Superior Group of Companies, Inc. (SGC) Q4 2019 Earnings Report, Transcript and Summary

Good afternoon, everyone. Welcome to the Superior Group of Companies 2019 Fourth Quarter and Fiscal Year-End 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 don't, then simply drop off the line.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, ma'am.

Thank you. This conference call may contain forward-looking statements about Superior Group of Companies' business opportunities and its anticipated results from 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 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 again for joining us. Today, I will discuss our execution against our strategic growth initiatives, performance highlights and the current macro environment, after which, Andy and Mike will provide operational and financial details during their respective remarks. 2019 was underscored by many successes during this transformational year, which positioned the company well for sustainable growth and overall improved operating results.We reported top line growth for the fourth quarter and the year, while executing multiple strategic initiatives. As they look at the business holistically, our key pillars are to strengthen our leadership, optimize our organizational structure, improve our systems and processes, elevate our innovation and automation, and renew our entrepreneurial drive for our next phase of development and growth. We have been a bit, very ambitious in our undertaking this past year. But we completed much of the heavy lifting to support our long-term objectives. I am proud of the significant progress made and appreciate the collective efforts, hard work and sacrifices of our teams who brought many projects in every division over the finish line.I would like to review several of these key accomplishments at a high level, and Andy will provide additional details in his remarks. We restructured the management team at HPI and completed the consolidation of Superior I.D. and HPI as one customer-facing entity with a more disciplined sales approach and a robust pipeline that has already accelerated more wins. Of note, the team began its largest rollout refresh ever of a customer program in Q4, which is now nearing completion.Next, we realigned the management teams at CID and Fashion Seal Healthcare to leverage sales and product strategies as well as capitalize on CID's founders, product development and leadership. We have also utilized CID's design team to drive cross-selling opportunities, particularly with Fashion Seal Healthcare. Another key appointment that came from the CID acquisition is our new Chief Marketing Officer, James Shimizu, who comes with a world-class background as a marketing leader to drive all of SGC's divisional marketing strategies as we continue to innovate and differentiate ourselves in very competitive markets.Our second Haiti factory at CODEVI is complete, and scaling its workforce to meet production needs for CID. The Office Gurus also opened its newest location in Jamaica and is well positioned to meet expected strong demand. We finalized the implementation of several system conversions, which Andy will discuss further in a moment. Amid these investments, we recognize the need to set the highest professional standards for ourselves as we grow and top-grade the organization in terms of quality and diversity of our team, training and development and leadership excellence.To that end, we expanded our human resources capabilities through exceptional senior leadership that is already driving organizational effectiveness and renewed fervor across our company. We are excited about our enhanced capabilities to attract and develop the talent we need to prepare us for our next phase of growth. Lastly, and importantly, we continue to receive top accolades across our brand-building platform. Our teams were recognized for many awards in 2019, which I'll highlight, just a few. We again received top honors at the Uniform Association's 2019 NAUMD Image of the Year Awards.We are honored with prestigious awards for 3 of our esteemed uniform brands, Fashion Seal Healthcare, WonderWink and Carhartt. 3 separate publications, including counseling magazine in the Los Angeles Business Journal recognized BAMKO being a top place to work in Los Angeles. Now this is for the third year in a row. Also to note, BAMKO won the industry awards, PPAI Awards for best branding Pyramid Awards they call them. And that was more than any other distributor and the entire industry won. We are also very excited to say that in 2019, The Office Gurus was named the best global call center and business process outsourcing provider by Latin America news.This is an incredible accomplishment. These are all tremendous honors that elevate our entire organization and validate our commitment to elevate our customers' brands, however, we touch them. As you can see, we are taking a very targeted and methodical approach to transforming our business, creating an empowered culture and a deeper moat that strengthens our competitive position and propels our company for long-term sustainable growth, profitability and efficiency that benefits all stakeholders.Looking to global macro conditions. We are closely watching the evolving coronavirus outbreak. Foremost, our primary concern is for the health and well-being for those directly affected. Our employees and partners on the ground are keeping us abreast of the current conditions as the situation continues to develop. A protracted disruption to supply chains would affect our industry and many others. We are proactively reaching out to customers to assure them that we are closely watching the developments and have inventories to support their near-term needs. In the event of an extended supply chain disruption, there could be challenges that develop, and we are assessing possible impacts to raw material sourcing and potential delays.Keep in mind, during our almost 100 years in business, Superior has been resilient in the face of unforeseen macro situations, managing well through these events that ultimately put us in a much stronger competitive position afterwards. We continue to enjoy a strong U.S. economy. And the need for health care professionals is tremendous affecting 2 of our largest divisions. The demand that we are seeing in both our Promotional Products and Remote Staffing Solutions segments are also powerful drivers for the company.