Superior Group of Companies, Inc. (SGC) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon, everyone. Welcome to the Superior Group of Companies 2019 First Quarter Earnings Conference Call. With us today are Michael Benstock, the Company's Chief Executive Officer; Andy Demott, its Chief Operating Officer; and Michael Attinella, Chief Financial Officer and Treasurer. After the speakers' opening remarks there will be a Q&A session. 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. This conference call may contain forward-looking statements about Superior Group of Companies business opportunities and its anticipated results and 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' quarterly report on Form 10-Q, 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 management makes today will relate to the corresponding period in 2018, unless otherwise noted. With that, I'll turn the call over to Michael.

Thank you, Hala and good afternoon everyone. Thank you for joining us to review our Q1 2019 results. My remarks will focus on performance highlights, strategic direction and market dynamics. Andy will then give you an update on our operational initiatives, and our integration progress, followed by Mike's financial review. The first quarter was a good start to 2019, and while we experienced what would appear to be some softness in our Uniform business during the quarter, we progressed well on our strategies to drive profitable growth across our organization. The first quarter does mark our 26th consecutive quarter of year-over-year sales increases, bolstered by record bookings quarter in our Promotional Products segment and solid growth and market penetration from the Office Gurus, our Remote Staffing Solutions segment. Our Uniform segment tracked well against our integration efforts. But as I just pointed out, our organic growth lagged our benchmarks for the quarter. In light of current revenue recognition rules, we don't believe that sales are good measure of customer demand, but rather shipments are a better proxy. Looking at our organic Uniform business, shipments were down 2%. Mike will discuss this in further detail shorter, but I believe this is a significant point to keep in mind under the current revenue recognition framework. Across our business segments, we are making the appropriate investments to broaden our capabilities, while streamlining operations, which is built upon our shared services model. We are already seeing tangible results from the stronger sales strategies at BAMKO as a result of a more aggressive keen focus on organic growth. With this momentum continuing to build, we expect to be able to capitalize sooner on additional operational efficiencies. We will continue to monitor the market should compelling acquisition opportunities arise. But at this point, we are very focused on our business to drive higher top and bottom line organic results. We are making headway on many of our internal objectives to create stronger organic growth within our Uniform segments as we manage through newer and stronger sales strategies put in place in 2018. Andy will provide more detail on these initiatives, and our integration progress in his remarks. From a macro environment perspective, we've stayed ahead of additional potential trade tariffs as discussed last quarter, maintained pricing discipline and continued to address customer churn in our end markets by focusing our channel penetration in the mid-to-upper deal size range. This is our sweet spot, and it is already netting a higher volume of opportunities and business wins. In addition to focusing on our sales strategies, we are working hard at elevating our existing team, enjoying top talent to join us, while at the same time creating efficiencies through automation and leveraging our offshore operation for additional support. To summarize, our efforts are focused on driving improved organic sales growth, continuing to strengthen our sales force, executing on our operational strategies and reducing our debt leverage. This also includes aggressively managing working capital and inventory to yield the best overall results for the business. Our new business pipeline is robust, and we have closed on deals within our sweet spot and expect to win additional new business in the coming quarters. I will now turn the call over to Andy, and then I'll return with my closing remarks after Mike provides the financial overview.

