Superior Group of Companies, Inc.

Good afternoon, everyone. Welcome to the Superior Group of Companies first quarter 2024 conference call. With us today are Michael Benstock, Chief Executive Officer, and Mike Kemple, 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 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 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 Michael Benstock. Please go ahead.

Thank you, Operator, and welcome everyone to our Q1 call. I'll begin with our first quarter highlights, including our revenue and profitability growth and our improving financial positions. I'll then walk us through each of our three business segments, discussing the recent improvement in market conditions and our strategies to maintain our momentum throughout 2024. I'll then hand the call over to Mike for additional detail on quarterly results and our more favorable outlook for 2024. At the end of the call, we'll be happy to take your questions. We had a strong start to 2024 with year-over-year improvements across the entire business. For the first quarter, we generated consolidated revenues of $139 million, reflecting a 6% year-over-year increase. Our EBITDA climbed 40% over the prior year quarter to $9.6 million. We generated 24 cents of diluted EPS, up sharply from 6 cents a year ago. On top of the improved operating results, we enhanced our financial position by generating solid operating cash flow that enabled us to further reduce our net debt and improve our net leverage ratio. This enhanced financial flexibility ensures we can continue to make prudent investments to further grow our business organically, while also capitalizing on any market dislocations that could produce attractive M&A opportunities. Turning to market conditions, I'm pleased to say that so far in 2024, we've seen continued improvement in the end markets we serve. Our clients are generally increasing their spending. For now, we remain cautiously optimistic on the durability of underlying demand in each segment, but even more important for our shareholders to understand is the reality that we operate in huge markets and have a very small but growing share. Our success will be determined by remaining laser-focused on new customer acquisition and our continued strong customer retention. To accomplish our goals, we're also investing in people and technology in our very attractive businesses. We are optimistic about the markets in which we operate, confident in our own ability to execute, and therefore excited about the future. Let's have a look at how each of our businesses perform during the quarter. Starting with healthcare apparel, We grew top-line revenues by 4% year-over-year, and EBITDA grew by 68%, mainly driven by improved gross margins. Demand strength has improved since last year, and opportunities continue to be uncovered. As I've outlined on recent calls, last year we kicked off rebranding efforts under the Wink trademark and are now entering year two of our direct-to-consumer efforts. Simultaneously, Last year's launch of our B2B website is adding efficiency to the wholesale process while we further fortify our relationships with other digital channels. All in all, we are seeing improved market conditions to healthcare apparel. This is a large, resilient, and rapidly expanding addressable market, and we're looking to grow our market share well beyond the more than 2 million caregivers who already wear our brands to work every day. Next up is our branded product segment, which generated 6% revenue growth during the first quarter as compared to the year-ago quarter, along with 32% year-over-year growth in EBITDA, driven by continued gross margin improvement. The demand environment has been improving, continuing the positive trajectory we first noticed last summer. Our key to success for branded products emphasizes strong customer retention, growing our share of wallets, driving greater RFT activity and increasing our sales rep recruiting. This is a $24 billion and growing market, and we intend to continue expanding our market share currently at less than 2%. Rounding out our business segment discussion, contact centers grew revenue 7% over the prior year quarter and EBITDA up 5% from last year. As we've indicated on prior calls, we're now beginning to anniversary the higher labor and talent costs that have been with us since early 2023, along with our move over the past year to raise prices, which should bring stronger margins going forward. Demand drivers remain solid and our pipeline of new business remains strong. Our focus is on increasing seats with existing customers, continuing to build our pipeline of new customers, and leveraging the very latest technology to enhance efficiency. With that, I'm going to hand the call over to Mike for a closer look at our first quarter performance, along with our stronger outlook for 2024. Mike, go ahead.

