Superior Group of Companies, Inc.

everyone welcome to the superior group of companies fourth 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 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-K 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. 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. We appreciate everyone being on today's call. I'll start with our fourth quarter 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 fourth 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 fourth quarter results being the strongest of the year. We generated $147 million of revenues during the fourth quarter, up sequentially and down just 1% versus the prior year quarter, which was our strongest year-over-year comparison of 2023. Fourth quarter adjusted EBITDA came in at $9.9 million, again, our strongest quarter of the year and up significantly from $3.5 million last year. We also produced 22 cents of diluted EPS in the fourth quarter, much improved from the adjusted six cent net loss per share last year, and again, our best result of the year. In addition to improved earnings, as you can see in our results released 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. 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 in 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. 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 million 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, which 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. Moving on to branded products. During the fourth quarter, we drove our strongest revenue in EBITDA results of the year, The gradual expansion of demand that began in mid-2023 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 first quarter, 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. 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 center's 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 first quarter. Our focus for contact centers is on increasing seats with existing customers and building the pipeline of new customers. We'll 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. 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 fourth quarter financial performance in greater detail and provide our outlook for 2024. We'll then take your questions. Mike, over to you.

Thank you, Michael. Rounding out a back-end loaded year as we first referenced a year ago, our fourth quarter results were the strongest of 2023. Our quarterly revenue reached $147 million. which was up 8% sequentially from the third quarter and down 1% from last year. As compared to last year, fourth quarter sales increased in the healthcare apparel segment by 6% to $28 million, and in the contact center segment by 5% to $23 million. These increases were more than offset by a 4% fourth quarter sales decline in our branded product segment to $98 million. While branded product sales were down, the fourth quarter result 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 760 basis points. The margin increase was primarily due to last year's inventory write downs of $7.8 million, 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 product segment. Our SG&A for the fourth quarter came in at $49 million, relative to $44 million a year earlier. While the SG&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 product segment employee-related costs and depreciation in our contact center segment, and lapping unrealized gains of $1.6 million recognized in 2022 on written put options. Our interest expense for the fourth quarter was $2.1 million, a slight improvement over the past year despite higher interest rates due to our successful efforts to reduce debt outstanding by $62 million during the year. Net income for the fourth quarter was $3.6 million, or 22 cents per diluted share, up from net income of $2 million, or 14 cents per diluted share in the year-ago quarter, which included a one-time pre-tax non-operating gain of $3 million, or 20 cents per share. Therefore, excluding last year's gain, our fourth quarter result of 22 cents 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 fourth quarter was $9.9 million compared to $3.5 million in the year-ago quarter, including last year's gain that I previously mentioned. The EBITDA increase was primarily driven by the healthcare apparel segment, whose EBITDA improved significantly to $1.4 million in the fourth quarter from negative $6.5 million a year ago, mainly driven by last year's inventory write-downs. Also, despite a sales decrease in the fourth quarter, the branded product segment EBITDA improved to $11.7 million in the fourth quarter from $10.8 million a year ago due to higher gross margins. These improvements were partially offset by an EBITDA decline in our contact center segment to $2.3 million in the fourth quarter from $3.8 million a year ago, primarily driven by labor increases earlier in the year. 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 three 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 million, benefiting from our continued strong free cash flow and our focus on reducing working capital. Our operating cash flow for the year was $79 million. I'll wrap up with our full-year 2024 outlook, which, similar to 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 million to $568 million, up from 2023 revenues of $543 million. We also expect earnings per diluted share in a range of 61 cents to 68 cents, up from 2023, 54 cents. And I'll reiterate that similar to last year, we expect a back-end weighted pattern. This concludes our prepared remarks, and operator, if you could please open the lines, Michael and I would be happy to take questions.

Certainly. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. We will now pause momentarily to assemble our roster. Today's first question comes from David Marsh with Singular Research. Please go ahead.

Hey, guys. Congratulations on the quarter. It looks really, really good. Thank you. If I could start, I want to talk about the contact center segment a little bit. It 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 some contracts that hadn't been renewed, but it looks like you've had some pretty good backfill. Could you 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?

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, you know, 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. 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, you know, 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. 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 a strong demand, pipeline strong. You know, first quarter should be pretty good, and we expect that that momentum will continue to build throughout the year. You know, fourth quarter is usually the softest quarter in terms of growth of that business. People don't tend to put on new seats as they're, you know, ending the year and looking at their budgets, usually that's when they're cutting back the most for the holiday season. And so, you know, fourth quarter 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.

And Dave, just to build on that, you know, if you look at the D 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 the fourth quarter.

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

Sure, Dave. This is Michael. 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 refer to as equilibrium, and we feel like we've reached that point here at the end of the year. I think with 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. We've worked the inventory down significantly by the end of this year. know are shifting our focus really toward new product launches and new introductions as we get deeper into 2024 so you know from a working capital perspective and inventory we've we've we've really driven a lot of value there i think that will certainly normalize as we go forward and we'll look to you know invest in inventory where we see you know the opportunities and growth in certain categories

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

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

the very last part in particular.