Thank you, Michael. And good afternoon, everyone. My comments today will focus on our key operational and integration highlights for the quarter. Let's take a look at our segment performance. Our Uniform segment, Superior Uniform Group comprised of HPI, Fashion Seal Healthcare and CID Resources, delivered a net sales gain. This was primarily due to the acquisition of CID. As Michael mentioned, we are working through several strategic initiatives, laying the foundation for meaningful improvement in organic sales and overall improved operations. CID and Fashion Seal Healthcare are working together to expand cross-selling opportunities with each of their customer bases. We are seeing good traction from this collaboration and our refreshed product lines and high interest -- and high market interest for CID's new product introductions that are launching in the near term. We believe these types of collaborative efforts as well as shared services driving a more effective marketing effort will result in stronger organic sales results in future periods. Organizationally, we're building a stronger business model at CID to handle higher levels of growth. That will take some time, though we are already utilizing some shared services to unlock value and capture cost synergies. We will see the results of these efforts in the coming years with our sourcing capabilities and warehouse management, which will provide more efficiencies with respect to the technology upgrades that are in process. And as we mentioned last quarter, we accelerated SAP integration and expect to complete that by the end of Q1 2020. Our near-shore factory in Haiti is also progressing on schedule and that should come online by the early part of third quarter with cost savings expected to be realized next year. Of greater significance, the new facility will align CID more closely to their supply chain. This will create rapid fulfillment capabilities as well as improved working capital and inventory management. CID is on a good track and in better position to resume higher sales going forward. Our sales efforts at HPI are now focused on opportunity sets in the $500,000 to $5 million that yield the greatest volume of success by filling the pipeline with these mid-tier accounts. We expect to see improved win rates and gain market share. Our shared services platform is creating value across our organization. Our technology investments are underway to update our semi-robotic warehouse, parts of which will more than double our capabilities. This state-of-the-art automation will ensure efficient operations well into the future. The ERP implementation at HPI is also tracking well and will be completed later this year. Turning to BAMKO, our Promotional Product segment, as Michael said, they posted a record quarter for bookings. They delivered another strong quarter of organic sales growth, and we are pleased with their success. We continue to actively pursue season sales representatives to further advance BAMKO sales initiatives to grow the business. We completed the implementation of BAMKO's in-house developed ERP system and the implementation is running smoothly in all divisions. The overall integration of Tangerine's business is almost complete at this point, and we are now starting to realize synergies and should see a higher level of that in the second quarter and as we move forward through the balance of the year. Cross-selling is another element of our sales strategy with active engagement across our business segments. We are capturing wins from these efforts, and we see more opportunities on the horizon. The Office Gurus, our Remote Staffing segment, saw another strong quarter. This segment sustained robust customer demand and the new Jamaica facility welcomed its first employees. We are positioned well for growth, while scale continues to improve operating results as we move forward. Now I'll turn the call over to Mike for the financial highlights.