Thank you, Michael. We generated solid first quarter results with quarterly revenue of $139 million, up 6% versus the year-ago quarter. All three of our business segments grew, with branded products up 6% to $87 million, healthcare apparel up 4% to $29 million, and contact centers up 7% to $24 million. This was profitable growth as well, with our consolidated growth margin of 380 basis points over the prior year, reaching nearly 40%. All three of our segments demonstrated improved gross margins versus the prior year quarter, particularly our branded products and healthcare apparel segments. Branded products was up 480 basis points, continuing the trend of year-over-year margin rate improvement and reflecting favorable pricing and lower supply chain costs. Healthcare apparel was up 350 basis points, primarily driven by lower costs, including improved manufacturing efficiencies in our Haiti facilities, improved market conditions, and higher margin sales from our direct-to-consumer channel that launched in the second quarter of last year. Our first quarter SG&A was $49 million, flat sequentially from the fourth quarter, but up from $43 million a year earlier. As a percent of sales relative to the year earlier quarter, SG&A was up about two percentage points to 35%. This was primarily driven by increased employee-related costs, an increased charge to recognize the fair value on written put options, and lapping the benefit of a reduction in acquisition contingent liabilities from the first quarter of last year. In terms of EBITDA, we generated $9.6 million during the first quarter, 40% above the prior year's $6.9 million. All three of our businesses contributed to this strong EBITDA performance. with branded products up 32% to $9.9 million, healthcare apparel up 68% to $2.6 million, and contact centers up 5% to $2.9 million, despite the higher labor costs we've yet to fully anniversary. Our interest expense for the first quarter was $1.8 million, which improved by $800,000 from the year-ago quarter, driven by our efforts to significantly reduce debt over the past year. Our first quarter net income was $3.9 million, or 24 cents per diluted share, not only up slightly on a sequential basis, but up significantly from $900,000, or 6 cents per diluted share, in the year-ago quarter. The improved result was driven by the increased sales and gross margin rate improvement across all of our segments. Shifting to the balance sheet, we've continued to make improvements with cash and cash equivalents of $22 million, up from $20 million in the fourth quarter and debt outstanding lower by an additional $4 million during the quarter following the significant reduction in 2023. Additionally, we generated approximately $9 million of operating cash flow during the quarter on top of significant operating cash flow generation last year. Based on lower debt outstanding combined with improved profitability, our net leverage ratio ended the quarter at 1.6 times trailing 12 months covenant EBITDA, a substantial improvement from 3.8 times a year ago. Turning to our updated full-year 2024 outlook, we remain cautiously optimistic on the demand environment continuing to slowly improve and on our own ability to push pricing when possible. We're raising and tightening our 2024 revenue range to $563 million to $570 million versus the prior range provided in March of $558 million to $568 million and up from 2023 revenues of $543 million. In addition, we're raising and tightening our full-year earnings per diluted share outlook to a new range of 73 cents to 79 cents, which reflects our updated sales guidance and better-than-expected gross margin performance, partially offset by incremental stock compensation expense from the May issuance of performance-based stock awards. Our updated outlook is up significantly from the prior range of 61 cents to 68 cents and reflects meaningful improvement over 2023's 54 cents despite the estimated incremental non-cash stock compensation expense of $0.04. From a quarterly progression standpoint, we expect a more balanced performance throughout the year as compared to 2023's heavily back-end weighted results. With that, operator, Michael and I would be happy to take questions if you could please open the lines.

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. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Jim Sidoti with Sidoti and Company. Please go ahead.

Hi. Good morning. Good afternoon. Thanks for taking the questions. I hope everyone's well there. You had growth in all three businesses, but the one that really struck me was branded products. Was that more attributable to better pricing or better volume, or can you give us some sense on how pricing affected that?

It's a mix. Certainly pricing affected, but we're still in a pretty competitive environment. So, you know, it's not just, we don't have, you know, freedom to price to the extent we'd love to. But it's definitely a mix of new customers as we've added on more salespeople, which you know has been one of our goals. They've brought new customers to us as well. So it's really, it's a good mix. I wouldn't say that we've been able to from quarter to quarter raise prices substantially. Last year, you know, on some of the ad hoc business we did, which we do on a regular basis, we are able to price those appropriately for the opportunity. But a lot of our businesses contract business, too, that gave us no opportunity to raise prices. So that was all new business or more business from existing customers.

And I think, Jim, also, there's still some favorable mix as well, both from a product as well as customer standpoint, where in addition to some pricing, we're also seeing, again, favorability from a cost standpoint, some of which we started to realize in the back half of last year.

Okay. And how about for the call centers? Have you been able to hang on, you know, hold the price increases that you put through there?

