Superior Group of Companies, Inc. (SGC) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon, everyone. And welcome to the Superior Uniform Group's Conference Call to discuss the company's Fiscal Fourth Quarter and Year End 2015 Financial Results. With us today are Mr. Michael Benstock, Chief Executive Officer of Superior Uniform Group, and Andy Demott, Chief Operating Officer, CFO and Treasurer. After the speakers' opening remarks, there will be a question-and-answer period. [Operator Instructions]. This call is being recorded and your participation implies consent to our recording of this call. If you do not agree to these terms, simply drop off the line. [Operator Instructions]. I would now like to 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, Andrew. This conference call may contain forward looking statements about Superior Uniform Group's business opportunities and its anticipated results of operation. 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 2015, in this morning's news release 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 in 2014 unless otherwise noted. With that, I’ll turn the call over to Michael.

Thank you, Hala. And good afternoon everyone. We're glad you could join us for a review of our fourth quarter and fiscal year 2015 results. I'll start as with usual with some highlights of our financial and operational performance for the quarter and full-year and then provide our thoughts on key industry trends. Andy will then give you additional insight into our financial progress. Finally, I'll come back with some comments on our general outlook for 2016. And after this, we'll be happy to answer your questions. We finished another solid year with successful execution on our long-term growth strategies with fourth quarter net sales up 7% to $53.2 million. We continued our string of 13 consecutive quarterly sales increases. Our fourth quarter results are typically our seasonal low period in our employee I.D. business. As u recall, many of our customers are more focused on holiday related sales than on buying uniforms at year-end. Our second and third quarters are most -- more reflective of peak buying patterns in our annual cycle. Let's take a look at how each of our segments performed during the quarter. Uniforms and Related Products continue its momentum, increasing sales by 5.2% over last year to $49.9 million. We continue to expand our market penetration across new and existing customers. Remote Staffing Solutions delivered another stellar quarter with sales up by 34.6% to $4.2 million. Sales to outside customers increased by 45.3% from a year ago as we continue to penetrate new customer accounts. From a profitability perspective, we continue to leverage our fixed cost across higher sales volumes and from low touch programs that become solidly profitable accounts due to their low level of service. This gives us the added ability to compete on larger programs that may be lower gross margin or require a Made in USA competent like the large orders we received last year from one of our oldest retail customers. Andy will provide more details on this along with other key performance measures in his financial review. Now, let's take a look at the year. Overall, consolidated net sales grew by 7.2% to $210.3 million, solid growth on top of the spectacular gains made in fiscal 2014. For uniforms and related products, sales increased by 5.4% to $198.3 million. We achieved this despite the fact that the prior year included a $5 million new uniform program rollout for an airline customer that did not repeat at the same level in 2015. Our employee I.D. team, which is the combination of Superior I.D. and HPI Direct replaced this business and demonstrate our ability again to drive organic growth with existing and new customers. The Office Gurus, our remote staffing business delivered another exceptional year. Sales to outside customers increased by $3.9 million to $12 million, a 49% increase over last year. As I mentioned earlier, our efficient cost structure and SGA leverage drive improvement and profitability at higher rates than our sales gains. Our operating margin increased to 9% in 2015. Let's take a deeper look at the operational advances we made during the year that supported this growth and will pave the way for future improvements. Our uniform segment continues to operate in a very competitive, but rational pricing environment. Our expanded global sourcing capabilities bolsters our competitive edge and continues to help offset the impact of pricing pressures. While commodity prices for our raw materials in some of the countries where we have a presence have declined, it has not yet translated to significant impacts to our private cost structure. We continue to invest in Fashion Seal Healthcare Direct and we are committed to driving higher sales and profitability from this direct channel. As we've discussed in the past, this is a long-term process. And we are gaining traction with additional integrated delivery networks or IDNs for sure. We're executing on our GPO strategy to gain additional IDN contracts, a well as additional GPO contracts beyond those already awarded. Those we have currently give us access to thousands of healthcare facilities nationwide. As we described in the past, when GPOs work with us they can offer their members not only a better price, but also a more efficient purchasing process. This allows their members creating affordable, consistent, branded quality appearance for their employees throughout their healthcare system. That does more than raise