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 discussion will center on our key operational and integration highlights for the quarter and fiscal year. As Michael stated, we accomplished a great deal, executing against our strategic initiatives during 2019 to deliver consistent, profitable results for years to come. As noted, we finalized the implementation of key system upgrades with minimal disruption to the business. The SAP implementation at HPI advanced significantly and is nearing completion with only a few customers remaining to transition. The WMS and SAP implementations for CID are now complete and will provide improved efficiencies and inventory controls.We restructured our web services capabilities to achieve better efficiencies by closing our Costa Rica subsidiary and move in support of our legacy uniform websites to our India location. Additionally, we initiated development of a unified back end for our uniform websites to streamline the website creation process as well as providing a more efficient management of website maintenance. Construction is underway at our Eudora, Arkansas facility for the additional capacity expansion and technology upgrades of our robotic fulfillment warehouse.The modernization of the warehouse is an integral part of our shared resource strategy that will support both the Uniform and Promotional Products segments. The expanded facility and cutting-edge technology will yield robust benefits for efficiency and fulfillment capabilities. When taken as a whole, our investments in technology and talent, fortify our shared resources capabilities and will drive greater efficiencies and position us for sustainable future success.Now let's take a more detailed look at each segment. Net sales in our Uniform segment were relatively flat for the fourth quarter and fiscal year. As Michael mentioned, the segment benefited from its largest uniform rollout ever of a customer program that was largely completed in Q4 and extends into Q1 of this year. SGC is proud that this is the most eco-friendly and sustainable rollout in our history with approximately 5.5 plastic bottles recycled in each of the 1.6 million uniforms that were produced. David Schechter, President of our HPI, has reenergized his team in creating a robust pipeline and better operational efficiency in our employee ID channels.We are seeing more business moved through the pipeline stages at an accelerated pace leading to higher win rates. HPI's SAP platform is a valuable tool that also allows the team to seamlessly manage accounts more effectively. CID leadership was elevated in multiple ways, including the appointment of Peter Benstock as President. He is pulling in the best-in-class resources from both Fashion Seal Healthcare and CID to leadership positions. The unified organization has been galvanized and is very enthusiastic about what is possible. They are refocused on design leadership, which is invigorating customer relationships, and driving cross-selling opportunities.Our operational investments in CID have equipped the business to resume its growth trajectory, and the team is working hard at designing multiple new collections for the coming year. We opened our second factory in Haiti, exclusively for CID products which will support this growth while delivering operating efficiencies. We currently have more than 140 employees in place and expect to scale to 600 employees by the end of 2020. This facility will benefit CID in many ways including a gross margin improvement as a result of the duty free production there and quicker fulfillment capabilities.The shorter lead time for production of product in Haiti will help reduce working capital requirements for this part of our business, and equally important, will shorten the length of time that we are required to make product decisions for CID. This will also allow us more time to gather information to making product decisions and should help to reduce future inventory related reserve requirements. We are excited to announce that our indie line is ready to go into full production in the next couple of weeks and will roll out products in third quarter 2020. This new line is generating significant interest and fills a void in the marketplace for a fashions scrub that can withstand the harsh requirements of the health care laundry system. We are very optimistic about the prospects for this new product offering.We also completed the rightsizing of our domestic workforce and achieved a multimillion-dollar reduction in payroll. Shifting to our Promotional Products segment, BAMKO under Phil Koosed's leadership, delivered a record year with 32.9% revenue growth and it's close to go to $107 million for the year. They had an exceptional fourth quarter, delivering a 54% increase in net sales. We continue to aggressively hire additional seasoned sales representatives to maximize growth momentum. As this segment accelerates its growth and is able to capitalize on our share resources strategy, we expect to see improved operating margins as well as a balanced mix of customized product offerings, thereby improving the segment's overall profitability.Our Remote Staffing Solutions segment, The Office Gurus, led by Dominic Leide, continues to grow steadily and our proactive stance to stay ahead of customer demand through capacity expansion positions us well to capitalize on the small seat niche of the market we serve. We expect 2020 to be a very strong year for SGC. In summary, we re-engineered our business processes, improved cost controls and implemented productivity-enhancing collaboration tools across our enterprise.Now I'll turn the call over to Mike for the financial highlights.

