Superior Group of Companies, Inc.

Good afternoon, everyone. Welcome to the Superior Group of Companies second quarter 2024 conference call. With us today are Michael Benstock, Chief Executive Officer, and Mike Compell, 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 I caution not to place undue reliance on such forward-looking statements. The company does not undertake to update the forward-looking statements, except as required by law. I'll now hand the call over to Michael Benstock.

Thank you, operator, and welcome to our call. Today, I'll start with the financial highlights from our second quarter. Next, I'll cover how each of the three business segments performed, including a high-level discussion of some of our go-forward strategies. I'll then turn the call over to Mike to take us through a detailed financial discussion and our outlook for 2024, after which both Mike and I would be happy to take your questions. Let's get started. We delivered profitable results in the second quarter. However, our results were not as strong as we had originally forecasted, due to softening market conditions as well as supply chain delays. We expect to recover the revenue associated with the supply chain delays in the branded products and healthcare apparel segments in the third quarter. On that basis, we are maintaining our full-year outlook. On a consolidated basis, we generated revenues of $132 million, up 2% over the prior year period. Our EBITDA of $5.6 million was down from $7.4 million a year earlier with a margin of 4.2% compared to 5.8%. Our continued growth in gross margin dollars and gross margin percentage were more than offset by higher SG&A as compared to last year. While our second quarter SG&A costs were down slightly from the first quarter, our costs deleveraged on the lower than expected revenues. As a result, our second quarter diluted EPS was 4 cents as compared to 8 cents in the prior year quarter. We continue to drive solid operating cash flow during the second quarter, which, with the balance sheet improvements we made over the past year, enabled us to maintain a strong net leverage ratio. Therefore, we remain in a strong financial position to make strategic investments that will help us capture additional market share over the long term, across our three very attractive end markets while standing ready for any highly compelling M&A opportunities. I mentioned last quarter that we were cautiously optimistic on the demand trends across our three business segments. While first quarter demand was strong, we began to see a shift to slower customer decisions to purchase during the back half of the second quarter as the uncertainty around inflation, interest rates, the upcoming election, and global geopolitics weigh on our customer sentiment. With that said, we remain focused on what we can control, which is positioning the company for long-term growth. I'll reiterate what I mentioned last quarter. Paragraph of Companies still has a very small but growing share of three large, attractive, and growing end markets. We are driven to win more than our fair share of new customers while maintaining impressive customer retention statistics through providing a superior customer experience. We're optimistic on the future given the enormous size of our target markets and our own ability to capitalize through wise investment in our people, our products, and technology. Turning to our business segments, I'll start with healthcare apparel. During the second quarter, our revenue was down 5% due largely to continued softness in our store-based uniform wholesale business and the timing of revenues as compared to last year do impart the temporary supply chain issues. These headwinds were partially offset by continued strong growth in our digital business, both in our wholesale and direct-to-consumer channels. While the gross margin rate was up versus last year, the SG&A percentage increased at a higher rate, primarily driven by investments in marketing to drive further awareness of the weak brand and support for the early stages of our direct-to-consumer channel. As a result, EBITDA was $1.3 million as compared to $1.9 million in the prior year quarter. Despite the second quarter sales decline in healthcare apparel, we believe our selling strategies in healthcare apparel, including last year's successful rebranding under the Wink trademark and expanding our direct-to-consumer efforts, will drive long-term growth. Over time, we see ourselves capturing significant additional share of this large growing and resilient addressable market, expanding well beyond the more than 2 million caregivers who already wear our brands to work every day. Turning to branded products, our revenue was up 2% compared to the year-ago quarter, despite an inventory shift related to certain contract uniform customers whose inventory was contemplated to be on the shelf in June, but instead arrived in the third quarter. As a result, the revenues from these contract assets will be realized in the third quarter. Interestingly, the overall demand trajectory for BAMCO in particular, which is the largest portion of the segment, is being driven by a significant increase in the number of customer orders, partially offset by smaller order sizes and lower value products, reflecting a cautious buying pattern by our customers. However, the increased number of orders including from new customers, results in capturing additional market share and, therefore, greater opportunity for growth when the headwinds normalize for expanded revenue. The good news is that customers haven't stopped buying. They are, however, being more prudent with their spend. The increase in gross margin dollars and rate was offset by higher SG&A, which was primarily driven by employee-related costs, including commissions on the higher gross margins. As a result, the branded product EBITDA of $6.7 million was down slightly from $7 million a year earlier. From a strategic standpoint, our game plan for branded products revolves around strong customer retention, growing our wallet share, driving greater RFP activity, and increasing our sales rep recruiting. Our market share of less than 2% has ample room to expand in this $24 billion market. Wrapping up our business segment discussion, contact centers grew revenues 9% year over year, accelerating slightly from last quarter's 7% revenue increase. Due to the attractive long-term growth opportunities, DOG continues to invest in advance in talent and satellite offices to support new and existing customer growth, which puts pressure on both gross margin and SG&A, but only in the short term. As a result, our EBITDA performance was almost flat, with the prior year period at $3.2 million, despite the stronger top line results. We're seeing solid demand for TOG's offering from both existing and new customers, and our strategy is to continue growing our pipeline and ultimately earning more business, while ensuring that our offering is competitive and reflects the value we bring to our clients. We're also investigating and already using some of the latest technology to provide the highest quality customer experience, while at the same time, employing additional technologies to enhance our efficiency and grow margins over time. I'll now turn the call over to Mike to walk us through our second quarter financial results in greater detail and to provide an update on our outlook for the full year. Mike?

