Superior Group of Companies, Inc. (SGC) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon everyone. Welcome to the Superior Uniform Group’s 2015 First Quarter Earnings Conference Call. With us today are Michael Benstock, the Company’s Chief Executive Officer and Andy Demott, Chief Financial Officer. After the speakers’ opening remarks, there will be a question-and-answer period. [Operator Instructions] This call is being recorded [Operator Instructions] Now, I will turn the call over to Hala Elsherbini, Senior Vice President of Halliburton Investor Relations who will read the Safe Harbor statement. Please go ahead.

Thank you, Amy. This conference call will contain forward-looking statements about Superior Uniform Group’s business opportunities and its anticipated results of operations. Please bear in mind that forward-looking information is subject to risks and uncertainties and actual results may differ from what you hear today. Many of these risks and uncertainties are described in Superior Uniform Group’s Annual Report on Form 10-K for fiscal 2014 in the news release that was published this morning and the Company’s other filings with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs. Management does not undertake any duty to update the forward-looking statements made during this conference call or elsewhere. Please note that all growth comparisons that management makes today will relate to the corresponding period of last year unless otherwise noted. With that, I’ll turn the call over to Michael.

Thank you Hala and good afternoon everyone. We appreciate you joining us to discuss our first quarter 2015 performance. I’ll start with some financial highlights and review the positive impact from our continued execution of our growth strategies. Then I will offer some comments on general industry trends. After this Andy will give you some additional back ground on our financial results for the latest three months. Next I will return with a general outlook for the second quarter and year. Then we will both be happy to answer your questions, if I have a voice left when that happens. So, bear with me. Let’s begin with the quarterly highlights. We had an outstanding start to 2015 with first quarter revenues up 13% to $46.3 million from $41 million reported last year. Net earnings increased by 67.7% and diluted earnings per share rose 55.6% on 7.3% more shares. Our Uniform and Remote Staffing segments both contributed nicely to our stellar performance as we increased our market penetration and leveraged our fixed cost structure on much higher volumes. Let’s break out the performance in our two segments. Uniform related products, which includes Fashion Seal Healthcare, HPI Direct, and Superior ID brands saw our revenues increase 11.9% from last year’s first quarter. This resulted in part from strong sales to existing clients. In fact, 41 of our top 50 customers bought more from us this quarter then a year ago. We also attracted a number of new clients. As part of this we are making good progress building new relationships to our recently awarded GPO contract, which opens up more than 30,000 health care facilities as potential customers. During the quarter, we did additional training and added to our sales team to effectively engage in these opportunities of note. Some of our current customers are part of the premier GPO and many have expressed interest in expanding their relationship to place additional orders. While in the early stages we are right on plan in filling our pipeline with GPO related opportunities. It will take between three to five years to fully penetrate the premier network and in the meantime we are seeking other GPO awards as well. Our successes more than offset some of the market challenges we face during the quarter. This includes as you know some challenging winter weather. Some work stoppages in Haiti and a West Coast port slow down. Our global sourcing and redundant manufacturing helps us mitigate the effect of these types of interruptions. Our global sourcing team and logistics group did a great job of moving our products reports that were less effective by the slow downs and strikes. At the end of the day, we always make sure our customers’ employees get their uniforms. Moving on to the office gurus, our call center and BPO operation, sales in the segment grew 36.1% for the quarter reflecting the inroads we are making in adding new customers as well as increasing sales penetration to existing customers. As you know, the call center business grew at of our own need to staff back office functions, while reducing operating expenses. We successfully executed this strategy and attracted outside customers with similar needs. While small part of our overall company, its revenues are growing at a healthy rate and is a smart extension of what we do. Our niche is serving customers that need support for fewer than 25 seats in addition to customizing needs for larger opportunities. We gained significant synergy and elevate the customer service experience even for our uniform customers by having our own captive call center. Their incredible growth opportunities here for a highly profitable business that contributes handsomely to the bottom line every quarter. The office gurus has a solid management team; that means we, the senior executives engage at the strategic level while they focused on what they do best running the day to day operations. During the quarter, we broke ground on our call center in El Salvador, our new call center in El Salvador, we are on schedule to complete construction during the first quarter of next and begin operations in the latter part of that quarter. This facility ultimately will seat over a 1000 agents who will help us continue to support our remote staffing segments profitable growth. With this as background, let’s look at the economic trends affecting our market. While not yet a robust economy, the economy is slowly headed in the right direction and we feel encouraged by that. New jobs, new hires and employee turnover are good for our industry. According to the U.S. Department of Labor Statistics most employment indicators in February were stable. With what we saw in January, if you remember was a high watermark. Employers continue to post the most job opening since 2001. This was true for every region in the country. Total hires remained at 4.9 million, which is the highest level in more than 7 years. In addition, the number of those who quit the jobs remained at 2.7 million people or 1.9% of the work force. In the 12 months that ended in February there was a net employment gain of 3.2 million people. In healthcare alone, the number of job openings increased by more than 25% between February of 2014 and February of this year. Hiring was up by 11% from a year ago and job separations rose 7%. This supports our belief that the improving employment situation will mean growth and demand for our market for the foreseeable future; more people in the uniforms in total and from turnover. In addition, employer is the one who will increase employee satisfaction in order to hold on to valuable trained employees will allocate more money to uniforms as an added retention strategy and spend additionally on branding initiatives. Our continued growth will also come from creating value added situations to our promotional branded products business by serving as a one-stop shop for our customers. When they purchase uniforms bearing their logs they can easily select other branded merchandize such as coffee mugs, backpacks, water bottles to round out a fully branded program. We have ramped up our sales efforts to accelerate opportunities in this key promotional products niche. Before I turn the call over to Andy, I would like to reiterate that we continue to aggressively seeking the right acquisitions. Our goals to add operations that will give us critical mass in an existing or new market create new relationships for us or add products that are logical extension of our business. To that end, we continue to have an investment banker engaged on our behalf and are in active discussions with acquisition candidate. Now I will turn the call over to Andy to walk you through our financial review.