Yeah, we did put through the price increases. You know, we spoke about that, I think, on last February's calls. And we implemented price increases, which were primarily effective beginning in the second quarter of last year. So we're starting to anniversary some of those costs going forward. And, you know, we should see some improvement accordingly. But, yeah, whatever little bit of pushback we have, we certainly were to explain things. uh, through, uh, you know, the, the inflationary environment we were in from a labor standpoint, as well as the fact that our metrics, uh, were getting stronger and stronger with some of the technology we were employing, which, which actually helped bring down their costs overall.

Okay. And then, you know, the, the balance sheet is, um, is made a lot of progress over the past 12 months, you know, you know, well under two times, um, It has been a little while since you've done a deal. How active are you on that front, and are there a lot of opportunities out there right now?

There's a lot of opportunities. We are very open to look at them. We haven't found anything that excites us very much yet. We're really focused on organic growth right now and trying not to distract ourselves from what we believe is a pretty ripe environment in each of the markets that we serve. You know, whenever we get into these tough economic environment, as the macro environment has been for the last year or so with a lot of uncertainty, our competition tends to get weaker and we tend to get more aggressive. So we're behaving very aggressively in the market to try to, you know, accelerate our organic growth. and not be distracted by acquisitions. But there will be acquisitions in the future. We certainly have the horsepower to do it and the dry powder to do it. But we're just going to wait until we find the right ones. There's plenty of them out there in each of our verticals.

And it really was a stellar quarter in terms of sales, in terms of EPS and pre-cash flow. You said the year would be more even this year. I would imagine that you're not going to have four quarters like this. Are you anticipating a pickup in CapEx spending or anything else that would affect the rest of the year?

From a CapEx standpoint, we would expect a pickup in CapEx, Jim. I mean, if you look at the quarter – You know, we had low capital spending for the quarter. We still expect to spend more this year than we did last year. You know, we consciously pulled back last year. So you'll see a pickup on that just based on the timing of projects here, Q2 from the second quarter, you know, through the balance of the year. You know, in terms of the cadence for the year, If you look back to last year, 75% of our earnings were in Q3 and Q4, so what we're saying is we'll be more balanced than we were last year, but there'll still be some seasonality, if you will, that we've seen in some of our businesses in future quarters.

I think also, I'm going to jump in and just say we're in an election year, and weird things happen sometimes in the quarters prior to an election. It's a major distraction for a lot of people, a lot of companies and uncertainty. And, you know, as this election gets more heated, it's probably going to be a little bit more distracting than most elections, I would imagine. And so, you know, we're couching the year a little bit and being certain that we're putting out guidance that we feel very comfortable in being able to hit. So it's going to be a good year. I'm glad we've smoothed it out a little bit where we don't have, we're not going to have that, as Mike said, 75% of our earnings happen in the second half of the year. It's more likely to be a lot more balanced. Okay.

All right. Thank you.

The next question is from Kevin Steinke with Barrington Research. Please go ahead.

Good afternoon and congratulations on the strong start to the year. I'm just wondering what has trended maybe a little bit better than expected thus far in the year that enabled you to increase the guidance just one quarter into 2024?

Sure. I think, Kevin, you've seen in previous quarters we've grown margin. Our margin rate has improved in the third quarter, again, the fourth quarter. So I think getting another quarter of margin growth where we're really seeing that growth across all three of our segments has been obviously a real positive for us. Seeing some momentum in the healthcare side of our business, both in terms of sales growth again, as well as seeing margin benefits. So we're seeing the benefit of cleaner inventories, as I mentioned in our prepared remarks, starting to see some margin benefit from our direct-to-consumer businesses that's starting to grow. So I think we're seeing continued signs of momentum that obviously translated into strong results in the first quarter. which we believe will lead to stronger results for the year.

Yeah, and since Mike didn't mention contact centers, contact centers had some tough comps for the quarter and didn't quite grow as we had expected. But part of that was a timing issue. I think you're going to see greater growth from our contact center business going forward. Already in second quarter, we know that our growth is going to be better. than what we were able to show in the first quarter. So we're optimistic about that business as well. And getting back to the cadence we've spoken about of, you know, high teams to low – I'm sorry, high single-digit to low team growth and, you know, high teams even without margin.