Thank you, Andy, and good afternoon, everyone. As noted earlier, we filed our 2019 10-K this morning. So I'll limit my remarks to address key income statement and balance sheet items for the quarter and fiscal year.Let's begin by reviewing the fourth quarter. Net sales increased 14.1% to $108.4 million. The largest contributor was BAMKO whose 54% fully sales growth accounted for $12.9 million of the $13.4 million increase. Uniforms' quarterly net sales were down 1.1% to $63.2 million, while The Office Gurus reported a solid 17% gain. And as we routinely reported during these calls, the comparative impact of ASC 606 during the quarter was favorable to revenues in the amount of $506,000.For the fourth quarter, we reported consolidated gross margin of 32.2% compared to 35.5% a year ago. Additional inventory charges and reserves within our Uniform segment and a greater sales mix from BAMKO, which operates at lower gross profit rates on other 2 segments, contributed to this change. Selling, general and administrative expenses increased to $29.3 million compared to $26.7 million a year ago. The increase is largely due to enterprise-wide investments to support growth, severance costs and increased bad debt reserves within our Uniform segment.As a percentage of net sales, consolidated SG&A improved to 27% from 28.1% in 2018. Operating expense leverage came from greater sales volume, and we should see further improvements as our businesses scale. Income from operations was $5.6 million and operating margin of 5.2% for the quarter compared to 7.4% in 2018. The impact of gross margin mix as well as higher overall operating expenses affected these results. Overall, we reported net income of $2.9 million compared to $4.6 million a year ago. Diluted earnings per share was $0.20 compared to $0.30 in 2018.Earnings were impacted by the aforementioned increase in inventory and severance charges, plus additional periodic pension costs of $584,000, which in total accounts for a $0.09 swing for the quarter. Our effective tax rate for the quarter was 25.8% compared to 19.5% a year ago. The change in the rates was principally the result of the effect of fine, state and local taxes between the comparable periods. We also paid a regularly quarterly dividend of $0.10 per share.Now let's shift to review our full year highlights. On a year-over-year basis, net sales are up 8.8% to $376.7 million. The increase in net sales is driven by the effect of the CID acquisition in May of 2018, which contributed 5.8%, offset by lower legacy uniform sales, $13.5 million of which related to the difference in timing of revenue recognized in our ASC 606 on a year-over-year basis. In total, Uniform's net sales were essentially flat at $237.6 million. BAMKO closed on a record year, posting an increase of 32.9% and TOG posted an increase of 16.5%.As a percentage of net sales, consolidated SG&A increased just 56 basis points to 28.5%. This increase was a result of increased operating expenses incurred to support growth and improve overall business processes. CID's operating expense growth and other charges during the year, such as severance, increased bad debt expenses and non-comparable adjustments to acquisition-related contingent liabilities, all of which were partially offset by CID acquisition cost incurred in 2018. Fiscal year 2019 operating income was $21.6 million compared to $25 million a year ago.And 2019 operating margins were 5.7% compared to 7.2% in 2018. 2019 periodic pension costs were $2 million compared to just $400,000 in 2018 and interest expense was $4.4 million for the year compared to $3.2 million a year ago. The effective tax rate remained relatively constant at approximately 21%. So overall, net income for the year was $12.1 million compared to $17 million in 2018. Diluted earnings per share was $0.79 compared to $1.10. Net income for 2019 was impacted by the variance of timing revenues recognized under ASC 606 that accounted for $0.22 of this variance compared with 2018, in which ASC 606 contributed $0.04 of earnings additionally, while we benefited by higher overall sales, margin compression, higher SG&A charges, periodic pension costs and interest expense contributed to the EPS results for the year.Now for a few balance sheet highlights. Our balance sheet and liquidity remains strong as we conservatively manage working capital. Working capital was $142.4 million as of December 31, 2019, a decrease of 5.6% compared to last year. We finished the year with cash and cash equivalents of $9 million, an increase of 68.6%. And net of cash, our total borrowings decreased from $112.2 million in 2018 to $110.3 million in 2019. During 2019, we paid cash dividends of $6 million, an increase of 3.4%.Our CapEx investments for the year were $9.7 million compared to $4.9 million a year ago. Our capital expenditures were lower than our plan of $11 million, but higher-than-our-normal spending on maintenance capital of 1.5% to 2% of sales annually. Capital growth projects will continue through 2020 at a rate of 2.5% to 3.5% of sales to support our infrastructure growth, realized cost and operational efficiencies and improve our speed to market across our business segments.I'll now turn the call back to Michael for his closing remarks and a general outlook for 2020.