Thank you, Michael, and good afternoon everyone. I’d like to give you some perspective on key financial indicators for the first quarter and let’s begin with the income statement. First quarter net sales increased 13% to $46.3 million all from organic growth. Uniforms and related products contributed 11.3% of the overall sales increase, with Remote Staffing solutions adding the remaining 1.7%. Our Uniforms and related product sales were up 11.9% from last year’s three months, clearly execution of our growth strategies allowed us to leverage the continued positive deployment trends Michael just mentioned. Remote Staffing solutions saw quarterly sales to outside customers rise 36.1% from a year ago. This reflects in growing business from current customers, as well as additional market penetration. Gross margin as a percentage of sales was down slightly to 34.1% from $15.8 million. For the 2014 quarter it was 34.3% or $14.1 million. As you know our gross margins fluctuate, primarily because some of our Uniform contracts had a higher service component and give us higher margin. Other contracts are low touch and these have lower gross margins, although they are typically just as profitable if not more profitable than higher growth margin customers. For this reason we believe looking at SG&A and operating margins offers a better measure of our overall progress. Income from operations climbed 71.6% to $3.2 million. That led to a significant increase in our operating margin to 7%, compared with 4.6% for last year’s first quarter. Cost of goods sold was relatively flat as a percentage of sales at 65.9% or $30.6 million that compares with 65.7% or nearly $27 million in 2014. This reflects our ability to spread overhead cost across the higher volume of sales offset by slightly higher direct product cost in the current year. SG&A was up 2.9% between the periods to $12.4 million from $12.1 million a year ago and continue to increase at a much lower rate than sales. As a percent of net sales, SG&A dropped to 26.8% for the first quarter, compared to 29.5% last year. We continue to do a great job in leveraging our fixed cost structure and capitalizing on our economies of scale. Also note that SG&A in the first quarter of each year includes a largest portion of our share-based compensation expense, as our executive and management awards are made each February. This accounted for roughly $825,000 in expense for each of the first quarters in 2015 and 2014. Also, interest expense was up 43.2% compared to the year ago quarter $136,000 largely from an interest rate swap that went into effect last July. Our effective tax rate rose to 36.6% from 35.1% in 2014. The two main reasons were a decrease in the benefit for income from foreign operations and an increase in the amount of taxable income subject to the higher federal rate for taxable earnings over $10 million. As you recall, our earnings in El Salvador and Belize are permanently reinvested there and we pay minimal taxes in those countries. This means there is no U.S. tax provision for their earnings. Because of the significant increase in our domestic income, foreign income is a much smaller percentage of the total. Net income for the quarter jumped 67.7% to $2 million. On a diluted per share basis, earnings rose 55.6% to $0.14. This included the impact of the 7.3% increase in diluted shares outstanding. The higher number of shares came primarily from the impact of share-based compensation, exercise of the related awards and the increased share price over the last year. You will also remember that our board declared a two-for-one stock split that was effective on February 4. And during last year’s third quarter, we raised the quarterly dividend by 11% to $0.075 per share. Now for some balance sheet highlights. Our cash and cash equivalents rose 9.4% during the latest three months to $5 million. Accounts receivable decreased in the same period by 3.1% to $27.1 million. This reflects the lower level of sales in the first quarter versus the fourth quarter of last year which we typically see. Inventories increased 2.8% to $59.9 million in anticipation of higher second quarter sales volume as compared to the first quarter of this year. This also led to an 11.8% increase in accounts payable to $10.8 million. Long-term debt grew 11.4% to $25.2 million primarily due to annual incentive compensation, which is paid in the first quarter of each year. Shareholders’ equity expanded 2.7% to $143.7 million. As you can see, we had a solid beginning to 2015. Now, I’ll turn the call back to Michael, so he can share a general outlook for the company.