employee satisfaction, which is important as turnover increases. It also makes a better impression on the patients they serve. As you know, in direct healthcare we are entering year two of five-year process. That means our investment hasn't yet yield at the level of sales and profitability we know it will in the long-term, when we expect it will become a more significant part of our business. However, we're very encouraged by our progress so far. We continue to analyze and refine our sales and marketing efforts to win more business. More and more opportunities are headed to closure in the coming months validating much of the efforts that we have put into what essentially was a brand new channel for us as just two short years ago. Fashion Seal Healthcare Indirect, which sells to healthcare dealers and laundries and has been around for nearly our entire 95-year history still finds ways to penetrate our existing accounts with new products and services. In fact, our new scrub catalog will release in March with some exciting new products that will take comfort and fashion on this more institutional side of our business to a whole new level. During the year, we also laid the ground work to open our first company-managed manufacturing facility in almost 20 years. In the 2015 third quarter, we signed a long-term agreement to lease a factory being built to our specs in Haiti right on the border of the Dominican Republic. This gives us a number of advantages. First, and most obvious and one we spoken about in the past, the single-line of healthcare apparel we're making there will be duty free. Second, we have access to an abundant highly trainable workforce who is eager to come work for us. Third, we are cutting out the middlemen where it makes sense, so we can be more cost effective. And fourth, we think that being more competitive on this product line allows us to bundle other products and put us in a more favorable position on larger contract bids. The factory opened on schedule in January. We're in the process of training the first wave of employees and expect to hire the next group in a few weeks. Our plans call for us to ramp up to about a 150 people by the end of the year. We had a long history of expertise in factory management, which will help us reach our desired levels of quality and efficiency in a shorter amount of time. The Haiti facility has a potential once full to seat approximately 300 operators to produce enough product for around $20 million in annual sales for us. We expect to expand it beyond the 150 employees as demand increases and to consider other opportunities to build offshore factories that offer similar potential in the future. Moving now to the Office Gurus, our remote staffing solutions business. As you know, this is a small but fast growing segment of our business that grew out of our own need for back office support. In turn, we are able to significantly reduce our operating expenses, elevate our customer service experience and offer these new services to outside customers. Our capacity expansion efforts are progressing well for the build out of a new call center in El Salvador, due to be completed by mid-year. In anticipation, we are reviewing our management support, staffing needs in that area. We'll continue to invest there to stay ahead of our anticipated growth. When completed, it will more than double our existing capacity there with the capability of hosting nearly 1200 contact center agents. El Salvador accounts for nearly two-thirds of our call center workforce. We've also made smaller additions in Belize and the United States centers. By mid-year, we'll have the capability to double the businesses that we support in all the countries in which we operate. And we will be able to move forward from that point to achieve our strategic objectives over the next three to five years without much further additional capital investment. We see a great return on investment in this segment of our business. And as it grows, it helps drive our operating cost even lower to support our uniform business. Now let's take a closer look at the market trends affecting our company. While we read that the economy remains sluggish, customers in our uniforms tell us that they're seeing more employee turnover and, in some cases, are actually having trouble finding people to hire. With this comes increasing wages to stay competitive, which also drives higher turnover, particularly in food service and in the retail store chains that we clothe. The latest employment data supports this. The current economy versus what we were seeing a year ago means two positive conditions first. First, employee turnover is increasing as evidenced from the higher-end separation data statistics published by the Department of Labor. People feel more comfortable about looking for and changing jobs. And second, customers will be expected to spend more to keep their employees happy, which often translates into more uniforms and related products. Our customers in all the markets that we serve seek a well-rounded corporate identity strategy through branding initiatives that extend even beyond uniforms and into promotional products. This is a logical extension of our product portfolio, which we currently offer through our value added branded merchandize division Blue Fusion. We are still aggressive pursuing accretive acquisitions to broaden our footprint in both uniforms and in promotional products. With this as background, I'll turn the call over to Andy to give you more detail on our fourth quarter and 2015 performance.