Okay, great. And you spoke there to the – continued strength in gross margin and the improvement in gross margin really, you know, stood out in both branded products and healthcare apparel. And it sounds, would you say like there's some sustainability to these gross margin levels going forward? Or, you know, I think I asked a similar question last quarter, but how are you thinking about that for the remainder of this year?

the remainder of the year we expect margins to still reflect improvement over last year. Um, like, uh, not necessarily to the level of the first quarter, but I would say, Kevin, as you're looking at the balance of the year, again, we would, we would expect, um, to continue to reflect margin rate improvement, uh, and driving the business.

Okay, great. And on the SG&I, SG&A side, um, You know, you mentioned, I think, a couple items that increased SG&A in the first quarter, and you talked in the earnings release about some investments. So is this a reasonable run rate for SG&A for the remainder of the year, or how are you thinking about that over the next few quarters?

Overall, Kevin, I would say it's a reasonable proxy. You know, we have made investments, continue to make investments in talent. And also, obviously, as the business improves, we're recognizing, you know, additional expenses as it relates to just associated payroll and whatnot. So, some of those will be consistent. The things we called out, for example, in the fair value put option that we had an adjustment to this quarter, that obviously wouldn't repeat itself. So there could be a little bit of variability quarter to quarter, but it's a good proxy for the balance of the year.

Okay. And you mentioned starting to lapse some of the higher waiver costs and contact centers and you know, perhaps increasing price there. What's your ability to increase price or plans to increase price over the course of the year in that business?

I think it'll be less frenetic than it was last year. We're not in a position to really have to raise prices dramatically to get where we want to go. We've done some small price increases already this year, but we'll continue to do them as necessary. Contracts allow us to do so and we're we can't gain efficiencies in some other way to, you know, create more bottom line for that business.

Okay. Thank you for taking the questions. I'll turn it back over.

Thanks, Kit. The next question is from David Marsh with Singular Research. Please go ahead.

Hey, guys. Congratulations. Really fantastic quarter.

Thank you. Thank you, Dave. We're feeling good about it.

Yeah, I would be too. It's great print here. You know, following up on kind of some of the earlier questions, I mean, this 40% gross margin is, you know, I was just looking back the last few years. I don't think you guys have ever been this high. I mean, is this – it sounded like you're, in terms of your response to the last caller, maybe feel like that could come back in a little bit, but, uh, you know, it sounds like you also may feel like you could stay in, in pretty close to that range. Maybe you could just provide a little bit more color there.

If you remember on an earlier call, I don't quite recall when it was last year, we spoke about the fact we had shed, uh, some customers who were very, very low gross margin and were no longer creative. And that's helped us a great deal, uh, focus on, you know, the customers that, that, that are profitable, uh, and, uh, And the margin improvement, I mean, it's been kind of a buyer's market out there, you know, with a pullback from most American companies from Asia. Asian factories are dying for work. They're all underutilized. So the pricing has been very good. In our own factories in Haiti, we've seen great efficiency gains and really operating them well. in a much, I would say, a much more profitable manner to the company with less variances and so on to standard costs. So, you know, all in all, I mean, it's all come together. We've got a good pricing environment with our customers. We've got a good costing environment with our vendors. And our own factories are doing very well, and that's allowing us to invest in a lot of talent in the business And that talent, obviously, is to even create more efficiency within the business. So we're feeling good about where our margins are at. Slight pullback, it could go either way. I wouldn't necessarily bank on, you know, it pulling back. It could just as easily be even a little bit higher, not much, than it currently is.

That's a great color, really helpful. You know, the other thing I think that you guys should definitely be commended for is, you know, the inventory reduction you guys have been able to achieve in the last 12 months. Looks like, you know, about $30 million, 24% reduction. You know, I know last year you guys had talked about feeling as though the inventory was a little bit above where you want it to be. Would you say that you're kind of where you want it to be now, or do you think you could still... perhaps whittle a little more away on that.

