Good afternoon, everyone, and welcome to the Superior Group of Companies 2020 Third Quarter Earnings Conference Call. Speaking first today on behalf of the company is Michael Benstock, the company's Chief Executive Officer. [Operator Instructions] This call is being recorded, and your participation implies that you agree to us. If you do not, then simply drop off the line. Now I will turn the call over to Hala Elsherbini, Senior Managing Director of Three Part Advisors, 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 within the meaning of the Securities Act of 1933, the Securities Exchange Act of 1934 and Private Securities Litigation Reform Act of 1995 and all rules and regulations issued thereunder. Such statements are based upon management's current expectations, projections, estimates and assumptions. Words such as will, expect, believe, anticipate, think, outlook, hope and variations of such words and similar expressions identify such forward-looking statements, which includes statements on the impact of COVID-19 on the company's business, including inventory, supply chain manufacturing capacity at the company's own and contract manufacturing facilities, service capacity and customer demand. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following: the effect of the COVID-19 crisis on the U.S. and global markets, our business, operations, customers, suppliers and employees; general economic conditions in the areas of the United States in which the company's customers are located; changes in the markets where uniforms are worn, where promotional products are sold and where call center services are used; the impact of competition; the company's ability to successfully integrate operations following confirmation of acquisitions; and the availability of manufacturing materials as well as the risks and uncertainties disclosed in the company's periodic filings with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the year ended December 31, 2019, the quarterly report on Form 10-Q for the quarter ended September 30, 2020, and the 8-K filed recently. Shareholders and potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to update the forward-looking statements contained herein to conform to actual results or changes in the company's expectations, whether as a result of new information, future events or otherwise, except as required by law. Please note that all growth comparisons that management makes today will relate to the corresponding period in 2019, unless otherwise noted. With that, I'll turn the call over to Michael.

Thank you, Hala, for that very short safe harbor statement. Good afternoon, everyone, and thank you for joining us to discuss our Q3 2020 results. Before I begin, you'll note that Andy Demott is not able to join in our call today. And in his place, I'm accompanied by Jake Himelstein, BAMKO's Chief Financial and Chief Operating Officer; and Jeff Hoefler, SGC Corporate Controller and VP of Accounting, who both have a wealth of experience and do a great job supporting Andy in many of the operational and financial aspects of our business. Jake will give the financial commentary today, and they will both be available to answer questions after our prepared remarks. First and foremost, we hope that everyone continues to remain healthy and safe. We continue to provide critical supplies to those frontline workers and essential businesses managing through the pandemic. It is an honor to provide quality protection to those confronting this virus every day. And we thank them and our 4,500 associates supporting them for their steadfast dedication. As anticipated, our third quarter results continued a strong trajectory, posting a 42.8% increase in consolidated net sales and 142.3% increase in diluted earnings per share. I will cover our outstanding segment performance and operational highlights. And then Jake will follow with financial highlights. I'll have some closing remarks before we open the call for your questions. Our Uniforms and Related Products segment performed very well and continue to respond to surging demand in our health care and essential retail business sectors, while nonessential businesses are starting to show small signs of near-term recovery. We expect to see sustained strength in the recession-resilient sectors of our client base, which comprise greater than 80% of our uniform business, as we told you on the last earnings call. Fashion Seal…

Thanks, Jake. I'm extremely pleased with how our teams are executing. We're showing tremendous resolve and collaboration, seeking opportunities to maintain our consistently high level of superior customer service while also supporting our communities. We certainly exceeded expectations so far this year. We have become even more disciplined, more responsive and more dynamic than ever. And we are well-prepared and capable of continuing to operate efficiently and effectively in this changing and new environment. Related to our long-term outlook. We opted to update our guidance earlier this year to provide additional transparency for our stakeholders during these extraordinary times. We're going to share with you a lot of information now -- and guidance, some of which you have not had before. This year, we expect to report more than $500 million in sales, with over $100 million of that being PPE sales. This is of course, I qualify that by saying it's dependent upon orders not being delayed and the continued flow of incoming orders that we've been receiving over the last couple of months, but we are relatively confident. Pre-COVID, we had expected 2020 to be somewhere just north of $400 million in net sales. Let me reiterate that. When we did our budgeting in November and December of last year that we've done throughout our strategic planning, we expected 2020 to be $400 million in sales. And now as we know, we're going to be greater than $500 million. For 2021 on a consolidated basis and excluding additional unexpected events, such as another wave or extended period of the COVID crisis, net sales are anticipated to be in the range of $450 million. This assumes that PPE sales will taper off across all divisions. Looking forward to our anticipation for 2021 and beyond. We expect our 4-year CAGR,…

[Operator Instructions] And our first question today will come from Kevin Steinke with Barrington Research.