Thanks, Andy. We delivered exceptional first quarter results despite this period historically being one of the lowest in our annual sales cycles as it also is the case with our fourth quarter. We generally see higher demand in the second and third quarters. I do want to point out for those of you who may not recall that during the second quarter of last year, we recorded about $7.5 million in revenue from two large program rollouts, while we have obviously reaped the benefits of continuing to serve this business on a regular day-to-day basis, we will not see that kind of volume in the second quarter of this year from those two accounts, as large program rollouts account occur less frequently, however, we are working hard to close the gap. Additionally, when we spoke last quarter, we indicated that gross margins were expected to be challenged during the first half of this year by several factors. These include some commodity pricing issues, higher direct product costs, as well as new contracts that require a much lower service level contributing to operating margins rather than gross margins. We believe this will smooth out in the second half. Overall, our top line guidance remains unchanged. To recap, we expect our uniform business will exceed its traditional organic growth rate of about 6% per year, our remote staffing operation should continue to see annual increases to sales in the $2.5 million to $3 million range and we expect to more than double staffing across our locations in the next 3 to 5 years. Acquisitions and new product launch could improve this outlook; however, certain situations such as unanticipated customers demands and changes in employment levels and turnover rates could also change our outlook. For the company as a whole, we anticipate average annual organic growth of more than 8% over the next 3 to 5 years, that’s an average, which means some years will likely be higher than ours. In 2015, Fashion Seal Healthcare uniform offerings will be enhanced by the release of our new stock lab coat catalog and later in the year by an expanded line of our simply socks scrub apparel. We also are upgrading our marketing and social media efforts to the healthcare market. To that end, we just launched a new website for our Fashion Seal Healthcare. I’m particularly proud of this because the site was entirely designed and programmed in collaboration with PowerTree Web, our web development subsidiary based in Costa Rica. The new website offers an interactive experience packed for value-added features and tools for uniform decision makers and end-users. This will also allow us over time to migrate from traditional print catalogs to e-catalogs. I invite you to experience the site for yourselves by going to fashionsealhealthcare.com. With that, let’s open the call for question and answers.

Thank you. [Operator Instructions] Our first question comes from Jim Gentrup at Val Vista Capital Management.

Good afternoon, gentlemen. How are you?

Good, Jim. How are you?

Good, good. Just wanted to ask you about the – very quickly about the GPO contract that you alluded to, and I know you talked a little bit about – I didn’t catch all that, so I guess – just I know it’s in the early stages, but do you expect some revenue bump this year yet or can you just talk about the timing in that a little bit?

Sure, we were rewarded the contract on February 1 and that gives all – everybody had - there is a sign-up process before we can do business with people and it is basically them reaching out to us and saying they have a need for our products. We induct them into our systems and now they become an active lead for us and we start making calls and so that process has gone very, very well. Lot of systems had to be set up around that to handle that and to understand exactly how that is done. We’ve had appointments, we will continue to have appointments, it will result in some revenue this year. I don’t believe it is going to be material revenue this year. It will be on an ever increasing basis more and more material. Over the next five years and it is a five year contract and there is a certain understanding here that you don’t derive tremendous benefits from this in the very first year of this, but we are seeing a lot of activity, our entire sales force is engaged in calling on the hospitals and all the healthcare institutions that are part of the premier network and we are making pretty good strides.

And there wasn’t much overlap, I mean, I think you said something about doing, you have been doing some business with some of the hospitals in that group already or…?

Yes we have been doing business with many of the hospitals in that group already, I mean, not all 3000, literally a handful of them by comparison, but we were relevant enough that from a value proposition and product standpoint that premier thought [ph] to invite us to bid this year and then awarded us the opportunity to now calling all 3000 hospitals. So they felt we are relevant and their shareholders who are the largest member hospitals within their system, felt that we were relevant. So, we are feeling very, very good about the opportunity but it does take time to build up sales. They don’t have from one day to next. Lot of these people are in a system already or in products already, they are not our products necessarily and it takes time to convert those products over. They may have agreements with respect to those products right now. So as those agreements fall off, we expect to be in place to be able to serve with those people.