Yeah, Dave, we, you know, last year we talked about setting the goal for ourselves by the end of the fiscal year, you know, to right-size inventories. And as you said, we made significant progress. And so we, by the end of 2023, we were able to achieve our goal of getting inventories, you know, more in line. As we look forward, And as we're looking to fuel the business, yeah, I see us making certain investments in inventory to support sales. So going, I'd say, a little bit more on the offense in some cases as opposed to, you know, pulling back on inventory. But, you know, we feel good about where we are. And I think we'll be focusing on, you know, inventory turns going forward. and obviously going forward keeping that in line with the demand curve. So, you know, again, as we look ahead and look at the trend of the business, you know, we'll make investments and continue to make investments in inventory, but, again, overall feel good about the position we're in.

Yeah, it's also, I'm just going to add a couple lines to that. There's, particularly in the healthcare side of our business, which carries a lot of our inventory and was most of our pain last year, was in working really hard to reduce that. But there's an awful lot of turmoil in that business right now. Positive to us, the competitive landscape is getting smaller. We've had major competitors file bankruptcy. We've had turnover of CEOs in multiple businesses that compete with us and that are really still trying to figure out, you know, what they're going to do. I think there's an opportunity for us to take greater market share. And so we're going to respond to that as necessary on as timely a basis as we can. And that could include not only being aggressive from a sales standpoint, but having to support a slightly higher level of inventory than we're currently supporting.

And, Dave, I'll just add one more thing. And that would be, again, this would apply to the healthcare business, I think as we move forward, the mix of the inventory is better as well. So we're introducing new product into our offering from our new design team. So we're excited about not just the fact that the inventory is leaner, but also that the mix is with newly developed product entering the market.

Got it. That's helpful. Just one last question, again, just on the balance sheet, because I think that it really deserves a lot of call-out and a lot of opportunity for some fanfare, if you will. You guys achieved a 40% year-over-year debt reduction from pretty elevated levels down to $84 million here. As you go forward and you generate free cash flow, can you talk about priorities for cash flow? Will it be continued debt reduction, perhaps revisiting of the dividend maybe for an increase, or perhaps maybe shareholders or something of that nature?

Yeah, Dave, we'll certainly continue to, I'd say, in a way, chip away at the debt. You can see in the first quarter we reduced our revolver by another $3 million. So as we generate additional free cash flow, we'll continue to pay some portions of that debt down as we move forward. In terms of the other ideas you mentioned, whether that's the dividend or previous question was around M&A, Those, of course, are all things that, you know, we discuss with our board and we'll continue to evaluate, you know, the merit of other uses of those cash as we move forward as part of our capital allocation strategy.

Great. That's all for me. Thanks very much, guys.

The next question is a follow-up from Kevin Steinke with Barrington Research. Please go ahead.

Thank you. Yes, just one follow up. I wanted to ask about just the improving market conditions you referenced and specifically in branded products. You know, certainly, you know, still some macroeconomic uncertainty out there and around interest rates, etc. But this may be the kind of the, you know, overall tone you're hearing from your customers and maybe they're Are they just becoming more comfortable operating in this sort of environment?

Yeah. We're seeing some pretty positive signs and increased spend with our clients and our prospects. There's still quite a bit of uncertainty due to higher interest rates, upcoming elections. Clients continue to be somewhat apprehensive, Kevin, about fully opening up their budgets. due to the economic and political uncertainty. But let's put what we've said in the past. None of this is really an excuse for not growing our sales. This is a huge market, a $24 billion market that we have a very, very small share in. And so we have loads of market share to take from our competition and who we believe is not generally as well positioned as we are to do so. So we can't use, you know, customer sentiment or economics as an excuse for not growing our business. It might grow at a slower pace than it would in a robust economy, but it's going to grow because we're going to continue to take market share.

Okay, thank you. That's helpful commentary.

Appreciate it. This concludes our question and answer session. I would like to turn the conference back over to Michael Benstock for any closing remarks.

Thank you, Operator. We very much appreciate everybody being with us today. 2024 is off to a strong start. Our entire team, as you can well hear in our voices, is energized about the opportunities ahead. We look forward to meeting with investors at the many upcoming conferences that we'll be doing, and we'll keep you posted on our progress as we move through the year. As a reminder, you can find our latest investor presentation, which was just completed, on our very updated website, also just completed. Stay safe. Please don't hesitate to reach out with any further questions. And thank you, as always, for your interest in SGC.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.