Thanks, Mike. As we enter in the next decade, the disciplined strategic initiatives put in motion has set us up as what some have called us in our industry, the 100-year startup. We're very proud of our past, and we're even more energized by our future. Our long-term 5-year goals reflect our previously stated objectives of 8.5% organic revenue growth. As we expand relationships with our customers to include uniform and promotional services, the relevance of the origin of our customers' relationships and the resulting segment revenues become a bit muddled and less important than does the entire suite of services we render the customer across all of our platforms.Therefore, over time, segment guidance could become a less relevant metric than is enterprise-wide growth. For the time being, we will continue to give guidance as we have in the past, with respect to our anticipated 5-year revenue outlook. And in effect, that hasn't changed. But we started to bring a bit more clarity for your benefit. And our updated goals are that in January of 2025, when we look back 5 years on revenue growth, we expect to have achieved an organic 5-year CAGR of 8.5% on a consolidated basis.Additionally, our goal is to achieve sustainable operating margins for our consolidated business by 2024 of 8% to 9%. We are stronger than ever in many ways and remain very optimistic as we move our brand-building business into the next century. I applaud our team members for their continued dedication and drive.With that, we'd like to open the call for your questions.

[Operator Instructions] And today's first question comes from Kevin Steinke of Barrington Research.

So I wanted to start-off by talking about your Uniform segment. You mentioned in the prepared remarks, seeing more business move through the Uniforms pipeline at an accelerated rate with higher win rates. And I know you also said maybe over the longer term that the segment level growth guidance may become less relevant. But given those comments on the pipeline and win rates, do you think we're at a point where we can start to see the Uniform's organic growth rate kind of trend towards those longer-term targets that you've noted in the past, following kind of flattish to slightly down in 2019?

Certainly, Kevin. Thank you for the question. Yes, that is the answer. We do expect them to accelerate. We have not given up on our original guidance of our uniform business growing at 6% per year. We think that it is highly achievable. And we're seeing light at the end of the tunnel, so to speak, with things really moving in the right direction, really on all fronts of our uniform business, the collaboration between Fashion Seal Healthcare and CID has been phenomenal under Peter's leadership.And we see the same thing under David's leadership at HPI. It's a whole new mindset with the new sales leadership he has there. We are definitely driving more opportunities. We're getting in front of more people. We are winning more business. We're bringing business finally to a close that's been sitting out there for some time in its state of progress towards finally closing it. So feeling very, very comfortable with that, and for the short-term and the long-term play, frankly.

Okay. Great. So I don't want to, I know you look at things on a longer-term basis. But I, it seems like perhaps 2020, you could perhaps return to some positive organic growth in that business. Just given kind of the tone, I know there's sales cycles and the length of those play into that. But I suppose, is it a reasonable expectation to see a better growth in that business in 2020 versus 2019?

Yes. To give a little bit of color to that. First quarter, we don't usually speak about quarters, but we did speak about a rollout that was going to be extended from fourth quarter last year to first quarter of this year. So we'll get a little bit of a benefit from that. But more so, we see the second half of the year, really, things starting to get more exciting. And so you know what our cycle is. We've talked about it before that the cycles, the sales cycle itself can be 2 years. And then the actual manufacturing cycle is generally around 6 months, 6 to 9 months until we actually roll out a program. So things happened long in advance. So we have pretty good visibility to what should happen later on this year. And we're feeling, absent any apocalyptic events, we're feeling pretty good about it.

Okay. Great. That's helpful. So I just wanted to circle back on something that impacted third quarter, namely your conscious decision to reduce merchandise levels in the Uniforms business, and just given the mechanics of ASC 606, the impact that had on growth in prior quarters. Are we kind of, have you accomplished everything you want to with the merchandise inventory reductions, and therefore, should we expect to see less volatility related to ASC 606 in the numbers going forward?

This is Michael. I'll let Mike jump and then second, Andy. But our goal is to always rightsize our inventories and also to protect our customers from a risk standpoint in the event of any happenstance around the world such as we have now with coronavirus. It makes sense for us, if we don't need the inventory to turn it to cash. And quite frankly, with the SAP tools now that CID has and HPI has, we should see an improvement of our inventory turns. And improvement in our turns ultimately will mean a reduction to our inventories, which will at least on paper, make it look somewhat negative with respect to our revenue, but it's the right decision to make for our shareholders and for us. And Mike?