Thank you, Andy and good afternoon, everyone. We filed our 10-Q for the first quarter ended March 31, 2019 this morning, so I'll limit my review to key income statement and balance sheet highlights. As a reminder, as of January 1, 2018, our results reflect revenue recognized under the accounting standard ASC 606. Among other things, this standard requires companies to recognize revenue for contracts with customers, in which there is an enforceable right to the payment for goods with no alternative use when the finished goods are received by us, rather than when the goods are transferred to our customers. This type of contract is prevalent in our Uniform business, and to a lesser degree, our promotional business. This change in timing of revenue recognition can make it difficult to use sales as a metric to measure customer demand. Further, sales under ASC 606 are affected by changes in purchasing patterns that may not be aligned with customer demand. For instance, as we execute our objective to accelerate inventory turns, sales fluctuations may occur in our year-over-year sales that aren't representative of changes in our business performance. During the next 12 to 18 months, we expect to reduce merchandise inventories by approximately $10 million, from which we may continue to see a negative effect on GAAP sales that isn't indicative of customer demand or product shipments. For further ratification, a reconciliation of Uniform segment GAAP sales and shipments of the Uniform segment without CID is provided on Page 31 of the Form 10-Q that we filed this morning. And of course, I can elaborate further during the Q&A session as needed. Now with this in mind, let's review our quarterly financial highlights. Net sales for 2019's first quarter increased 18.4% to $86.6 million, with our Uniform-related product segment contributing 14.4%, our promotional product segment adding 2.3% and our Remote Staffing Solutions segment contributing 1.7%. Uniform's and related products net sales increased 21.9% or $10.5 million compared to Q1 of 2018. The acquisition of CID contributed 33.5%, which is offset by timing differences in revenue recognition between the first quarter's March 2018 and '19, contributing 9.5%, and reduction in sales resulting from shipments within our Uniform business exclusive to CID of 2%. The Office Gurus sales were up 19.5% and sales of BAMKO were up 9%. Consolidated gross margin for the first quarter was 35% compared to 34% a year ago, resulting from gross profit improvements across all segments. The result of changes in pricing, customer product mix and the acquisition of CID, whose direct healthcare business realizes higher overall gross margin rates, and our other Uniform businesses. As a percentage of sales, consolidated SG&A increased to 29.9% compared with 29% in Q1 of 2018. These increases were the result of changes in sales mix, investments to support growth within all business segments, integration and development costs related to the earlier referenced projects, the amortization of intangibles related to the CID acquisition and lower SG&A leverage in CID business compared to our other Uniform businesses of note, we continue to realize benefits of scale within our Promotional Products segment resulting in 190 basis points improvement. And similar to what we realized within our Promotional Products segment, we anticipate that the infrastructure and business process investments that Michael and Andy spoke about earlier, will yield SG&A cost efficiencies within our Uniform segment and our overall business as these projects are completed. Operating income increased 15.3% to $4.1 million and operating margins were 4.8% for the quarter compared to 4.9% in 2018. Interest costs resulting from the CID acquisition financing gave rise to $1.2 million of interest expense compared to $277,000 a year ago. Our effective tax rate for the quarter was 20.2% compared to 26.2% a year ago. The change in the rate was principally the result of the effect of foreign and state and local taxes between the comparable periods. Overall net income and diluted earnings per share were $2.4 million and $0.16 in both comparable periods. Now turning to the balance sheet. On January 1, 2019, we adopted a new lease accounting standard, ASC 842, which requires us to record the present value of operating and direct financing leases on our balance sheet. The impact of the new standard is the recognition of the right of use assets of $4.6 million, a current lease liability of $1 million and a long-term operating lease liability of $2.9 million. Cash and cash equivalents increased by $1.4 million to $6.8 million. Additionally, the current portion of long-term debt increased by $9.3 million, reflecting the current portion of our $65 million term loan, which has a 7-year maturity. For the first quarter of 2019, we declared a cash dividend of $0.10 per share, or $1.5 million, an increase of 7.1% over the first quarter of 2018. Lastly, as we discussed during our last call, our planned CapEx for this year will exceed 2018's, as we invest to improve operational efficiencies and innovation across the enterprise. Our CapEx for 2019 is approximately $11 million, and our CapEx investments were $1.7 million for the first quarter of 2019 compared to $1 million in the comparable quarter of 2018. I'll now turn the call back to Michael for his closing remarks and a general outlook for the remainder of the year.

We feel good about our prospects as we managed through what is truly one of the largest endeavors ever to transform our enterprise to harness our brand-building and customer-centric expertise. The investments we are making in sales execution, technology enhancements, operational efficiencies and cost synergies will position us better than ever to reach our next level of sales growth and improved profitability. As I mentioned, we have shifted our primary focus toward organic growth and we're taking a longer pause on pursuing acquisitions, unless a very compelling opportunity arises. We are continually reviewing and adjusting our business strategy, making the shift changes needed, to refine and optimize our strategic direction, to enhance operating performance, ultimately to deliver long-term sustainable growth and shareholder value. Customer satisfaction is at the center of our business, with our work geared towards existing customer expectations, driving deeper relationships and helping our customers unlock the value of their brands. We appreciate all the contributions from our SGC team members, almost 3,000 and strong now, for their hard work and continued commitment. With that, we'd like to open the call for your questions.

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] And your first question will be from Kevin Steinke of Barrington Research. Please go ahead.

So you mentioned in your prepared comments that newer and stronger sales strategy in Uniforms and you touched on some of the key points of that on your last call. Can you just give us more of an update on some of the initiatives you are implementing on the sales side, on the Uniforms -- and the Uniform segment? And how they're progressing and how you see them yielding, perhaps, better growth in the coming quarters?

