Good afternoon, everyone and welcome to the Superior Group of Companies 2018 Fourth Quarter and Year End Earnings Conference Call. With us today are Michael Benstock, the company's Chief Executive Officer; Andy Demott, its Chief Operating Officer and Mike Attinella, Chief Financial Officer and Treasurer. [Operator Instructions] This call is being recorded, and your participation implies that you agree to this. If you do not, then simply drop off the line at this time. 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. This conference call may contain forward-looking statements about Superior Group of Companies' 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 Group of Companies' Annual Report on Form 10-K, 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 management's 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 comparisons that management makes today will relate to the corresponding period in 2017, unless otherwise noted. With that, I'll turn the call over to Michael.

Thank you, Hala, and good afternoon, everyone. Thank you again for joining us to review our fourth quarter and fiscal 2018 results. I'll focus first my remarks on our performance highlights, the strategic direction and market dynamics. With Andy providing more detail on our operational segments and integration progress followed by Mike's financial highlights. We closed the fourth quarter and fiscal 2018 on strong footing and again, delivered positive results on revenue and earnings marking our 25th consecutive quarter with year-over-year sales increases. Our Promotional Products segment regained its positive momentum, underpinned by a fortified sales force. The Office Gurus delivered another strong quarter and year of impressive performance. Our Uniform segment fell short of expectations and organic growth slowed. We are aggressively addressing, as we've said in previous conferences, the shortfall from multiple angles. And we've made tremendous progress integrating and realigning our expanded uniform product assortment and service lines to optimize our go-to-market strategy. Andy will provide more detail on our integration and operational activity shortly. For the year, we execute on number of strategic initiatives that strengthened our brand holding solutions across our diverse yet complementary product portfolio. We completed our transformational acquisition of CID Resources which greatly broadens our healthcare uniform offering while giving us entry into the fast growing retail scrub market. We politically responded to trade disruptions to mitigate most of our tariff exposure. We elevated BAMKO sales force and that strategy is yielding exciting results. The strategic direction of the company is anchoring capitalizing in our shared services model. We're accelerating efforts on all fronts and leveraging the unique strengths of each business segment to optimize operational efficiencies and capture the power of our scale across our platform. In addition, we made key leadership hires, promotions and appointments that address our multi-faceted strategic…

Thank you, Michael and good afternoon, everyone. My comments today will focus on our key operational and integration highlights for the quarter and the fiscal year. Let's take a look at our segment performance. The Uniform segment, Superior Uniform Group, comprised of HPI, fashion Seal Healthcare and CID again delivered a net sales gain. This was largely due to the addition of CID Resources. However, organic growth lagged historical trends in light of the acquisition process and initial integration within our organization. As Michael noted, we have developed strategies of realignment of our sales and marketing that we believe positions us for accelerated future growth. We also took the first steps of conversion of CID to SAP, and we expect the complete the SAP conversion projects at CID by early next year. We did enlist technical consultants to ensure integration targets are achieved expeditiously and without disruption to our customers. Additionally, as we've learned more about CID's inner workings, we see greater opportunities, operational and organizational efficiencies. We reinforced CID's customer relationships under the SGC umbrella and establish significant sales collaboration with Fashion Seal Healthcare. Through our shared services, we are well underway with shared warehousing and employing new manufacturing and sourcing strategies. One of the highlights of this strategy includes supporting what we believe is a robust growth profile at CID with an additional near-shore, low-cost factory, primarily to achieve quicker response and delivery of CID's fashion scrub products to the retail market. We've committed to building an additional factory in Haiti comparable in size and adjacent to our existing facility. The new factory will house 350 operators working primarily on CID's fashion oriented scrub apparel. In addition to providing factory support for HPI and Fashion Seal Healthcare products. For CID, this near-shore option, which will replace some dutiable…

