Superior Group of Companies, Inc.

Good afternoon, everyone. Welcome to the Superior Group of Companies second quarter 2023 conference call. With us today are Michael Benstock, the company's chief executive officer, and Mike Kemple, the chief financial officer. 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 expect, believe, anticipate, think, outlook, hope, and variations or 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-K and the quarterly reports on Form 10-Q. Shareholders, Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to update the forward-looking statements contained herein except as required by law. And now, I'll turn the call over to Mr. Michael Benstock. Please go ahead.

Thank you, Operator, and thank you, everyone, for joining today's call. I'll begin by reviewing our second quarter highlights on a consolidated basis, including an update on our strategy to navigate the current economic uncertainty and ultimately position the company to capitalize on the compelling growth opportunities ahead. I'll then review our three business segments and our various initiatives to more profitably grow each business. Mike will then provide more detail on second quarter results along with an update on our full year outlook, We'll then open the call for Q&A. We generated consolidated second quarter revenues of $129 million compared to $148 million for the same period last year, along with consolidated second quarter adjusted EBITDA of $7 million compared to $5 million in the prior year quarter, which excludes last year's non-cash impairment charges. Our overall financial performance was consistent with the soft market conditions described in our last quarterly call. In the midst of a challenging market environment, our team remained focused on delivering on our commitment to drive positive cash flow and strengthen our balance sheet. As a result, we generated operating cash flow of $38 million for the first six months of the year, reduced working capital, and improved our leverage ratio while also strategically investing in the attractive addressable markets across all three of our business segments. As a result, we believe SGC is in a better position to capitalize on improved sales trend in the second half of the year and beyond, as macro softness and uncertainty ultimately gives way to better economic times. With that, let's take a closer look at each of our three business segments. Healthcare apparel, which primarily includes the Wink and Fashion Seal healthcare brands, generated second quarter revenues of $28 million, up from $26 million in the prior year second quarter. This 7 percent increase came despite the continued soft conditions across the healthcare market. Second quarter adjusted EBITDA of $1.9 million improved from negative $1.4 million in the year-ago period, which included significant inventory write-downs last year, as you may recall. Consistent with what I've mentioned on our past two earnings calls, we have made and will continue to make progress towards achieving better inventory equilibrium. As a reminder, healthcare apparel is a large and growing addressable market, and our overarching strategy involves growing our market share well in excess of the 2 million-plus caregivers who already wear our brands every single day. Since the launch of our direct-to-consumer website featuring our Wink product line early in the second quarter, results have remained above expectations. By adding the D2C channel to our business, we have been able to drive higher consumer awareness and engagement with our brand. Another strategy within healthcare apparel is the recent launch of our B2B website, designed to allow wholesale accounts to engage with us more efficiently. Wrapping up on healthcare apparel, we see attractive long-term growth opportunities that continue to expect stronger year-over-year results, which have already begun. Next up is branded products, which is our largest segment, generating revenues of $80 million during the second quarter versus $102 million a year ago, consistent with the softness that we outlined on our last call. Branded Products' second quarter adjusted EBITDA of $7 million was up slightly over last year, with last year's result reflecting PPE-related inventory write-downs. While top-line headwinds caused by economic uncertainty continue, Branded Products is another segment which we're effectively managing through this period by improving gross margins, carefully managing expenses, and developing new sales strategies to overcome the macro environment. In other words, We're focusing on what's within our control, and these actions will leave us well-positioned to capitalize on future growth as the economy improves over time. Our long-term vision for branded products is to expand our market share currently less than 2% in this attractive and growing $26 billion marketplace. Let's move on to contact centers, our highest margin segment. Second quarter revenues were $23 million, up 6% over the past year, with adjusted EBITDA $3.3 million, reflecting a margin of 14%, slightly improved from the first quarter. Relative to adjusted EBITDA $4.9 million a year earlier, this quarter reflects higher labor costs and the investments in talent, technology, and infrastructure during the second half of 2022, partially offset by price increases that were implemented at the end of the first quarter. We continue to build our pipeline of new business while identifying further pricing opportunities. Our long-term plan is to continue to significantly grow the office gurus, tapping into the large addressable market for contact centers while aiming for EBITDA margins in the high teams. I'll now turn the call over to Mike before we take Q&A. Mike?

Thank you, Michael, and thanks, everyone, for joining today. Second quarter results were consistent with the quarterly cadence we described in our call in May. and we continue to expect a back-end loaded year. We generated consolidated revenue of $129 million compared to $148 million in the prior year quarter. Our gross margin expanded to 36.8% of 430 basis points over the past year. This improved gross margin was primarily driven by last year's inventory write-down of $4.5 million. which accounted for 300 basis points of the expansion and a significant improvement in the branded products gross margin rate due to favorable pricing and customer mix. While second quarter SG&A costs of $43 million were improved from last year, SG&A expenses as a percent of sales increased to 33.6% for the quarter compared to 31.1% for the second quarter of 2022. The increase as a percent of sales was due to expense deleverage resulting from the sales decrease in branded products and higher expenses associated with additional headcount and infrastructure costs to support growth in our contact centers segment. Second quarter interest expense of $2.6 million was consistent with the first quarter, but was up $2 million from last year due to higher interest rates. Rounding out our income statement discussion, second quarter net income was $1.2 million, or $0.08 per diluted share, compared to the prior year quarter's net loss of $26.7 million, or $1.70 per diluted share. In the year-ago second quarter of 2022, the company recognized pre-tax non-cash impairment charges related to goodwill and trade names of $30 million, or $28 million set of tax, or $1.78 per diluted share. On an adjusted basis, which excludes the prior year charges, this quarter's net income of $1.2 million, or $0.08 per diluted share, was about flat to last year. Moving on to the balance sheet, our cash and cash equivalents grew slightly since the start of the year. As Michael mentioned, while we navigate challenging market conditions, we have made meaningful progress towards strengthening our balance sheet by continuing to reduce debt and working capital, as well as driving $38 million in operating cash flows through the first two quarters of the year. We remain focused on these areas and will also continue our tight management of expenses and capital expenditures. As a result of these efforts, our net leverage ratio has improved slightly from the first quarter to 3.7 times our trailing 12-month covenant EBITDA and was well within our covenant requirements. Turning to our updated four-year outlook, given the persistence of soft and uncertain macroeconomic conditions, we now expect a revenue range of $550 to $560 million, relative to the range issued in March of $585 to $595 million. For earnings per diluted share, our outlook now reflects $0.45 to $0.55 relative to our original range of $0.92 to $0.97. Note that our updated outlook still calls for a back-end weighted year with both the third and fourth quarters stronger than both quarters in the first half. Finally, on a business segment basis, For healthcare apparel, we continue to expect low single-digit sales growth for the full year that reflects gradual improvement through the balance of the year as inventory levels and customer demand approach normalized levels. For branded products, we expect a high single-digit sales decline for the full year, again, based on an improved sales trend during the second half. Lastly, for contact centers, We anticipate improved sales and profitability in the second half of the year compared to the first and second quarters, resulting in double-digit sales growth in the low teens for the full year. Operator, if you can now open the line, we'd be happy to take questions.