Yes. Kevin, this is Mike. I agree completely. I mean, we've continued to try to be as aggressive as we can to manage our inventory and our contract assets, holding as much inventory as we need, but not much more than what we need to support our customers consistently and effectively. So we will continue to drive as best we can to increase our turns and keep our inventory and our working capital at levels that make sense for us and the tools we've invested in will allow us to do that more effectively.

Okay. Great. That makes sense. All right. So in terms of the margins in the Uniforms business, you've talked quite a bit about just the overall competitive environment and pricing pressure, et cetera. I mean are you seeing any of that having a meaningful impact on your business recently or in the most recent quarter? Is that something you still view as manageable? Maybe just any comment on the pricing and competitive environment in the Uniforms business?

It's Mike. It's always been competitive, sometimes a little bit more than others. It's certainly, we don't see it behaving irrationally right now. As a matter of fact, of late, at least, looking at past results, more or the same, as we've reported in other quarters. Right now there seems to be a concern on many people's part with respect to whether they're going to have merchandise in that. So we're seeing more opportunities than ever that we have not even been able to see in the past from our competitors' customers with concerns that this could turn out like the cotton crisis did years ago, where we were the only ones prepared to really service many of these customers, and we find ourselves in a very, very strong position that if they are not prepared, we certainly will be better than them.

Yes. Are you kind of talking specifically about coronavirus impact there? I mean I suppose the question is, have you seen any impact at all from that on your supply chain? And I think you've been gradually reducing your exposure to China over time anyway, but just kind of, has there been any impact? Are you in any heavily impacted areas in China with your supply base? Maybe just, I know it's an unpredictable situation, but any more color, I guess, would be helpful.

