Superior Group of Companies, Inc.

Good afternoon and welcome to the Superior Group of Companies first quarter 2025 conference call. With us today are Michael Benstock, Chief Executive Officer, and Mike Kemple, 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 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 caution not to place under 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.

Thank you and welcome everyone to today's call. As usual, I'll start with a review of consolidated financial highlights for the first quarter, including a discussion around our three business segments and current market conditions. Mike will then walk us through our financial results in more detail. Then we'd be happy to take your questions. So let's get started. Our customer buying hesitancy persisted through the quarter. On top of the uncertainty around inflation and interest rates, The recently introduced tariffs that have already been revised a few times, in particular the ever-escalating China tariff rate, not only further slowed customer decision-making, but has made sourcing of our products somewhat of a challenge. The good news is that SGC has successfully navigated numerous economic challenges in the past, and we entered 2025 in a strong financial position to manage through the current economic uncertainty. Of course, we have no line of sight to what the next move by our executive branch will be and what counter moves will take place in this tit-for-tat environment. As many of you are aware, for decades we have had a redundant manufacturing and sourcing strategy in place for most of what we produce. This competitive strategy has helped us greatly in the past, no matter the challenging environment. Let me point out for those of you who are new to our story that we are not heavily invested in China manufacturing or sourcing our finished products for our healthcare segment or, of course, for our call center segment. But a handful of our customers' products that we support in our call centers will be impacted by high tariffs on China-made products brought into the USA, and that will ultimately impact their businesses, which could have a trickle-down impact to us. It is also true that some of our customers could competitively benefit from high tariffs on products from China or elsewhere. During these challenging times, we have the advantage of leveraging the diversification of our three business segments combined with our multiple sources of supply. We remain focused on what we can control, which you can well imagine is centered on strong cost management. The cost we've recently eliminated from the business that Mike will speak to will support even stronger profitability as demand normalizes. Taking a look at our consolidated first quarter results, we held revenue nearly flat year over year despite the macro headwinds and lapping a 6% increase in the first quarter a year ago. Growth in our contact center business was offset by a slight decline in branded products, our largest segment, and a decline in healthcare apparel. Also on a consolidated basis, we recorded a first quarter net loss per share of 5 cents relative to earnings per diluted share of 24 cents in the prior year period. The profit decline was primarily the result of lower gross margins from sales mix changes that included fewer orders from higher margin customers. Despite the quarterly net loss, we maintained a strong balance sheet net leverage position, which allows us to take a strategic long-term approach to capital allocation. This includes prudently investing in our three attractive businesses while capitalizing on market dislocations to actively repurchase our common shares which we consider a compelling value. Turning to our business segments and starting with branded products, sales and promotional products grew while branded uniform sales with existing customers were down year over year, primarily due to stronger uniform program rollouts in the year-ago quarter. Overall, our pipeline of business opportunities in branded products is setting new records. Our order backlog remains strong, and our customer retention continues to be over 90%. This gives us line of sight to Q2 being a relatively strong quarter. In addition, we continue to recruit new sales reps, win new accounts, and expand wallet share with our existing base. All these actions will enable us, as we have in every crisis, to gain overall market share as we still control only a very small portion of this attractive market as the eighth largest of more than 25,000 distributors. Turning to healthcare apparel, economic uncertainty is also having an impact, most notably in institutional healthcare apparel and in our brick-and-mortar wholesale-related channel. We're investing and will continue to invest in growing our digital channels, both wholesale and direct-to-consumer, to continue expanding our single-digit market share in this growth industry. We're also spending to drive demand creation for our Wink and our Carhartt licensed brand products, albeit being very strategic while doing so. As for contact centers, while not immune to current macro uncertainty and markets, this remains our highest margin segment. We've begun to realize the benefits of our first-ever sales team through successfully participating and winning RFPs, as well as developing a record pipeline. We will continue to test and utilize cutting-edge technology that enhances the customer experience, enables operational efficiency, and serves as a competitive advantage, particularly as we target high-touch, small, and medium-sized enterprises. With that, I'll turn the call over to Mike, who will take us through first quarter results in detail, and then we'll open it up for Q&A. Mike?