Thank you, Michael. And good afternoon everyone. Let's start with the fourth quarter income statement. Net sales increased 7% to $53.2 million. Uniforms and related products contributed 4.9% of this gain with remote staffing adding the remaining 2.1%. Uniforms and related product sales were up 5.2% from the 2014 quarter. This reflects a continuation of the trends we saw all year, greater market penetration, higher levels of employee turnover and a solid new business pipeline. In remote staffing solutions, quarterly sales to outside customers expanded by 45.3% from a year ago. We continue to increase business of existing customers, as well as to attract new ones. Cost of goods sold rose 8.9% to $35.3 million. As a percent of sales, cost of goods sold were 66.4%, compared with 65.3% in 2014. This reflects the pattern you saw throughout the year. We experienced higher direct product cost as a percentage of net sales in our uniform segment due to contract mix. We see this when some new business carries a lower gross margin than our average contract. As Michael mentioned, one of our large customers initiated a Made in the USA uniform program earlier in the year, which had a higher than average dollar selling price and lower than average gross margin percentage. However, this is offset by the fact that this business requires a lower level of customer service, distribution and other related cost and those factors reduce our SG&A. This account and others like can be just as profitable if not more so than contracts with higher gross margins. Additionally, our remote staffing segment experienced a significant portion of its growth in net sales at our US location. While sales generated from our domestic locations in this segment carry a higher hourly rate, they also carry a significantly lower gross margin percentage than the non-domestic business in this segment. These domestic sales accounted for approximately 38% of our revenues in this segment in the fourth quarter of 2015 as compared to approximately 21% in the same period of 2014. As a result of these factors, our overall gross margin as a percentage of net sales was 33.6% or $17.9 million for the quarter. In the same period of 2014, this figure was 34.7% or $17.2 million. Because gross margins can fluctuate based upon customer mix, we believe looking at operating margins offers a better measure of our overall profitability. SG&A expenses increased 4.5% in the latest quarter to $13.1 million. As a percentage of net sales, SG&A dropped to 24.6%, compared to 25.1% in the 2014 quarter. This difference is not only the result of those lower touch programs, but also demonstrates our ability to leverage a higher level of sales across the fixed cost structure. Our interest expense decreased 6% from the year ago quarter to $124,000, because our average borrowings were lower. Income from operations increased 1.8% to $4.7 million and that created an operating margin of 8.8% versus 9.3% for the three months in 2014. Our effective tax rate for the quarter declined significantly to 28.3% from 38.1% for the 2014 fourth quarter due to several factors. First, the reversal of deferred income taxes from foreign operations, which are now considered to be primarily reinvested. Second, an increase in the tax benefit on income from foreign operations. And third, a decrease in non-deductible share-based compensation as a percentage of total taxable earnings. Finally, during the first three quarters of each year, we estimate our effective rate expected for the full year. This amount is trued up with actual amounts in the fourth quarter each year. During the 2015 quarter, the final true up resulted in lowering the expected rate from 31.7% at September 30 to 30.9% for the full year. While in the fourth quarter of 2014, the actual year-end rate was increased to 35.3% versus the expected rate of 34.2% as of September, 2014. Net income for the quarter was $3.4 million; this was an 18% increase. On a diluted per share basis, fourth quarter earnings were $0.23 compared with $0.20 a year ago for a 15.1% improvement. Now, let's take a look at the highlights for our -- from our full-income statement for the full year. Net sales grew 7.2% to $210.3 million. Uniforms and related product sales expanded by 5.4%. As Michael mentioned, organic growth in 2015 more than offset a $5 million new uniform rollout in 2104. Remote staffing solutions revenues to outside customers experienced 49% growth. Cost of goods sold increased 8.9% to $138.8 million. This represented 66% of sales compared with 65% in 2014. The increase is largely due to the higher direct product cost as discussed earlier with one of our larger customer initiated a made in USA program early in 2015. Additionally, the absence of the $5 million new program rollout 2014 as discussed above also negatively impact the gross margin in 2015. This program carried a higher gross margin than our average accounts, as it required a higher level of customer service, distribution and other related cost. Additionally, as noted earlier, the percentage of remote staffing sales from our domestic location increased and it accounted for approximately 31% of the segments revenues in 2015, as compared to approximately 21% in 2014. SG&A expenses continue to increase at a lower rate than sales, rising only 2.6% from a year ago to $52 million. As a percentage of sales, SG&A dropped to 24.7 %, compared with 25.8% for the prior year. Interest expense was essentially flat at $519,000. We paid a higher interest rate on some of our long-term debt as part of an interest rate swap that went into effect in the second half of 2014. However, this was largely offset by lower average borrowings during in the current year. Operating income grew 7.8% to $18.9 million. That gave us an operating margin of 9%, compared with 8.9% for 2014. Our effective tax rate drop to 30.9% from 35.3% a year ago due to the reversal of deferred income taxes, foreign operations -- an increase in the tax benefit on income from foreign operations and a decrease in non-deductible share base compensation as a percentage of taxable earnings. Net income for the year expanded 15.1% to $13.1 million and diluted earnings per share increased 9.8% to $0.90 versus $0.82 a year ago, despite 5.1% more diluted shares outstanding. We continue to share our success with our shareholders through quarterly dividends. In August, we raised the quarterly dividend by 10% to more than $0.08 per share. For 2015, we paid cash dividends of $4.3 million versus $3.7 million in 2014. Let's move on to the balance sheet. Our financial condition remains very strong. Our cash and cash equivalents decreased 77.4% this year to $1 million. Much of this decrease was in our foreign cash, which was used to fund our new facilities in El Salvador and Haiti. Accounts receivable grew 7% to $29.9 million, due to higher sales in the latest year. Inventories increased 9.1% to $63.6 million, reflecting the timing of purchases and to support the sales increase. This also led to a 21.3% rise in accounts payable to $11.8 million. Long-term debt was 6.4% lower at $21.2 million as we continue to pay down debt. N shareholders equity expanded 15.3% to $92.7 million. Our cash flows from operating activities were $8.4 million for the year. The 22% increase for $6.8 million in 2014 primarily reflected higher net income. Our cash used in investing activities increased 67.3% as we made significant investments in new facilities in El Salvador and Haiti. As you can see, this was another solid year of performance. Now, I will turn the call back to Michael for his closing remarks and general outlook for the coming year.