Right. So I think the good news is as unpredictable as it is. Remember, we have a lot of feet on the ground, and we're having our own option fully staffed in Hangzhou, China. And many of our people are actually working from home right now, we asked them not to travel, but we have a full staff working and staying in touch with all of our suppliers there and so on. So there's 2 parts in this question. Do we, have we seen any other new business opportunities as a result of this, we're certainly getting a lot of phone calls because of this.Our first response to anybody calling us, who's not done business with us before, is we have an obligation to our existing customer base, and that's our first obligation. People give us business, people have given us contracts. We're going to take care of them first. So we're in the process of evaluating what the effects would be of one week more shutdown, 2 weeks more shutdown, 3 and so on. Factories coming back not at 100% capacity, but at 90%, 60% and 50%. You've never seen more spreadsheets in your life. But we have a very, very good handle on where we stand.And fortunately, with the help of our folks in China and the, particularly the BAMKO people who really have their fingers on the pulse probably better from a standpoint of what's really happening on the ground in China. We feel like we've got a very good handle on it. So yes, we're seeing more opportunities come to us. We're going to be very judicious in how we handle those from customers who are not already our customers to make sure that we service our existing customers.Now let's talk about what's happening on the ground there, if you don't mind. I told you we have our office, sourcing office, and that office has been there for many, many years for BAMKO, and we've had people on the ground, even on the uniform side of our business for many years, who are now part of that collective office. Our relationships in China with factory managers and factory owners and the government, it's very, very strong. These are long-term relationships, and some of them are quite personal.We know their families. They know ours. And they, they have met the executives of our company, including me, many, most of these larger suppliers. And when things do get back to normal, we've been assured from the BAMKO side and from the uniform side that we are going to be first in line or one of the first in line to run production through our facilities. Now what production we need? In fourth quarter, less than 12% of our uniform production was actually done in China. So it wasn't significant, and they are not items that we couldn't put somewhere else.So with our redundant strategies, we're not worried about that. What is of more concern are fabrics in China. Our fabrics in China, for the most part, come from every region except Wuhan, and we actually have 1 million Hubei that we're looking at alternative average from other mills right now to replace that because we don't know when they're going to come back to work just to make sure that we're in a redundant position.In addition to that, when you look at our inventories. And we have an obligation in, at least with respect to these contract assets that we keep talking about, to have those on the shelf for our customers. And generally, that's months of inventory sitting on the shelf for our customers for their exclusive use. And that puts us in a pretty unique position. But even behind that, we have taken very, very long positions as we did years ago during the cotton crisis. And part of this is a result of the tariffs and not knowing what would happen with the relationship with China. We've taken some very long positions on fabrics, which are not sitting in China right now for the most part, are sitting in other countries and other factories ready to be sung.So we look at the time line of how long this virus might actually impact Chinese workers coming back to work and be able to make our merchandise. We see it as pretty low risk right now for the near future. Near future, being the next 3 or 4 months, we're going to be okay. Beyond that, the longer this goes on, the longer this could ultimately impact us. We feel pretty good until the end of this year. I mean, quite frankly, what might we have to do in the meantime, if this extends beyond, let's say, April or May, is we might have to airfreight some fabrics once these mills get going. And keep in mind that most of the textile mills are not very labor-intensive.So they don't have to have a lot of people back to work for these, for the textile mills to get going as opposed to sold factories, which we don't have much going on from that standpoint anyway in China. So we're feeling pretty good. I mean there could be some logistical issues we're looking at. Trucks are finding it difficult to travel through China right now to deliver great fabric to a dye house because truck drivers are being stopped on the road multiple times there for the temperature taking and so on. We're hearing all these stories. It's not anecdotal. It's the people on the ground telling us what's actually happening. So, but we are on top of this.We feel the impact will be less for our uniform business than it might be for some of our competitors, in fact. When we look at BAMKO, most of BAMKO's production is dependent on China. Now BAMKO did, a couple of years ago, follow our lead. And went and started sourcing elsewhere in Bangladesh, Vietnam, various other places and have moved a fair amount of the sourcing. But remember, their business also changed. When we bought BAMKO, they were 70% customized merchandise. And today, they're 35%. That's half of what it was when we bought them. And that's a result of their growth has been primarily in the standard promotional products business with all the reps they've taken on.And our goal was to ultimately convert those reps to sell and customized merchandise, which is at a higher gross margin and so on. But that hasn't quite happened yet. So we're in a pretty good position on 65% of our merchandise to keep buying from U.S. suppliers who supply these items, which are primarily sourced in China, by the way until they run out. And the good news is that we have very strong relationships with those U.S. suppliers. Again, they have assured us that they will take care of our needs. They have assured us because most of them loaded up on inventory prior to Chinese New Year anyway, knowing there would be an interruption that they are, they have strong inventories. And it may, usually, they would they would build up their inventories, and we would believe those off over the period through the next year.Those inventories might be blowed up in a shorter amount of time, but we feel like they will be sufficient to take care of our needs. We have lost a small amount of business at BAMKO. To put it out there, there were events that we needed to deliver in the next month or so that we will not be able to deliver, and we are working on alternatives with those customers. Some of that business will just get deferred to another period of time. Some of it has to do with budgets that won't be spent but maybe spent later in the year. Some of that is business that will not repeat itself. It doesn't mean we've lost a customer. They certainly understand the position we're in, which is, it is what it is.Now keep in mind, as well, with respect to CID, which we didn't talk about, that CID has very large inventories. And while this could affect slightly CID's normal rollout of fall season, which we would be selling in, which we'd be shipping in June and July. It's a very small part. The newer items of fall season is a very small part of their business. They are flushed with inventory on our legacy products. Maybe even too much, and we've actually been trying to reduce that over time. But I'm glad we weren't successful earlier in reducing it because, quite frankly, it's a little bit of a godsend. I don't know. I can't imagine any competitor having more inventory than we have sitting there right now in terms of how it matches up to our revenue. We should be able to take care of customers.Our customers and our competitors' customers over these next few months very, very nicely. So there's a lot going on here. I don't believe in any of our businesses that are, that have the kind of strength on the ground that we have in China, that have the systems that follow this as we do to anticipate where the outages might come from and to be able to respond from them proactively and very early in the process. And I mentioned before, we've gone through crisis before the cotton crisis in 2010 was pretty devastating to a lot of uniform manufacturers.We, in fact, picked up market share during that time. That was a great turning point for the company being able to sign up customers who were dealing with competitors who didn't have the resources we have. So we're feeling good. And that's the long answer. I hope I answered most of the questions related to that, but if you have any more, let me know.

No. That's great. That's helpful commentary on a pretty complex subject. So I appreciate all the color. Maybe just switching to Promotional Products. Obviously, a very strong quarter there in terms of top line growth against a fairly difficult year ago comparison. I mean maybe just talk about the strength there. Is that being driven all by this aggressive hiring strategy? Were there any unusually large orders in the quarter? And I guess despite, that happened despite some slight deferrals of business that you mentioned. So just maybe more color on what's driving that growth right now?