Thank you, Andy and good afternoon, everyone. We filed our 2018 10-K this morning, so I'll limit my review to key income statement and balance sheet items for the quarter and the fiscal year. Let's begin by looking at the fourth quarter. Net sales increased 31.1% to $95 million, largely driven by the 2017 acquisition of Tangerine in our Promotional Products segment and 2018 acquisition of CID in our Uniform segment. Together, they represented 84.1% of the sales growth. Our legacy businesses delivered organic sales growth of 5.2%. The Office Gurus or TOG, was up nicely by 22.5% and BAMKO reported a strong gain of 32%. Similar to last quarter, sales softened in our legacy Uniform businesses comprised of HPI, Fashion Seal Healthcare and Superior ID. Collectively, these businesses reported lower organic sales of approximately $2.3 million. And while these sales did not meet our expectations, we are aggressively working on driving better results through a more disciplined sales execution and regain our growth trends. Consolidated gross margin remained reasonably consistent at 35.5% compared to 35.9% a year ago. The difference is a result of higher sales mix of lower gross margins from our Promotional Products business, offset by improved gross margins from TOG and CID, both of which enjoyed higher gross margin rates. Of note, we didn't realize a full lift from CID's higher margin profile due to promotional activity to support yearend retail sales and clearance of discontinued merchandise. As a percent of sales, consolidated SG&A increased to 28.2% compared to 26.1% in Q4 of 2017. This decrease in operating expense leverage came from the amortization of intangibles related to our acquisitions, investments to support growth at TOG, losses in investments related to our supplemental executive retirement plan and CID's OpEx leverage as their business model is more…

Thanks, Mike. As Mike just outlined, we believe the strategic and aggressive investments that we are directing towards our brands, technology, products, people, diversification and infrastructure will drive our long-term sales outlook, which remains unchanged. As a reminder, our long-term guidance reflects annual average organic sales growth in our Uniform business to exceed 6%. Promotional Products should generate average organic growth of greater than 12% per year. This reflects potential for customer overlap that will happen as we continue to do additional acquisitions in this segment. And Remote Staffing should add organic growth in excess of $7 million per year. On a consolidated basis, this would yield a company-wide average organic sales growth of greater than 8.5% over the next three to five years. We are resuming our acquisition strategy in Promotional Products. While we took a brief pause, we continued to explore strategic opportunities in this very fragmented market, which lately has had a remarkable increase of private equity consolidation. We believe we are the better strategic, long-term partner for many of these businesses. We expect to execute one or two acquisitions annually to build out BAMKO as a top-tier branded products agency. I want to extend our thanks to all of our dedicated SGC team members for their hard work and meaningful contributions to realizing our long-term success goals. Superior customer experience is at the heart of our business, and we could not succeed without the dedication and innovative driving creativity of our entire team. With that, we'd like to open the call for your questions.

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

I wanted to start off by talking about the Uniform segment. You mentioned that it fell a bit short of your expectations but just wondering if you could offer any more color around that statement in terms of maybe what you're seeing in the new business pipeline. And I think Andy might have mentioned something about distraction from acquisition integration. I just want to make sure I'm hearing that all correctly and what other color you might offer on that segment.

Sure. Let me break it out in some pieces. It's a good question, Kevin. I expected that this would come up, if not today, then someday in the future. HPI certainly has had their challenges. And HPI today, you recognize is most of our - it's about half our Uniform business and it is our employee ID part of our non-health care side of our Uniform business. And as we've said on past conference calls, we saw the delays of 2017 and 2018s, and we see the pipelines fuller now. We have seen a lot of turnover among the people that we were dealing with. Really, literally, I've never seen anything like this before in our history. I personally believe it's a good thing. Yes, some of our relationships are changing out. But as I say so are the relationships with 94% of companies that we don't deal with. When you look at our market share, it's about a 6% market share on the Uniform side of the business. So I'm very excited that more opportunities than ever are in front of us. Certainly, there are some that are much bigger, and I look at those. You get one of those, it moves the needle a lot. And you're not going to get one of those every year. There aren't more than a few of those that even come up as a possibility in a given year. But every few years, we will win one of those, and that will - just as we did years ago with a major airline if you recall, right after we bought HPI and we had major quick service restaurant chain that they took on. And those things do move the needle, and they will, for us, in the future, too. But we're not…

No problem. No. That's a lot of good commentary and good information in there. So if I could just follow-up a little bit on some of that. I think in reference to the turnover in some of your contacts at your uniform customers, I believe you might have said in the prepared remarks some innovative go-to-market strategies. And I don't know if you've found different ways to protect the opportunity in light of current market conditions so any comment on that?