Sure. A few years ago, when we had -- went through some hyper growth back in 2014-15 with HPI, which is a segment of our -- or the portion of our Uniform segment that sells to employee-facing uniforms, we really started to focus our attention on much larger accounts. We might've even spoken about that in a conference call. And we were much bigger company then. We felt like we could take on the world even much bigger opportunities. And those bigger opportunities come, but a couple of times a year because the larger companies or maybe big airline companies, large transportation companies don't necessarily go out to bid very often and they are fewer in number than what we consider our sweet spot to be of -- people would buy $500,000 to $5 million of Uniforms. The -- so what I'm saying is the potential customer might buy $10 million, $20 million, $30 million of uniforms are few and far between, but we felt that we were capable of doing that kind of business, we have a couple of accounts already that we do that kind of business. What we found was that there's a lot of competition for that business. We are not the only ones out there. We are not the biggest that are trying to garner those opportunities and win them. But in the $500,000 to $5 million slot, there is many those that come up every single year. And in fact, for the companies that do go after that business, we are one of the largest. And we're safe choice, besides being the best choice, we're also a safe choice for many of those potential customers. So we started shifting our strategy during the middle of last year. It's taking some time. We have won some opportunities as a result of that, which you will see -- they're not the $10 million rollouts, Kevin, or even the $5 million roll outs. It's a continuation of good solid business between that $500,000 and a few million dollars that we spoke about. But it's much more sticky business. As I said, it comes up more often. I think we have a competitive advantage with those types of accounts. So we're back to our core strategy of not taking our eye off the ball of what really is good for us. And we go through this every couple of years of evaluating what we're doing, what business we're actually doing, what business we're going after. It's an ongoing process for us that began really in 2003, and this is just a shift in our strategy that we believe, ultimately, will result in more closings.

And you also talked about how you believe CID is now better positioned for better growth or higher growth going forward. Last call, you talked about just some of the integration or distraction from the sales process that they went through and you've talked about a number of initiatives there, the Haiti facility, I think new product development, so maybe just expand on what's going on with CID? How you believe or what you believe is going to lead to better growth there going forward? And maybe how quickly that can materialize for you?

Yes, the power of SGC behind CID can't really be -- it is such an advantage to what they had prior to the acquisition, just can't underestimate what the potential is. With our ability to finance, with our ability to source, our taking over a fair amount of their operations, although, they're building operational efficiencies in and by themselves with our help, the integration took that will complete towards the end of the year or the beginning of next year. Certainly, SAP will certainly help them greatly create operational efficiencies to be more profitable, to be more competitive. But really what has happened is because we've taken the lion share of responsibility for supporting their operations in so many different ways that their senior leadership has been able to focus more on sales and product development. And they really have, I think hit a home run in the latest offerings that they put out in the marketplace with respect to what those will yield from a sales dollar and a future sales dollar standpoint. They've come out with some collections that have been very well received by the marketplace, come out with some products that in cooperation with Fashion Seal Healthcare, we should start seeing some significant sales from those, particularly in 2020. Those products were at the design stage, testing stage and everything, as I said that first year, which is about now. We have purchased orders for fabric. We'll be rolling those out in third quarter. It's going to take a little bit of while to build the ground swell for those, but we're very, very confident that those are products that are needed and desired by the markets that we will be selling those in, and which we will first launch in June. And we feel very, very confident that, that will bring significant revenues to them. You will see some of that in early 2020, by late 2020 you should see some very, nice growth in this division. And we're not going to sit here and talk about what that's going to be. It's certainly going to be -- our guidance with respect to our uniforms, overall, is staying the same for now. CID, Fashion Seal Healthcare, the combination, will be a very big part of that and will be probably the largest part of that.

And also discussing another one of your fairly recent acquisitions, Tangerine Promotions. You mentioned there that the integration of that acquisition is almost complete, and you feel that integration should lead to better growth for that business. So maybe just walk through some of the mechanics of how completing the integration can, maybe, boost growth in that particular business going forward?