Yes. Kevin, this is Andy. On BAMKO, the growth really is coming from the investment that they've made in that sales force. There's not any individually large add-on on your unusual orders that are driving that volume up for the quarter. I think they've been very successful in what they've been able to do as far as gaining from the momentum of those, the new sales reps as well as the others becoming more seasoned with the company. I mean they've done very well in that regard. One point to clarify for you, though, on the deferrals, that Michael referred to, those are affecting first quarter. There were none that affected the fourth quarter for BAMKO.

Yes.

Okay. Okay. Yes, go ahead.

The good news, too, on what's happening out in the marketplace. And with us putting on these sales. We have no shortage of salespeople that we could put on. I mean with BAMKO's reputation being the best employer in L.A. and now they've expanded to Texas, and they've expanded to Colorado. And eventually, we'll, I presume we'll have people in every single state, but we just branded BAMKO, Texas. And we expect that to go very well. And with reputation of receiving the most awards and everything else we've spoken about BAMKO. I mean all the accolades are getting from all the publications in that industry. We have a lineup of salespeople who are dying to come work for us.And this coronavirus, unfortunately, is going to make that line longer because the smaller competitors are going to really struggle in keeping up with us with their supply chain. And we're going to be able to take care of it. So they're may be at a point, a tipping point of making a decision. But when they can't get product through their current employer to take care of their customers. They're going to come looking for a new employer. So we, this is, we want to be opportunistic as well. It's a terrible thing that's happening around the world. But we do believe that, ultimately, this will be just like the cotton crisis, where we took advantage of it and we land up on the other end of it stronger than ever.

Okay. Great. Just following up on BAMKO. So it was interesting to hear that the mix change from customized has gone down by about half, just as you've hired more. But have you seen is reps, are in that business? Is there 10-year increases? Are they selling more customized products, just do you, would you hope to get that mix back up again over time? Well, it sounds like you would like to, to improve margins. But what are the trends you're seeing in terms of individual reps? Is there the, there tenure increases in terms of how much customized business they sell?

Yes. Kevin, as their tenure increases, they will sell more of the customized. And finally, Michael was intending to lead to the conclusion that we were failing in that regard. It was more a matter of, we were fortunate that we were early in the process for relative to coronavirus and where we're at from a sourcing perspective. We feel very comfortable that those reps over time will get to a higher, much higher mix of customized. Will we ever get back to where we're 70%? I don't know that, that will happen in the near term as we're continuing to add reps as we go along. So there will be a mix of more season and your newer reps, they'll be coming in with the less customized product to start with. But over time, it will definitely increase back up.

Yes. Keep in mind, when we bought BAMKO in 2016, their trailing-12 was $32 million. And so 70% of that was customized. And they stayed very much in line with that until we began the strategies of really hyper growing that business. And yes, reps do come in with more of a mindset of selling things out of the catalog from suppliers in the U.S. But one of the reasons why they come at BAMKO is because they have that custom capability, which is something that most promotional product distributors do not have. It kind of makes BAMKO a hybrid supplier/distributor, which there aren't many of those out there. But they can be all things to all people in that respect.And so yes, over time, I mean that's why many of them come to work for us. Now they have to work their book of business to get people to convert to more customized material, which requires more lead time and a little bit more advanced planning, so to speak. But that is definitely moving in the right direction. And so you say, of their $107 million last year. If you say 35% of it is customer, it's still double, nearly double what they were doing when they were 70% to $32 million. So it definitely is coming up.

Okay. Got it. Just maybe talk, let's talk a little bit about the margin side of things here. So it sounds like you're ramping up some of these implementation projects, SAP and the WMS done at CID, nearing completion of SAP at HPI, should we think about, and you also put out that longer-term margin goal. But should we think about maybe 2020 is a year where you start making some progress towards that long-term goal as you get past some of these implementation costs and investments? Just what's kind of the outlook for profitability and margins in 2020, from a higher level anyway?

Yes. Kevin, certainly, we plan to make an attempt to gain as much upside as we can as we move forward with our profitability goal. We thought we will find ourselves in a position with systems and technologies and capabilities. And it's a single ERP system across our uniform divisions and platforms in place during 2020, and we expect to be able to take advantage of those opportunities and upsides to manage our effectiveness from an operating margin standpoint in 2020 and as we continue to move forward. We also expect to see as BAMKO continues to grow and as BAMKO continues to grow with respect to their top line sales, we've seen it this year with respect to their operating expense efficiencies and we expect to continue to see as we move forward in that business line as well.And finally, with our TOG business, we continue to expect to see that growth as well. You saw this year, their gross margins, the gross margins, not their operating margins grow. And you also see that, as we talked about in the past, we've made growth investments at TOG that will position ourselves well as we move forward as well. So we have every intention to move forward and try to maximize our operating margins every year from here as we move toward that 2024 target of 8% to 9%.