I wanted to start off by talking about the long-term outlook. You gave 4-year CAGR 2021 to 2024. So -- what, 12.5% is the goal? It looks like the segment that changed most materially from your prior expectation is that the uniform segment at 12%, about double what you were targeting before. So just want to get a sense as to what's driving that very positive change in the outlook there.

I don't know if I misspoke or you misheard, but that is a CAGR from 2021 to 2025, that would be a 4-year CAGR comparison...

Okay. And I apologize for that. Okay.

It could have been on me, but I just want to make that clear. You were right. That was pretty -- you picked that up pretty quickly. I said that at the end and you already got that. Our uniform -- yes, what's really changed that is our outlook on our health care uniform business. It's driving most of that. The employee ID side of that hasn't changed much, as a matter of fact. We don't usually break it out and report them separately. But I can tell you, the uniform -- the HPI is very much in line with what we thought before. And Fashion -- the Healthcare and CID both are the driving force behind that rising to the 12%. And there's just so much opportunity in health care. We see it in not only in personal protective apparel -- and we're not talking about products that we haven't had. These are legacy products. We see more and more demand for reusable products versus disposables. We see a lot of outpatient centers outfitting their people differently with isolation gowns. I went to the dentist the other day for the first time ever. I got greeted by people wearing masks shields and barrier gowns and barrier coats. And that is the new norm and that is the guidance from the American Dental Association. But that's happening across the country and we -- that is not going away, in our opinion. We're very happy it's not. It's a new norm of safety that is going to be practiced. Besides which, we have some very exciting things happening at CID with some of the new channels that we're operating in, with our e-tailers and with some of our brick-and-mortar. They're international, as I spoke about. It's coming on very fast. That's…

All right. Great. Well -- so yes, I guess maybe to dig into CID a little bit more. Is this a matter of them kind of getting back to kind of the growth trajectory or that they were on prior to them being acquired? I know there was some kind of transition or integration there. But I mean -- or is it just kind of new opportunity beyond what they are doing? Obviously I guess international is new. Just trying to see what's really changing for CID, or if it's just kind of getting back to more historic norms. What are you seeing in that business?

Well, their e-commerce business that was sold through other distributors who are distributing our product, including Amazon and many others, has grown significantly. It was growing significantly before COVID and has become a much larger portion of their business, so we see continued growth of that. We do have products that we've spoken about that -- and other channels that CID is introducing, which are unique to the industry, and manners in which ways they can help some of their channel partners like e-tailers and even brick-and-mortar retailers, service groups, is going to be brought to a whole another level. They're a very dynamic organization. And I don't -- we had a couple of years where we had to fix a lot internally. They're now on a good warehouse system, they are on good ERP. Their marketing is fabulous. They're right on the path they should be. I mean we -- I think we properly took the pause we needed to. And not that the business has been doing well, the business continues to thrive, but we see much greater opportunity for them in the future.

Great. And how does the WonderWink INDY launch play into this -- the increased outlook for health care uniforms specifically? You mentioned that was very well received.

Yes. You have to look at INDY as a long-term product. So when INDY is introduced by a laundry to their customer, that customer is generally already in a uniform program supplied by that laundry. So it's the laundry's job to convince that customer, or a new customer, to go into a more fashionable product, which is not very difficult to convince them to do, but to go in at a higher price point. It's not going to be -- there's a value proposition there that they're not able to get from their current products. So we think it's great. I mean before we had -- we forecasted what our first 6 months would be after delivery of product. And our first delivery product was in July and we predicted that it would be 6 months worth. And in fact, all of that is sold out already. So we've issued multiple productions after that to take care of the other needs of the market. And as I said, when all the wear tests and wash tests are done, which should be over between now and the end of the year, we should be seeing all the laundries going out and selling this product with confidence to their customers. I can tell you, there's a lot of excitement out there. And it's not that -- we have a unique position in that we're early to this and we're first. There are going to be those that are going to copy us. We spent 2.5 years on development and production, almost 3 years actually. Maybe they could do it a little bit faster than we did it. We were very, very careful to make sure we have brought the right product to the market. But we believe we've got a pretty good tailwind. You have to look at it over the long term, though. Over a 5-year period of time, yes, this will be an 8-figure business, INDY, over -- but it's got to scale up to that over time, Kevin and it's going to take some time. Now it could happen faster than I'm saying, all it really takes, if you think about it is 5 or 6 large group health care systems in the United States. 15,000 or 20,000 employees each to blow my numbers out of the water. But we're very conservative and that's what we're projecting at this point.

Okay. That's helpful. And so on promotional products or BAMKO, in excess of 12% I believe you said, which is unchanged from before. Just obviously that's still a very healthy growth rate. Just wondering how you're thinking about that in terms of PPE versus traditional promotional products and how that plays into the outlook over that 4-year period.