Yes. Well, the first part of that is getting in front of more people and having successful first meetings. And the Uniform side of our business, one of the exciting thing is that they have BAMKO as a resource. And BAMKO really is, as you know, was this branded merchandise but is almost very, very similarly run as an advertising agency, marketing agency. And so they've become somewhat of a marketing agency. And a matter of fact, we're going to be reorganizing some jobs over the next few months to take advantage of all the marketing capabilities we have, where we have graphic artists and we have marketing and digital capabilities kind of broken up throughout all the different companies. We're going to bring them together under a shared service but more of an agency approach. But there aren't very many uniform companies that have that kind of agency capability internally. And so the idea is to get in front of a customer and they're helping us be better at that. But also, once we're in front of a customer, to be more relevant and to provide materials and differentiation that sets us apart from everybody else who's getting in front of that potential customer. And then, of course, from a design standpoint, we feel now with what we're doing with Hanoi, from a product development standpoint and using all the tools of the company from a design standpoint, we have used even CID people to help us, who are basically been designing scrubs for the last 10 years, seven years, whatever. They've been helping us on other parts of our business as well. And I think there's going to be more and more of that which is only going to add to our success. And then there are a lot of other strategies some which I can't talk about. But rest assured that we're never sitting back saying, “Let's do next year what we did last year.” We're always looking for new ways to approach things and I think we have done that. I mean certainly, we're doing what everybody else is doing on the SEO and digital side to try to drive customers to us. But we know who the customer base is particularly on the HPI side. I mean, it's not - I wish I could tell you it's 10,000 potential customers, but it's not. It's less than 1,000 that we want to do business with, that we feel would be the right customers for us. So we pretty much know what every one of those customers is doing and with whom and when their contracts are up and what we need to do to get in front of them. Did that answer your question, Kevin?

Yes. That's great. That's really helpful. Thanks. So you continue to talk about the cross selling opportunities created by CID in terms of - to the laundries and dealers and new product development on that side. I mean, maybe just an update on how that's progressing. And does the new facility in Haiti tie into those efforts?

Let me answer the second part of the question first. The new facility in Haiti will be - is really being put there for CID's growth, also to give us a choice with non-dutiable countries or dutiable countries we happen to move product in dutiable countries to non-dutiable countries, just to have a lower cost basis. And CID has their production pretty set. But at the anticipated growth levels, we're going to need more and more and more production every single year. And we've got to stay ahead of that. And that is the reason for Haiti. Now the first part of your question, Andy is going to answer. Go ahead, Andy.

Well I think as far as the cross-selling opportunities, as Michael mentioned earlier, I mean, we've made some tremendous progress on that relative to CID and Fashion Seal Healthcare. I mean, those two teams have worked together better than anything I've ever seen before. I think those are - a lot of seeds have been planted, bringing products to both our customers that were starving for more of the retail inspired product that CID offers as well as us introducing CID into the laundries and other customers that we're dealing with. We're also seeing nice cross selling opportunities, continuing to see that between BAMKO, BAMKO's customers and our Uniform customers. We're very pleased with where that's at.

Yes, Kevin. The group at CID and Fashion Seal Healthcare, I would say, has spent - CID is in Dallas, and we're in Florida. But that hasn't stopped us. I don't think a day has gone by since its acquisition where we haven't been sitting with them or them sitting with us in each other's offices, working on strategies, visiting customers together, actually making determinations when there are opportunities to, how they might feed that through a retail or distributor or laundry in order to create loyalty with that customer base. I mean, they've done a fabulous job. Last year, it was kind of a tough year for CID. And I didn't mention this earlier, and probably I should have. But when CID went through this process of selling the company, the entire marketplace knew they were selling the company, knew they've been owned by a private equity seven years. They very honestly approached the market, their largest customers and said, “We're trying to sell the business.” So there's a certain amount of nervousness around that to begin with. And obviously, some of that nervousness was created by competitors who thought they would capitalize on letting everybody know that CID was for sale and what kind of disruption that would bring to them. And then of course, we bought them, bigger company, which worried some of those people and even worried quite some of the CID internal sales people. What's a big company going to do? They're going to get rid of our sales force. They're going to integrate them into their sales force, so they're going to start selling direct. And it took us about a month to put together, really, after that acquisition in May what our plans were, how we're going approach the market. I mean, we…

Okay, good. That's helpful. And thinking about your increased CapEx targets for the next couple of years, I'm trying to just think about what all factors into that? You talked about the new facility in Haiti. I mean, are you going to build something else for Remote Staffing in Jamaica? You mentioned some automation projects so just trying to get my arms around what all layers into those higher CapEx expectations.

