Superior Group of Companies, Inc.

Good afternoon, everyone. Welcome to the Superior Group of Companies Third Quarter 2024 Conference Call. With us today are Michael Binstock, Chief Executive Officer, and Mike Compel, 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 and are cautioned 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. And now, I'll turn the call over to Michael Benstock. Please go ahead.

Thank you, operator, and welcome everyone to today's call. I'm going to start with third quarter financial highlights and then discuss our three business segments. After that, I'll hand it over to Mike, who will walk us through a more detailed financial discussion, as well as our outlook for the rest of the year. When Mike is done, we'll open the call for your questions. Our overall third quarter performance improved versus the second quarter, as well as the year earlier quarter, with top line growth and greater profitability. While we still sense some hesitancy on the part of customers, given the uncertainty that's existed all year around inflation, interest rates, the presidential election, and geopolitical conflicts, we achieved the acceleration over the first half results that we spoke about on our Q2 call. You might recall that we contemplated the benefit of the revenue shift into the third quarter, resulting from the second quarter supply chain issues. We continue to execute internally to make the most of these still somewhat soft market conditions. On a consolidated basis, we produce revenues of $150 million, up 10% versus the year-ago period, driven by double-digit growth in both healthcare apparel and branded products. We are proud to say that these are the highest quarterly revenues ever achieved in our core products and services. The only other time we have ever slightly exceeded this was in Q2 2020 when our revenues were largely made up of PPE in response to the early stages of the pandemic. EBITDA of $11.7 million was up 26% from $9.3 million, and our EBITDA margin expanded a full percentage point to 7.8%. Breaking this down further, our gross margin percentage climbed 130 basis points over the prior year, and we were able to hold SG&A as a percent of sales almost flat at 34.9%, which includes the growth-oriented investments mentioned in prior quarters. Putting this all together, our third quarter diluted EPS rose to 33 cents from 19 cents a year earlier. On top of all this good news, we also continue to strengthen our financial foundation by generating another quarter of positive operating cash flow, which allowed us to improve our already strong net leverage ratio. Going forward, our financial strength will allow us to continue our strategic investments to capitalize on the compelling growth opportunities within our three very attractive end markets. Before turning to a discussion around our segments, I'll reiterate what I mentioned on prior calls. From a big picture standpoint, Superior Group of Companies still has a very small but expanding share of three large, growing, and highly fragmented end markets. We are intelligently investing in our people, services, products, and technology to continue to take more than our share of new customers with an emphasis, as always, on excellent retention of existing customers. Now let's shift to our business segment, starting with healthcare apparel. Our third quarter revenue was up 11% versus the prior year quarter, benefiting from growth in our online channels, both wholesale and direct-to-consumer, despite continued soft market conditions in the wholesale channel of our business selling to healthcare apparel retail stores. Our third quarter revenue also benefited from the timing of revenues as compared to last year, due in part to the supply chain issues in Q2 that we already mentioned. The increase in our gross margin percentage of more than 300 basis points was partially offset by an increase in SG&A as a percentage of sales of 200 basis points. While the SG&A rate was at its best level so far in 2024, the rate did increase year over year, mostly due to sales and marketing investments to drive awareness of the Wink brand and to support our online channels, as well as continued investments in top talent. As a result, our EBITDA and our healthcare apparel segment of $3.8 million was up from the year ago $3.1 million. Let's move on to our branded product segment, which also achieved revenue growth of 11% compared to last year. The revenue increase was mostly driven by increased volume with existing customers, including the revenue shift discussed earlier, as well as the addition of many new customers. For now, we're taking market share by adding new customers, which is helping to offset some legacy customers largely coming in with smaller orders, and which we believe will further fuel our growth once the environment improves. Overall, the business has played out as indicated on our prior call. Similar to the second quarter, demand trends were reasonably solid, even though there's still a fair amount of customer caution. In addition to the top-line growth, during the quarter, our gross margin expanded 160 basis points, and we were also able to reduce SG&A as a percentage of sales by 180 basis points. As a result, our EBITDA was up. more than 50% over the prior year to $10.7 million, and our EBITDA margin expanded more than three percentage points. Next up is contact centers, our highest margin segment, which had a 4% year-over-year sales increase driven by new customers, partially offset by lower sales from existing customers. Our investments in talent and satellite offices to support future organic growth are reflected in our healthy win rate in pipelining new business, but are also reflected currently affecting our gross margin SG&A. As a result, our EBITDA was $3 million versus $4.1 million in the prior year period. Our longer-term strategy for contact centers is to grow our customer count catering to small and medium-sized enterprises. In addition to significantly launching and growing our sales team and increasing our marketing spend, we're also deploying the very latest technology to benefit the customer experience, enhance our efficiencies and competitive edge, and to profitably grow over time. With that, I'll turn it over to Mike, who will take us through our third quarter results in detail and update you on our full year outlook. Mike?