Let me make clear that my numbers from 2021 to 2025 only included the PPE business that we know about at this point, the business that we've written, that most of it is the sustainable business that will become part of programs. It doesn't include that there might be some crisis buys of PPE of 10 million or 5 million or 20 million or whatever along the way or smaller. In any of our numbers, not in BAMKO's numbers and not [indiscernible] . But I'm going to let Jake speak to that. Jake, since you're on, and Jake is the COO and CFO of BAMKO, why don't you respond to that? Jake Himelstein;BAMKO;Chief Financial and Chief Operating Officer: Yes. Nice to meet you, Kevin. And so as it relates to long-term outlooks for BAMKO, we think of the business as a long-term potential. Yes, PPE should taper off, but legacy PPE won't. Even before the pandemic, we were doing PPE, hand sanitizers, wipes, things like that. And demand for promotional products and uniforms is going to continue to increase. We think PPE demand will continue for some time, but we aren't banking on it. And we're continuing to build our promo business. Had a lot of success in winning RFPs, converting PPE customers in the branded merchandise customers, bringing on new sales reps. Kevin, the truth is that COVID's been pretty tough for our industry, right? The industry is down somewhere between 30% and 40% depending on what publication you read. But we're up 107% year-to-date in the BAMKO segment. And so we've capitalized on opportunities that our competitors just couldn't pivot too quickly enough. We're really diversified in our client base. And we believe that the pain that's happened this year in the promotional products industry is going to have some long-lasting effects on some of our competitors that will allow us to continue to pick up market share, puts us in a really strong position with sales reps, with customers that are going out to RFP and M&A opportunities.

Yes. That makes sense. I mean so what are you seeing kind of, on the pipeline for new salespeople in promotional products, given that dislocation in the industry? And just in general, kind of your performance versus the industry and how that's going to play into your favor going forward? Jake Himelstein;BAMKO;Chief Financial and Chief Operating Officer: Yes. We continue to be extremely active in sales of recruiting. I think we represent a really, really appealing landing spot for sales reps. We go through a really painstaking process of evaluating sales rep candidates and only take on the right ones that are a good fit for us and can immediately start generating revenue for the company. But look, we have great technology. We have great warehousing. We have an unbelievable management team. We have the support of the entire shared services model. We are a really, really appealing landing spot for a lot of people. And so we continue to see more and more interest in people coming to BAMKO when they see their own company struggling.

Got it. That's great, okay. So I guess the other piece of the long-term guidance is the margins. And I believe, correct me if I'm wrong, you said by 2025, in excess of 10% operating margin. I believe before, you were talking about 8% to 9% by 2024. So just confirm that I have that right. And maybe what's changing there that is enabling you to increase your target for that longer-term operating margin?

Great question. Scale, mostly. The fact that our uniform divisions will grow at a greater clip than we had anticipated. And even TOG will certainly help us get to that operating margin by then. I feel pretty confident in that. And I think we've shown through our scale from just the last 2 quarters, that what happens to our operating margin when we just add on additional volume. We're built to do more than we're currently doing. I can't say that's true in every aspect of it, but most aspects of this from a sales standpoint, from a marketing standpoint. You're always going to have to put some money into infrastructure. But it's quite small what we'll be putting into infrastructure beyond next year with our warehouse project that we've spoken about in terms of big infrastructure product -- projects for the next few years.

Okay. Great. Just you mentioned TOG there. Just kind of maybe talk about what's driving the momentum there in this environment? And if it's just kind of business as usual during the pandemic, or if there's something about this environment that's favoring them? I know you said you've been able to expand your capacity with work from home, but just maybe any comments on what's driving growth in that business.

Yes. Call it maybe by luck or somewhat design, we happen to have a cadre of customers at TOG who have grown significantly during the pandemic on some of our home warranty services, energy sales, some of the legal services that we provide support for. It's phenomenal. And some of them were using centers elsewhere that disappointed them in the pandemic. We didn't. We actually, in many cases, raised the level -- or raised the bar, so to speak, with respect to the service they can expect from home, being almost as good or as good as what we're providing in center for them. I think they like a hybrid solution now. Some people working internally, some people working externally. We certainly have -- we put on some new customers, as I've said, as well. Primarily, our growth has been existing customers. There's a lot of centers that have disappointed people during this work-from-home model and haven't gotten it right and have cost customers a lot of money and anguish. I think they're also, with India being shut down and having so many other problems with floods and tsunamis, whatever, that there's a lot of work moving back to this hemisphere as well as the Philippines, too. But a lot of that work is moving back here. I think people in the U.S. want people on the phone dealing with them who are more culturally aligned with them, who are more understandable on the phone, who -- they could go visit once things reopen with a 2-hour flight or a 3-hour flight, a little less. I think The Office Gurus is actually perfectly situated to capitalize on this growth. And it doesn't hurt too, Kevin. The awards they've won for being the best call center, best place for young professionals to work. We're -- sure, we're like every call center in the world that's trying to put on hundreds of people at a time, recruiting is really the biggest job you have. When you're recruiting for 350 people, we probably went through more than 1,000 resumes to get to 350 people and probably did more than 600 or 700 face-to-face interviews. So a lot of it is building up your HR capabilities to be able to handle that. And I could tell you that we probably could have done more. Dominic, if he were here, would say we could have done more last quarter, if we had done a better job of recruiting. We're working really hard with some new strategies to try to get ahead of that, because we believe we can accelerate that growth if we can just get better on the recruiting side.