Yes, Kevin. This is Andy. I'll start, and Mike could probably jump in with a little bit. The major projects there, we are updating the semi-robotic warehouse in Eudora, Arkansas. That's a project we've talked about that warehouse being state-of-the-art for years when we put it in probably back in the mid-90s, and it has served us very well. And in fact, today is still one of the most efficient warehouses out there in our industry. But this opportunity that we're investing in really gives us the opportunity to substantially improve that, to be able to much more efficiently deal with that, to handle greater capacity with better resources there. I think that will be a tremendous deal. That project will actually we'll end up doing in some stages where we'll do it side by side with our existing system. It won't be a situation where we shut the existing robotic system down one day and start the new one the next day. We certainly don't like to have those big bang type situations when we can avoid it. I don't think anybody has ever put a big bang warehouse in without creating disruption. So we're doing everything to avoid that and do it in stages. That project will likely take a couple of years. We'll start seeing benefit probably a little over a year from now whenever we put the - we'll have completed the first wave of that. You mentioned in Jamaica, there we're not building a facility there. We actually will be leasing a facility. That won't be a tremendous CapEx involved with that. Mike, do you want to touch on Haiti?

A lot of what we have is technology based, its technology in the warehouses, it's end of life for servers throughout the company, it's creation of a lot of these things we're doing and developing programs to run ERPs, to run BAMKO and web developments that we're doing that will carry us for the next few years. Of course, that will be an ongoing issue. Mike, can speak of Haiti because that's not actually - the equipment is CapEx, but the rest of it isn't.

Right, right. Yes. And what we're doing in Haiti, as Andy said, we're opening a manufacturing facility near where our other facility is in Haiti. We're going to lease the - it's a build-to-suit lease, if you will, for the manufacturing facility. We'll put the equipment in the facility. One of the upsides of - beyond the upside that Andy talked about with respect to doing this in Haiti, is we can leverage our back-office administration activities that we have in Haiti and be able to execute that facility at even lower cost than does an offshore or near-shore manufacturing facility provide us normally. So we have a relatively small investment with respect to machinery and equipment, not that much investment in the factory because that's going to be on a lease program. But we're excited about getting that opportunity underway in Haiti with our other facility there.

And of course, Kevin, the other investments we're making, we are wrapping up the SAP implementation at HPI, which will yield some significant benefits from an integration perspective with the rest of our legacy Uniform business as well as putting SAP in the CID, where, I mean, they really are in significant need of a new ERP system there.

The thing is we used to talk about when people ask us about CapEx, and you've asked us yourself, that our CapEx normally ran in that 1.5% range. And that about every five years or so, we have some big expense that, I mean, that's really what's happening this time, except we're taking that big expense and we're spreading it out over two years.

Okay, great. Got it. I guess I'll ask a few other numbers related questions here and related to the other segments, so you mentioned, I guess this is still Uniforms. But you mentioned you didn't realize full CID gross margin in the fourth quarter. I believe you mentioned some promotions and inventory clearance. I mean, is that kind of a normal fourth quarter type of occurrence or related to some of the distractions you've mentioned? Just wondering what was going on there.

Yes so direct answer to your question is no, not really. We don't see and anticipate that there's going to be a lot of margin drag during the fourth quarter with respect to sales at CID. Certainly, they do a little bit of promotion activity in the fourth quarter, but it's not that terribly seasonal of a business such that, that will occur routinely that's going to have an impact on the margins. This quarter, discontinued inventory was an impact that gave rise to a drag on margins. And the sales levels that we experienced or we realized at CID were a little lower than we typically would experience. So the amplification of the impact of discounted and promotional sales did impact the overall gross margin percent, the gross profit percent that we did realize. So the percentage of promotional sales were higher than what we would typically realize in CID than what we would see on a typical routine fourth quarter basis. Does that make sense?

Yes. Got it. Thank you. In Promotional Products, sorry if I missed this, but the gross margin came in at 30.7%. You had been running 26% to 28% through the first nine months of the year. So what accounted for that higher gross margin? Was it a mix, product mix or what was going on there?