Kevin, I don't think we were saying that the integration was going to boost their sales growth pertaining to Tangerine that was going to improve the operational efficiency, which certainly makes it more competitive and could help sales growth. Really where were talking about the sales growth coming from in the BAMKO, Tangerine arena is where they're working together as well as bringing on more seasoned sales representatives in order to increase that organic growth that way. It's really not directly related to the integration.

There is, BAMKO brings a lot of operational efficiency to Tangerine or to anybody they would acquire. They did to Public Identity as well because their ERP system, very efficient, their task management -- there are so many components, their web, everything, all their development for all their processes, the fact that they're using our shared warehousing, which Tangerine is using now. So we do bring a lot of capabilities to Tangerine that allows them, as Andy said, to focus on their sales and not have to focus internally on their operations. And while doing so, they're also creating operational efficiencies, which ultimately, should result in us being more competitive and more profitable.

And I guess following up -- the Promotional Products area. Where you specifically talked about emphasizing organic growth going forward, may be deemphasizing acquisitions, I mean is that more specifically related to Promotional Products? Previously, you talked about a goal may be 1 to 2 tuck-in acquisitions in promotional products a year. Is that kind of where you see the biggest shift, perhaps, in terms of more focus on organic growth versus acquisitions?

Yes. We're not going to stop evaluating acquisitions. Should something come along, that is so accretive and so desirable, gives us some capability that we just simply can't walk away from it. But at this point, we're so focused outwardly on what our capabilities are organically. There's consensus among us that getting involved in an acquisition, all that takes, the diligence, the integration afterwards would be a mistake. We've got plenty on our plate right now. I think we've heard it loud and clear from the market that we're expected to focus on the deliverables as we've already spoken about in previous conferences and on one on ones, and we're very, very focused on that. So I don't see anything happening. I really didn't see for a long time anything happening on the Uniform side that although, I said that I think 2 years ago and then CID came along, which is a market that we desire very much to be in. But I don't see anything coming along anytime soon. There is nothing on the horizon -- on the near horizon. And I think our -- if something's going to change in our guidance, it hasn't yet. The concept of 1 to 2 acquisitions per year is on pause now, so that will certainly affect the 1 to 2. It could be down to 1 over the next couple of years. It all depends on finding the right acquisitions, but nothing in the near term.

And is that deemphasis of acquisitions also, perhaps, due to shifting priorities for use of capital in terms of, maybe, the desire to pay down debt. So maybe any comment on that would be helpful?

Kevin, this is Mike. To some degree, yes. But the other part of the deemphasis of the acquisitions is really more of a focus on our opportunities that we identify on the organic growth side. As Michael said, we do see a great opportunity with the business plans that BAMKO has developed to grow our businesses more organically, and that's where we see the best use of our time, the best use of our capital is to invest in that side of the business. Certainly, we do have an aggressive expenditure plan this year with respect CapEx and the development of our resources internally to improve our ability to service our customers through our warehouse expansion and our technology investments. But we do see that our focus is best served with focus on our organic growth strategies and plans across various segments.

[Operator Instructions]. And ensuring no additional questions. We will conclude the question-and-answer session. I would like to hand the conference back to Michael Benstock for his closing remarks.

My closing remarks, I usually wish everybody well and see you at the next quarterly results conference. But I do want to make mention that we had a very seasoned executive of 44 years, retired from the company last week, Mark Decker, having spent 44 years working alongside -- well 40 of the 44 working alongside Mark. Very proud of his accomplishments over the years as our CIO, prior to that as our Chief Engineer. Mark is a large part of the reason why we have been so successful for so many years. And he has left his area in very capable hands with very strong staff, and I know that we'll still be very much in touch with him. But I wanted to thank him for his very many years of service and wish him well. And I'm sure he'll be listening to this call. And well we look forward to updating you on our second quarter 2019 results in July. Thank you.

Thank you, sir. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.