Superior Group of Companies, Inc.

Good afternoon, everyone, and welcome to Superior Group of Companies' third quarter 2022 conference call. With us today are Michael Benstock, the company's chief executive officer, Mike Kempel, the chief financial officer, and other members of the senior management team. As a reminder, this conference call 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 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 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 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. And with that, I will turn the floor over to Mr. Benstock. Sir, you may begin.

Thank you, Operator, and welcome everyone to our third quarter 2022 conference call. This afternoon, I will begin as usual by sharing highlights relative to our third quarter results, and then I'll discuss the performance for each of our three business segments, including our evolving strategy to capitalize on the growth opportunities ahead of us and how we're managing through the current macro environment. Mike will then provide more details on our financial performance for the quarter and our outlook for the year. We'll finish with Q&A, for which we'll be joined by other members of our executive leadership, including our Chief Strategy Officer, Phil Cousett, our COO, Andy DeMott, the President of our Branded Products segment, Jake Himmelstein, the President of our Healthcare Apparel segment, Catherine Baldotti-Donlan, and the President of our Contact Center segment, Dominic Leidy. Overall, for the third quarter, consolidated revenues of $138.7 million grew 12.5% versus the third quarter of 2021, led by continued growth in the contact centers and branded product segments. Consolidated third quarter adjusted EBITDA of $9.7 million decreased from $12.6 million versus the third quarter of last year, primarily driven by revenue decline in our healthcare apparel segment due to continued softness in the healthcare market. Now looking at the results by segments, we'll start with our healthcare apparel segment. During the third quarter, healthcare apparel revenues of $30 million were down 15% to last year, reflecting continued softness in the healthcare market. EBITDA for the quarter was $2.2 million, down from $6.4 million last year. While healthcare results are clearly below our expectations, both revenues and EBITDA did improve compared to the second quarter of this year. During the quarter, we began to see positive momentum with our institutional customers, but that improvement was more than offset by continued challenges in the retail market, due in part to saturated inventory levels. Despite the short-term challenges this year, we believe in the long-term growth of the healthcare apparel market and our ability to improve profitability. SGC operates numerous highly recognizable companies, brands in healthcare apparel with more than 2 million essential caregivers wearing our brands every day. We continue to offer one-stop shop solutions and the widest range of products in the market. In order to capitalize on what is a large and growing market, we're working toward adding new products, markets, and customers, as well as broadening our omnichannel approach. Turning next to our branded product segment, revenues of $87 million were up 21% compared to the third quarter of 2021, which was primarily driven by sales attributable to the Sutter's Mill and Guardian acquisitions in December 2021 and May 2022, respectively. EBITDA for the quarter was $5.6 million, down from $6 million last year. The slight decline in EBITDA was due to an increase in SG&A driven by investments in talent and technology to support future growth. For branded products, including branded merchandise and uniforms, The total addressable domestic market of $26 billion remains highly fragmented. Our quality branded offerings are unique and customized, and yet our market share is less than 2%, again suggesting a long runway for growth. Now turning to our contact center segment during the third quarter, our contact center segment generated third quarter revenues of $23 million for a year-over-year growth rate of 30%. Our EBITDA margin remained strong at 22%. again reflecting how attractive this high-growth business is for our overall financial performance and creation of shareholder value. Our investments in this business, such as opening in our fifth country a contact center in the Dominican Republic during the quarter, will drive our ability to grow our existing customers' agent counts as well as take on larger customers to accelerate our growth rate. Our pipeline of potential customers remains very strong. With the highest EBITDA margin among our three segments, The continued strong growth of our contact center segment will have positive implications for our overall SGC margins and profitability. With that, I'll turn it over to Mike to review our financial results in greater detail.

Thank you, Michael, and good afternoon, everyone. Turning to the financial highlights of the third quarter, SGC reported consolidated revenues of $138.7 million last versus $123.3 million during the third quarter of 2021, an increase of 12.5%. Our gross margin was 36.5% for the quarter, compared to 37.1% in the third quarter of 2021. The decrease in gross margin was driven by incremental inventory reserves for slow-moving items and manufacturing variances resulting from lower production volume in our Haiti facility which was planned as part of our inventory reduction initiative. SG&A expenses as a percent of sales were 31.6% for the quarter compared to 28.4% for the third quarter of 2021. The third quarter SG&A includes a $1.8 million benefit associated with a fair value adjustment of a stock put liability. Overall, the increase as a percent of sales was due to expense deleverage resulting from the 15% decrease in healthcare apparel sales. In addition, we had higher expenses associated with additional headcount and infrastructure costs to support growth in our branded products and contact center segments, depreciation and amortization, and severance. Interest expense for the quarter was $1.8 million compared to $320,000 last year. The increase is driven by the write-off of approximately $550,000 of deferred financing costs related to our debt refinancing in August and increased interest rates on higher average debt outstanding. The net loss was $12.7 million, or 80 cents per diluted share, compared to net income of $8.2 million, or 51 cents per diluted share, for the third quarter of 2021. During the third quarter of 2022, the company experienced decline in market value, thereby triggering the requirement to perform a quantitative goodwill impairment test. Based on the analysis, we recognized a pre-tax non-cash impairment charge related to our remaining goodwill of $21.5 million, or $17.1 million net of tax, or $1.07 per diluted share. This charge does not affect the company's cash position, cash flow from operating activities, or bank debt covenants, and has no impact on future operations. Excluding the impairment charge, third quarter net income was $4.4 million, or 27 cents per diluted share, compared to net income of $8.2 million, or 51 cents per deleted share, for the third quarter of 2021. 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 and by focusing on improving operational and financial efficiencies. In terms of the balance sheet and cash flow, cash and cash equivalents as of September 30, 2022, were $18.9 million. Consistent with prior quarters, operating cash flow continues to be negatively impacted by elevated inventories. As a result, we continue to significantly reduce our buying levels, which will enable us to reduce and optimize our inventory levels in 2023. Our net leverage ratio of 3.4 times our covenant EBITDA is elevated, but remains below our covenant limit. We remain focused on our expense management and inventory optimization efforts in order to reduce our leverage over time. Consistent with our focus on inventory, we are tightly managing our capital spending with an emphasis on business critical investments only. As a result, our year-to-date capital expenditures are down over 20% from last year. Also, SGC remains committed to returning capital to our shareholders and announced a dividend of 14 cents per share during the quarter. As we mentioned in our second quarter earnings call, we identified at least $8 million in annualized cost savings. Recognizing the challenging macroeconomic environment, we remain committed to delivering the savings and we will continue to evaluate all areas of our business for any further operating efficiencies. Lastly, in terms of guidance, we are updating our full year 2022 sales guidance to reflect sales ranging from $570 million to $580 million as compared to our previous range of $575 million to $590 million. With that, I would like to ask the operator to open the line for questions.