Thank you, Michael, and again, welcome to our call. On a year-over-year basis, our consolidated first quarter revenues were down 1%. Taking this segment by segment, for branded products, revenue was off less than a percent, an improvement over the fourth quarter's 5% decline. Consistent with last quarter, sales of promotional products grew, while branded uniform sales with existing customers were down year over year, primarily due to stronger uniform program rollouts in the year-ago quarter, as well as hiring freezes implemented by some of our customers during the first quarter. For healthcare apparel, first quarter revenue was down 7% versus the prior year, reflecting a decline in institutional healthcare apparel. For our contact center business segment, we were able to grow revenue 3% with solid retention and growth of existing customers, as well as adding new customers benefiting from our internal sales force. Moving on to gross margin, on a consolidated basis, the gross margin rate was 36.8% for the first quarter, nearly flat sequentially, and compared to 39.8% the prior year. SG&A was 36.5% of revenues compared to 35.2% the prior year quarter, and consolidated EBITDA came in at $3.5 million versus $9.6 million a year earlier. Let's take a closer look by segment. Our branded products gross margin was 32% in the first quarter, which compares to 36.5% a year earlier. primarily the result of sourcing mix that led to higher product costs, as well as customer mix that led to lower pricing. SG&A for branded products was up just slightly at 27.1% of revenues, and we generated EBITDA of $5.7 million compared to $9.9 million in the prior year quarter. Moving on to healthcare apparel, our first quarter gross margin of 37.2% was up sequentially, but compares to 39.4% in the prior year period, with both variances reflecting changes in underlying cost of goods. In terms of SG&A for healthcare apparel, it was 34.9% of sales, up from 33.6% a year earlier, reflecting expense deleverage on this quarter's sales. The result was $1.5 million in healthcare apparel EBITDA, as compared to $2.6 million in the first quarter of 2024. Lastly, on contact centers, we held gross margin essentially flat year-over-year at 53.6%, and SG&A as a percentage of revenues was 45.1%, up 90 basis points due to an increase in professional fees. The resulting EBITDA of $2.8 million was just slightly below $2.9 million in the year-ago quarter. Moving further down the income statement, interest expense net was $1.2 million during the first quarter, improved from $1.8 million in the year-ago quarter due to a lower weighted average interest rate. The net loss for the quarter was approximately $800,000 compared to net income of $3.9 million in the first quarter of 2024. resulting in a net loss per share of 5 cents as compared to earnings per diluted share of 24 cents last year. Turning to the balance sheet, we ended the first quarter with $20 million in cash and cash equivalents, up from $19 million to start the year. We have also been actively repurchasing shares under the board's authorization that was recently expanded, as mentioned on our last call. We consider the repurchases to be a favorable use of cash and completed $3.8 million worth of share buybacks during the first quarter to repurchase approximately 294,000 shares. Overall, we ended March with a net leverage ratio of 2.2 times trailing 12-month covenant EBITDA versus 1.7 times to start the year. We had anticipated a first quarter increase in that leverage given the back-end wetted nature of our forecast at the beginning of the year and the timing of cash outflows. We remain well within our covenant requirements and continue to maintain significant liquidity to support the growth of our business. Turning to our updated full-year outlook, given the heightened economic uncertainty following the April tariff announcements, We currently expect revenues to be in the range of $550 to $575 million, suggesting year-over-year growth at the high end of about 2%. This compares to our prior outlook range of $585 to $595 million. Clearly, the economic uncertainty is resulting in macro volatility that has many companies, including our own clients, delaying decision-making. Therefore, due to the bottom-line sensitivity to tariff and other developments as we move through the year, we are not providing an earnings per share outlook at this time. It is important to reiterate that we have a proven track record of successfully navigating challenging economic times, and the significant improvement that we have driven over the last two years in operating cash flow Working capital and net leverage places our company in a position of strength relative to many of our competitors. So while we are managing our cash flow and expenses tightly during these uncertain times, including a reduction of approximately $13 million in annualized budget expenses, which will begin to impact the second quarter, we also remain laser-focused on driving growth and leveraging our position of strength to gain market share. With that, operator, Michael and I would be happy to take questions if you could please open the lines.