin reduction was primarily driven by $4.5 million in inventory write-downs on excess inventory related to personal protective equipment and discontinued styles. Gross margin also continued to be impacted by higher logistics costs. SG&A expenses as a percent of sales were 31.1 percent for the quarter compared to 25.9 percent for the second quarter of 2021. The increase as a percent of sales was due to expense deleverage resulting from the 30% decrease in healthcare apparel sales. In addition, we had higher expenses associated with additional headcount to support growth in our branded products and contact centers segments, depreciation and amortization, executive hiring and related transition costs, and investment losses related to our supplemental retirement plan. The net loss was $26.7 million, or $1.70 per diluted share, compared to net income of $6.4 million, or 40 cents per diluted share, for the second quarter of 2021. In the second quarter of 2022, the company recognized pre-tax non-cash impairment charges related to goodwill of $24.5 million, or $23.6 million net of tax or $1.50 per diluted share, and trade names of $5.6 million or $4.4 million net of tax or $0.28 per diluted share. In the second quarter of 2021, the company recognized a pre-tax non-cash settlement charge related to the termination of its defined benefit pension plans of $6.9 million or $4.5 million of tax or $0.28 per diluted share. On an adjusted basis, which excludes the above charges in 2022 and 2021, second quarter net income was $1.3 million or $0.08 per diluted share compared to net income of $10.9 million or $0.68 per diluted share for the second quarter of 2021. As it relates to the trade name impairment, in the second quarter, the company began an effort to centralize certain branding and go-to-market strategies under the BAMCO brand and determined that it would no longer use certain trade names associated with promotional products. The company's rebranding efforts resulted in the aforementioned impairment of trade names related to its branded products. We view centralized branding as a very positive development for a branded product segment, as it removes any confusion surrounding the various brand names in the market and centralizes all efforts under BAMCO, which is one of the strongest and most recognizable names in the industry. SGC remains well capitalized and continues to operate effectively across all of its markets. SGC has shown its resilience by managing through challenging times with a continued emphasis on profitable growth opportunities by focusing on improving operational and financial efficiencies. In terms of the balance sheet and cash flow, cash and cash equivalents as of June 30, 2022, were $10.3 million. Consistent with prior quarters, operating cash flow continues to be negatively impacted by elevated inventories. Over the last two quarters, we have reduced our buying levels, and based on product lead times, we expect inventories to decline later this year with a goal of returning to normalized levels of inventory and improved turns in 2023. Lowering inventory, which is our largest asset, will drive significant improvement in working capital over time. While our leverage ratio of 3.3 times trailing 12 months EBITDA is slightly elevated, it remains well below our covenant limit and will also improve based on our working capital efforts. Following a significant investment in warehouse automation last year, we are targeting a lower level of capital expenditures this year, less than 2% of sales, and we will continue to carefully scrutinize our investments for the balance of the year. SGC remains committed to returning capital to our shareholders and announced a dividend of $0.14 per share during the quarter, a 17% increase from last year. In addition to our focus on driving working capital improvements, The management team also evaluated our organizational structure and identified opportunities to improve operating efficiencies as well as our service to our customers. We expect these opportunities to achieve at least $8 million in annualized cost savings while still maintaining our focus on consistent sales growth. Lastly, in terms of guidance, based on the current economic environment, Our expectation is to achieve sales of $575 million to $590 million for 2022. With that, I would like to ask the operator to open the line for questions.