Thank you, Michael, and thanks, everyone, for being on today's call. Starting with our high-level consolidated results for the third quarter, we grew revenues 10% year-over-year, which was our strongest growth rate so far this year, despite still soft market conditions. Taking a look at what drove this performance, healthcare apparel revenues were up 11%, to $33 million, and branded products revenues were up 11% to $93 million. As we expected, the timing of revenues due in part to the supply chain delays we referenced last quarter benefited our third quarter results for these two segments. Contact centers also grew year-over-year with revenues up 4% to $25 million as new customer growth was partially offset by lower revenues from existing customers. We expanded margins and profitability during the quarter with our consolidated gross margin growing 130 basis points over the prior year third quarter to 40.4%. Both healthcare apparel and branded products saw stronger gross margins of 310 and 160 basis points, respectively, benefiting from cost of goods favorability associated with healthcare production at our Haiti manufacturing facility during the quarter, as well as favorable sourcing mix and pricing within branded products. Gross margin for contact centers was down 60 basis points, mainly due to wage increases for our agents. Turning to SG&A, versus the prior year, we were able to hold expenses almost flat as a percent of sales, up just 20 basis points to 34.9%. Our SG&A expenses were $52 million, up from $47 million a year earlier, primarily driven by increases in employee-related costs, commissions, marketing investments within healthcare apparel, professional fees, and satellite office expansion and bad debt expense for contact centers. Moving to the EBITDA line, our third quarter grew to $11.7 million, up from $9.3 million in the year-ago quarter, representing a full percentage point expansion in our EBITDA margin, as previously mentioned. On a segment-by-segment basis, our healthcare apparel EBITDA margin expanded 110 basis points to 11.4%, driven by higher gross margins, partially offset by investments in marketing and talent. The branded product EBITDA margin was up 330 basis points to 11.6%, benefiting from both expanded gross margins and operational leverage on the top-line strength. However, contact centers, our smallest segment, saw an EBITDA margin decline from 16.8% to 12.1%, driven by increased agent costs and the aforementioned investments in talent to drive the pipeline for future growth. Moving further down our income statement, our third quarter interest expense was $1.6 million, improved from $2.5 million in the prior year period, driven by a $36 million reduction in our weighted average debt outstanding, as well as a 110 basis point decrease in our weighted average interest rate. Our net income for the third quarter also improved to $5.4 million, up from $3.1 million in the third quarter of 2023. This equated to 33 cents per diluted share, up from 19 cents in the year-ago period. Shifting gears, our balance sheet remains solid. We ended September with cash and cash equivalents of $18 million, compared to $20 million at the start of the year, while debt outstanding was $85 million at quarter end, improved from $94 million at year end 2023. These results include $6.3 million in share repurchases during the quarter, which I'll touch on in a moment. Our operating cash flow remains strong, having generated $24 million year to date, and our net leverage ratio for the third quarter was 1.6 times trailing 12-month covenant EBITDA, an improvement relative to two times at the end of 2023 and 2.9 times a year earlier. Regarding our share repurchase plan announced on August 12th, during the third quarter, we repurchased approximately 452,000 shares for $6.3 million, translating into an average price of $14.05 per share. We ended the quarter with roughly $3.7 million remaining under our buyback authorization and continue to view our shares as a compelling value. Now turning to our outlook, we're reaffirming our full year 2024 expectations, which reflects the acceleration over our first half results that we mentioned last quarter, largely driven by our strong third quarter results. Therefore, we continue to expect revenues in the range of $563 million to $570 million, and full-year earnings per diluted share in the range of 73 cents to 79 cents. With that, operator, Michael and I would be happy to take questions. If you could please open the lines.