Yes, primarily was product mix. So we have a couple of very large customers that are legacy customers within that business. But as we've grown that business, we've grown it with customers that provide us and afford us better overall margins. So as that mix changes and evolves, we've been able to see and enjoy higher overall gross profit rates. It's what we saw in the fourth quarter. And as we target customers that do have higher general gross profit opportunities to us that should continue to - we should continue to realize that.

Okay, great. And then you mentioned record bookings for BAMKO or Promotional Products in the fourth quarter. I mean, so I guess we should take that as even better than what you experienced in the third quarter in terms of bookings.

Correct.

Okay. So we should, I guess, see some continued momentum in that business early in 2019.

That would be the expectation.

Yes. Kevin, as Michael touched on briefly in his remarks, if I may add. BAMKO, we said earlier last year that they've gotten a little distracted with the acquisitions and had, for lack of a better word, taking their eye off the ball on the growth a little bit, put heavy emphasis in investing and growing and improving their sales force. And I mean, the results that we've seen in the bookings in the third and fourth quarter are a result, to a large extent, of that sales force. Investment in those people are - I mean, that team is doing very well, and we feel very good about it.

And getting better by the day.

Okay, great. And then you mentioned resuming the acquisition strategy in Promotional Products. Is that an indication, I guess, that you feel like you have the sales talent in place now? I think there was some - you've made some commentary about getting the various businesses in that segment on a common financial system. So let's say - I mean, I guess does that imply, if you like, you have the infrastructure in place now operationally where you feel comfortable with moving ahead with more acquisitions in that space?

Yes. One of the things that caused us to pause, not only the fact that they needed to really tie up on loose ends with the acquisitions they had done, but also was that they were in the last stages of development of their ERP system, which has been rolled out to BAMKO. We rolled out in the next couple of weeks to Tangerine and Public Identity, but it went very, very well at BAMKO. It was very well tested. That's one of the advantages of our staff being the ones who've developed it, is they could test each piece as they went along. And certainly, this is going to make them much more efficient. It's a much better idea for us to have everybody on one platform and be going to - and when we're - the sooner for our business to be able to show them what our capabilities are electronically versus the ones that they currently have. And what we've developed in our new product, which is called core, is I think, something far superior to what anybody has in the Promotional Products business. And so we become maybe - we have a little bit of advantage from a standpoint of where those business owners are looking to sell their business might want to join.

Okay, great. And then in Remote Staffing, you talked about continuing to invest ahead of growth. We saw a sequential increase in the SG&A expenses in that segment, which isn't uncommon. But is that kind of the expectation? As you continue to grow the top line so strongly, we'll continue to see some of those investments in SG&A and maybe continuing sequential increases on that line?

Yes. I think we'll continue to see that, at least for 2019, as we continue to grow that business. What we saw in 2018 was continued investment in some of the restructuring of how we go about bringing our call center agents in with respect to investment and training, some additional investments in leadership and the continuing growth of our Belize facilities. So as we continue to grow that process to support demand, you saw that increase in operating expense investment. As we grow and continue to grow demand in that organization, we will expect to see some degree of sequential OpEx growth moving forward.

Every one of those investments we make, whether it's in people, whether it's in CapEx, I mean, we look at it on an ROI basis, and we're pretty conservative in that regard. Whether we're doing an acquisition, whether we're doing CapEx, whatever, we expect a good return on our investments. And so we're not - really, that business has been great. It's been growing by a few hundred. I won't say exactly how many because I really don't want to give away that information to the public. But it's been growing but at least a few hundred each year for the last couple of years and actually could see even greater growth than that in the future. We've got to stay ahead of that. You think about every couple three years, we might have another 1,000 people, for instance, as an example. That's about as many people as we want to manage under one roof before we start looking for another location. So we're actually opening in Jamaica. And at the same time, we're looking for where we're going to be two or three years from now, where is our next location. It could be in Jamaica. It could be a second location in Jamaica, but Jamaica is not tried and true for us yet. So we're looking at other places, so we know what our alternatives are. So it's a constant process, great process. As good as that business is growing, I wish we had that in all of our businesses.

Okay, great. That's all I had. Thanks for taking all the questions.

[Operator Instructions] And this concludes our question-and-answer session. I'd like to turn the conference back over to Michael Benstock for any closing remarks.

Thank you, Andrea and sorry for jumping in there on you. We appreciate all of your time today, and we look forward to updating you on our first quarter 2019 results in April. In the meantime, enjoy the rest of your winter.

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