Thanks Andy. We're proud of our 2015 results, a year in which we reinvested significantly in our business segments and delivered top-line revenues that were solidly accretive to the bottom-line results. We believe our investments will drive long-term profitability, strengthen our competitive position and meet our broadening customer needs. We've discussed our aggressive acquisition strategy. We remained very active in seeking acquisitions that reach new markets, create new relationships for us or offer natural product to our service additions. Our acquisition pipeline is robust and we believe we can close on at least on acquisition this year. We expect to achieve additional efficiencies as well in our sourcing, which ultimately will include the benefits of our new Haiti manufacturing facility. And we also will be leveraging the highest level of sales across our fixed cost structure that should lower SG&A as a percentage of sales. While we expect some of our customers may be distracted by the presidential election year, we feel positive about our outlook for 2016. Barring any major geopolitical events, our long-term outlook remains unchanged. Excluding the impacted acquisitions, we expect consolidated average organic sales growth over the next three to five years in excess of 8% per year. This includes expansion in our uniform segment of approximately 6% per year and $2.5 million to $3 million increases for our remote staffing solutions. That wraps up our prepared remarks. Now, Andy and I are happy to take your questions.

[Operator Instructions]. The first question comes from Kevin Steinke of Barrington. Please go ahead.

Good afternoon. You talked about penetration of existing customers is a growth driver on the uniform side of the business. Just wonder if you talk more about how you're doing that, if it's with additional product or just capturing greater share of customer wallet in certain product categories or how you go about doing that?

It's both of those, Kevin. Thanks for the question. We have long-term relationships with many of our customers. And where we seek to penetrate them further is usually by offering them products that they might be buying from somebody else or products that they perhaps are not even supplying currently to their employees, that their employees are having to supply on their own. We focus heavily on our customers’ branding efforts in all the markets that we serve and sometimes even on our customers’ customers' branding efforts and try to support those activities as well. Sometimes that's what value-added service is, such as embroidery or screen printing. Sometimes it may be a component of introducing our shoe line to them, which is something they may not be purchasing now. Often times it might be for vent apparel that they're currently not buying from us or could be any range of promotional products as well beyond the uniforms that they're buying from us. So it's really a mixed bag of -- on one hand it's defiantly more and more products trying to introduce into. It's more focused selling to penetrate markets and acquire new customers. It's really working for a much more intelligent lead list and I think much more intelligent selling techniques that we've used in the past.

Okay. Great. And you mentioned having a solid new business pipeline. How would you characterize the new business pipeline compared to maybe a year ago? And how did it progress as you move throughout 2015?

It has improved over last year significantly. And it has steadily got larger and larger I think in part, because the economy has improved during that period of time, but also in part because I think our -- I know our sales efforts are much more targeted. And we're being much more careful about what business we're targeting and making sure that it's the right type of business for us. And in doing so, we might be dealing with fewer opportunities in some cases, but there are larger opportunities and more right for our company.

Okay. Thanks. That's all I had for now.

Sure. Thank you.

[Operator Instructions] The next question comes from Ralph Marash from the First Manhattan Company. Please go ahead.

Good afternoon. I have a question about cash flows for 2016. Can you give any projections at all on what you think bottom-line might look like in terms of cash production? And if you don't want to do that, then how about just CapEx estimate for 2016?

Yes. I mean we -- as you know, we generally don't give guidance on the earnings side of it. But I will tell you on -- from a cash flow perspective for fixed asset additions, I mean we are still continuing the wrap up of the project in El Salvador, which we’ve got roughly another $2.5 million to spend on that in 2016. A normal CapEx is typically $2.5 million to $3 million, so yes to add to that and there may be a $1 million more about the products -- projects that we have going on.

Thanks. That's helpful. Thanks a lot.

At this time, there appear to be no more questions. I would like to turn the conference back over to Michael Benstock for any closing remarks.

Thank you, Andrew. Andy and I thank you very much for your time today. We look forward to sharing our first quarter performance with you in April. Till then, we wish you a good finish to this earnings season.

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