Yes. I'll add to that, that we did expand our call it our, call it, our CODEVI 1, our first factory, and their capacity in the last just few months to be able to produce more for us in 2020, which will definitely improve margins. And CODEVI 2 is on track and is producing product now, albeit it will be a small amount of product for the first 6 months of this year. But in the second 6 months of the year, become more and more once we have 600 people at the end of this year, it certainly ought to make impact later on in the year in terms of our gross margins, significant gross margin improvements. All that is, later on the year, more than it is right now. You should see operating margins improve through some of the rips that we did last year. So we look at comparative periods, you should see, certainly in the first and second quarter, some improvement to that, provided our sales hold up. And, so we're pretty excited. We're heading on the right track for sure.

Okay, great. And I think Mike kind of referenced this in terms of where you expect the margin expansion over this time horizon to come from? And so as you think about just what it was 8% to 9% in 2024 operating margin. You see that as kind of, obviously, there's going to can be unforeseen events, but as you think about that in your planning process at least, is that a kind of steady, pretty steady progression toward that year-after-year? And maybe just, again, expand on the sources of that margin expansion in terms of the segments or what have you as you move forward?

Michael, I'll let you jump into that.

Yes. So as we build our, like we discussed, as far as how we like to look and try to provide guidance on that growth from, to 8% to 9% operating margins. We talk about it on a 5-year time line because we are going to see ebbs and flows in our business. And we are going to see that vary on a year in and year out basis. On an overall basis, if you drew a straight line from where we are now to 5 years out, you'd certainly see a trend that is upward and moving throughout the course of that time, but there are going to be points in time, I would expect, given the timing of our sales and the length of our sales cycles and investments we will make to try to achieve and accomplish greater overall efficiencies throughout the course of that 5-year period, where we may see declines in our operating margins from where they are from the year prior. But we may not. It just depends. But we do expect to see, and we are planning for a trended straight line growth basis over the course of time from now through 2024, toward that 8% to 9% operating margins.

Yes. Kevin, I think when you look at, if you were to look at it on the individual segment basis, we expect to really see the operating margin in each one of those segments, trending upward the whole time in case of any unusual events. And what will affect that swing in different years is a year like this where BAMKO contributes 32% of the growth of the growth and they happen to be at a much lower operating margin than the average of the other 2 segments. And that could affect you in individual years.

Okay. Got it. That's helpful. Just one last question here. I might have missed this, just the numbers question. Did you give the, at least as calculated according to your financial covenants, what, where your debt-to-EBITDA ratio currently stands?

No. Actually, we didn't. But we're at 4x.

Okay. All right. How are you kind of thinking about leverage and debt pay down, et cetera, as you move forward, capital allocation, maybe as you move past some of these larger investments you've done in the last year or 2?

Yes. So as we mentioned during my prepared remarks, and we actually, we did bring our net debt down slightly during the course of this past year, and that's even with significantly higher investments in CapEx that, between 2018 and 2019. So we're particularly proud of that. We were able to manage our working capital down. We're able to manage the balance sheet side of our business in such a way that we're able to make those payments and drive our net debt position down.Now we did, we do plan to have our overall CapEx plan for next year, at or above, slightly above where we are this year, so in the $11 million to $12 million range. So we do expect from a capital allocation standpoint to still find ourselves leaning in on the CapEx side to continue to expand our abilities in our Eudora facility and continue to invest in what we have underway in CODEVI, plus some other overall investments. So as we look into 2020, CapEx is still a priority for us, and we will find ourselves in a position where that is one of our primary objectives with respect to capital allocation.

And ladies and gentlemen, that's all the time we have a later for Q&A. So this concludes our question-and-answer session. I would like to turn the conference back over to Michael Benstock for any closing remarks.

Thank you, Rocco. We appreciate your time today as always. We look forward to updating you on our first quarter 2020 results in April, at which time we will be speaking about how we will celebrate our 100-year birthday in May, which should coincide with our shareholders' meeting. Looking forward to that. Stay well. Enjoy the rest of your morning.

Thank you. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.