It would be interesting to know, I don’t know if you can answer on this call but as we got the incremental opportunity that’s there if you now have I am not sure exactly what value of your average customer is, but it would be interesting to find out for you guys sometime maybe today but just how much incremental market opportunity you guys are now exposed to [indiscernible] just for investors sake?

Yes, as you know, as far as giving guidance, we don’t give guidance as far as disclosing. The average value of a customer, we typically don’t disclose that as well. But for the acquisition cost for that customer, all the things I know you would like to have, we don’t normally disclose that and there is a certain unknown element to this. This is our first GPO contract. I don’t believe it’s going to be our last. I am fairly confident in that, but we will have others as time goes on which will just broaden our appeal and our ability to call more healthcare institutions. Our goal is ultimately to be able to have our products favored in some preferential basis in every healthcare institution in America and to get our fair share of that business is not we ever be without any competition, but we believe that we will reap our fair share of that business.

Also Jim, as we get more confident in dealing with the information around the GPOs and what the real opportunity when we are comfortable that we’ll consider putting that out to the investing public in the future, but we are not there at this point.

Yes. Actually I just I kind of meant just okay, we think this could be $100 million incremental opportunity, felt something like that or – that’s all what I was referring to, not to get too specific. Just on the promotional products business, you already have a portion of your revenue I am not sure how much it is, but coming from the promotional products and I just was kind of curious as to the same thing, what holistically or what - or even if you go up by the opportunity I know it’s a big business but you’re already doing business with all of these customers so it’s kind of an upsell I take it or maybe I need to be corrected. And so I just wanted to get a little more detail on that area as well.

Yes, there is an upsell opportunity there with our existing customers. The $2.5 million opportunity that we had in the last year second quarter that Michael referred to earlier as part of that $7.5 million was an up sell of promotional products to an existing uniform customer. We are looking to capitalize on that in the future, but by the same token we also use the promotional products, the branded product side of it, when our uniform contract maybe a period of time before it’s going to come due and we can’t get in that door, we will try to go in through the promotional products door as well and then turn that into a uniform opportunity.

Okay. And then last year you had a weak Q1 because of weather and things like that, didn’t sound like it was as bad this year or maybe I should ask that open ended, was there some similar challenges as Q1 last year or?

No, Jim, the real problem for the country as a whole which sometimes affect our customers as well both first quarters were not very good weather. There was harsh weather in the north. What really impacted us last year was we were hit directly at our shipping locations the last several days of the quarter and we missed out a day and a half, two days of shipping which is what – they had some impact on last year. And this year, our impact really had to do with factories in the United States that we are merchandize for some of our customers who require U.S. made merchandize were shutdown a number of times because of weather in the Carolinas and Mississippi and Arkansas and Tennessee.

Yes. Maybe I realized the port strikes sounds like it had some impact as well in Q1 too. Can you quantify that or not?

I think yes for sure it did. We had a slow down to some extent but – our logistics group just was brilliant. We got ahead of it and move things around to other ports that were less effective. They were really on top of it very early on. It did not take us by surprise. Even other ports were affected because we weren’t the only ones routing things to other ports. So other ports got behind as well. I think the ports right now even though the slowdown is supposed to be over, we are still thinking out from the mess that was created from the long beach situation, but it hasn’t impacted us that greatly revenue because of our redundant strategies.

Thank you. I’ll let somebody else jump in.

Thanks, Jim.

[Operator Instructions] At this time, I’m showing no further questions. I would like to turn the conference back over to Michael Benstock for closing remarks.

Thank you, Amy. I would like to leave you with these final thoughts. The first quarter showed the power of Superior Uniform’s growth strategies in both the uniform and remote staffing businesses. The combination of our volume purchasing power redundant global sourcing and manufacturing capabilities allowed us to cost effectively manage our business despite some market disruptions. And the cost controls we have in place throughout our operation mean that we continue to increase the bottom line faster than revenues even while continuing to invest in future growth. We are excited about the rest of this year, we remain steadfast in our efforts to strengthen the companies and their price value, and create a long term value for our shareholders. Andy and I appreciate your time today and our investor’s confidence in our company. We look forward to sharing our second quarter and first half results with you in July. In the meantime, we hope you have enjoyable spring.

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