Thank you, Michael. During the second quarter, we grew our top line 2% over the prior year period. This was our second consecutive quarter of year-over-year growth, and while our second quarter revenue was somewhat light versus our forecast, we're able to reiterate our full-year revenue expectations given our favorable outlook for the rest of the year. Our consolidated sales growth was driven by our branded product segment, which grew 2% to $81 million, and our contact center segment, which grew 9% to $25 million. These increases were partially offset by a 5% sales decline in our healthcare apparel segment to $27 million for the quarter. In terms of our profitability, our consolidated growth margin expanded 170 basis points over the prior year, coming in at 38.5 percent. Both branded products and healthcare apparel continued to drive year-over-year margin expansion with increases of 240 and 120 basis points, respectively, driven by a combination of improved supply chain costs and pricing. These gross margin rate increases were partially offset by a 140 basis point decline at our contact center segment, driven by increases in employee-related costs of our agents, including agent training in anticipation of new clients in the back half of the year. Our SG&A expenses were $48 million for the quarter, up from $43 million a year earlier. primarily driven by higher sales-related compensation from growth in the branded product's gross margin, higher marketing and advertising expenses, increased third-party professional fees, and increases in employee-related costs. Our EBITDA of $5.6 million was down from $7.4 million in the prior year period. Looking at this by segment, branded product EBITDA was down just slightly to $6.7 million. as stronger sales and a stronger gross margin were offset by higher SG&A expenses. Healthcare apparel EBITDA came in at $1.3 million, down from $1.9 million in the prior year period, primarily due to the lower revenues and higher marketing expenses this quarter. Contact centers EBITDA was almost flat year-over-year at $3.2 million, as sales growth was offset by the combination of a lower gross margin rate and a higher SG&A rate, largely reflecting investments in talent to support future sales growth. Shifting gears, our interest expense for the second quarter was $1.5 million. That's sequentially improved from $1.8 million in the first quarter this year and much improved from $2.6 million in the year earlier quarter. The interest expense decrease from last year was primarily driven by a $53 million reduction in our weighted average debt outstanding, which I'll touch on in a moment. In terms of net income, we reported $600,000 for the second quarter, or 4 cents per diluted share, relative to $1.2 million, or 8 cents per diluted share, in a year-ago period. Turning to our balance sheet, which continues to improve, we ended the second quarter with cash and cash equivalents of $13 million, and we reduced our debt outstanding by another $12 million during the quarter. We've also generated $16 million in operating cash flow year-to-date, and our net leverage ratio at the end of the second quarter was 1.7 times trailing 12-month covenant EBITDA, much improved relative to 3.7 times a year earlier. I'll wrap up with our full-year 2024 outlook, which is unchanged from what we provided on our last quarterly call. Specifically, we look for full-year revenues to be in the range of $563 million to $570 million, and a full-year earnings per diluted share to be in the range of $0.73 to $0.79. These ranges call for acceleration over our first half results, including the later timing of quarterly sales that were originally expected during the second quarter, as previously discussed. That concludes our prepared remarks, and operator, if you could please open the line, Michael and I would be happy to take questions.