Did you repeat that, Dave? Sorry.

Sure, sure, sure. SG&A, it just, it upticked a bit in the fourth quarter. I just wondered if that was just a typical kind of fourth quarter seasonal, you know, kind of incentive comp accrual type action, and if we would be right to expect a reversion back to kind of, I mean, you know, 1Q2Q, you guys really had things in check, you know, I just wondered where should we expect the level of trend?

Yeah. No, no. Thanks, Dave. I would probably call it a couple of things. It wouldn't be driven by incentive, confident, cruel. I'd call it a couple of things. One, just as a reminder, in the branded product segment, the commissions that we pay, which obviously roll through SG&A, are based on margin. recognizing that the fourth quarter was the biggest quarter for branded products. We've got a larger commission expense in the fourth quarter, 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 fourth quarter we had an expense driven by the fact that our share price did appreciate. So that was an incremental expense, if you will, in Q4. So, you know, 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 fourth quarter.

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

Thanks, Dave.

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

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, you know,

said business conditions continue uh are gradually improving but you know maybe not back to full strength yet so maybe any thoughts on on that please sure i i'd say a couple things uh kevin you know first of all in terms of the back end loaded nature um you know i think a lot of that's driven by the fact that you know what we do see in our branded products businesses they typically do have a strong uh 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. 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 backend 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, 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.

Okay, yeah, fair enough. That's helpful. I was going to ask about the segment growth expectations, so I appreciate that. All right, so, again, I mean, I just, you know, so it doesn't sound like you're necessarily a, assuming some dramatic improvement in the demand environment, you know, but it's just kind of your, you know, regular cadence of new business ramping up. And you mentioned strong pipelines. So, you know, it sounds like you're just kind of basing that outlook based on what you kind of see today and, you know, that should lead to a stronger second half of the year. Is that fair?

Yeah, and 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. You know, 20 to 23 were pretty crazy for us, 20 to 22 certainly because of the pandemic, but then 23 with the overhang of inventory. We finally feel like we've gotten to a place where where our results are more predictable and, you know, we're certainly 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.

Okay, great. And you mentioned the direct-to-consumer effort and 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?

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 not only helping the direct 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. I think we're creating a demand for our products that we haven't in the past. And, you know, I've spoken about our marketing team in the past. I think they're second and none. And I'm hoping that, you know, 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.

Okay, great. Lastly, I wanted to ask about gross margin. was quite strong in 2023. I know you had some of the, you know, larger inventory write down charges in 2022 that made that comparison a little easier, but even without that, those charges, you know, still some pretty healthy gross margin expense. And so I'm just wondering if you could talk about what's driving that and, you know, speak to the levels of sustainability and gross margin. or opportunities for improvement or pullback or how you think that might trend going forward?

Sure, Kevin, this is Mike. Yeah, I think consistent with what we've mentioned in prior, at least the prior quarter, if not the previous two, we continue to see strong margins in the branded product segment. With sales down, we've been able through through pricing and customer mix, as well as some favorability and supply chain costs to drive improved margins. You certainly see that happening again in the fourth quarter. You know, 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 We'll look to see how we can grow that margin in 2024.

Yeah, 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. 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.

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 your production down there, or what's the state of that effort today?

Sure. As you know, it's a good question. As you know, the factories that we manage are on the border with the Dominican Republic, and there was some earlier noise towards the end of last year with respect to the water rights, and the water rights were 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. 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 will 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. You know, 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. 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, You know, beyond, you know, we carry 60 stocks, as you know, 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. But I would say right now we've been very fortunate for it not to have impacted us really greatly yet.

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

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

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. Do you think that's more on the SG&A line you get the leverage or on the gross profit one?

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 in G&A, but I would attribute any operating income improvement largely through some expansion in margin.

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

How many sales folks?

Yeah, you said that, you know, one of the reasons you're not going to get the leverage on SG&A is because you're adding sales people.

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

On the gross margin line. Correct. Got it, got it. And you seem to have really turned a 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 Both on acquisitions, do you think you could increase the dividend or are there other priorities?

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 million in 2023. It's a very low number. 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&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&A transactions, we obviously keep the pipeline open and we'll certainly continue to evaluate whether there's potential accretive opportunities. And we're certainly in a position where if there were, we could take advantage of that. And so that'll be something that we'll evaluate throughout the year as a potential opportunity. All right.

Thank you.

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

Thank you, operator. Firstly, I would like to publicly thank Phil Cousett for selling BAMFCO to us almost eight years ago. And Phil, thank you for your leadership as well as your time in the C-suite as our Chief Strategy Officer. We've accomplished a great deal during your time with SG&C and are more diverse and stronger than ever. Personally, it's been an incredible experience for all of us to have had the privilege to work side by side with you for these eight years. 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 two new board members, Sue Lattman and Laureen 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. Thirdly, we want to welcome Dr. Kelly Richmond Pope as our first 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. Look forward to participating in upcoming investor conferences and presenting our Q1 results in the spring. Until then, be safe.

The conference is now concluded. Thank you very much for your participation. You may now disconnect your lines.