Okay. Got it. And you did mention -- you just mentioned India there, and you mentioned rapidly rising fabric prices due to plant closures in India. I think that will be temporary but how do we think about how you're able to manage that pressure in the short term? Will you try and implement price increases to offset some of that? Or should we kind of expect a temporary blip in gross margin? What's -- how are you going to manage that? How should we think about how it plays out in the financials, perhaps?

I knew that question was coming. I'm going to let Jeff answer any questions. or [ bid ] on the call yet. So Jeff's going to speak about gross margins and -- all that you said is true, but we've been great stewards of our gross margin. But Jeff, go ahead and jump in on that one. Jeff Hoefler;Corporate Controller and VP of Accounting: Yes. I'll -- Kevin, this is Jeff. I'll talk a little bit about operating margins and where we're at, where we've been, and hopefully, kind of what we could sustain. For the third quarter, we were at an operating margin was 9.8% compared to a high of 12.3%, which is taking on account the significant PPE sales. Now your direct question of whether or not the fabric prices in India and other pricing pressures will impact us. I'm sure there will be some impact, but we're mitigating -- we have certain avenues that mitigate that with our kind of diverse supply chain as long -- along with our kind of pricing already on the customers and the pricing that we've negotiated with the vendors thus far. And so we feel like we're in a pretty good spot, to not take a impact, a noticeable impact, at least in the next quarter and still pretty comfortable in the kind of starting 2021 as well.

Good, Jeff. I think those are the correct responses. Since beginning of 2019, Kevin, we've actually been able to hammer a lot of our prices down. And that's coming back now. That pendulum constantly swings. So 2017/2018, prices were rising. In 2019/2020, we've been able to push them down. We're going to see them change a little bit, but so will the mix of business as that happens. And I think to Jeff's point, our redundant manufacturing strategy has really served us well. I mean just think about it's not just CODEVI 2 that will have 800 people next year and be doing 20% of CID product. But CODEVI 1, we put a couple of hundred more people into that factory. We actually moved some of the fabric out of that factory, and we're using a separate warehouse so we could put more people into that factory. So it's doing a larger percent of our product, duty-free, which generally means to us anywhere from a 6% to a 17% savings on cost, which makes it a lot more competitive than, let's say, Vietnam or Bangladesh or Pakistan or any of these other places. It doesn't make it any cheaper than, let's say, Madagascar, which is duty-free, or our other Haiti factories that in Port-au-Prince are contract factories. But I don't think you've ever seen huge swings overall in our uniform margins from one quarter to the next or even one 6-month period to the next. So yes, I think Jeff is right. You'll see a little bit of a change. We'll make it up in other ways.

All right. No, I mean yes, you've obviously been great at managing those margins over the years. So that's good to hear. So I don't -- I might have missed it, but did you give -- last quarter, you gave a specific number for the PPE backlog for the second half of the year, I think 52 million. What -- where does it stand now in terms of the PPE backlog that you can kind of separate out or specifically identify, if you can?

Yes, sure. Our PPE backlog at this point is -- I think Jake's talked about it on the uniform side, not sure. Consolidated backlog, Jeff, if I have this right, is 60... Jeff Hoefler;Corporate Controller and VP of Accounting: $61.2 million.

$61.2 million. That's -- yes, I said just over $60 million, I did say in my script. And that's broken out between BAMKO and the rest of Superior.

Okay. And that rolls in over what, the next couple of quarters, you think it benefits? Or...

Over the next 2 quarters. I mean if you look at the end of first quarter, I think we said we had approximately $60 million of PPE we said on our February -- on our April call. So you saw that in the following quarter, we did roughly $30 million. And then we said at the end of last quarter, we had about 50-some-odd million dollars and about half of that rolled in. So yes, it rolls out over about 2 quarters. I did say in my script that 90% of it will roll out over the next 2 quarters. The 10% is part that we're going to hold on to and be shipping all next year, weekly, monthly, whatever customers require. Also, keep in mind, there will be additional PPE and that is not in my projections. Any large PPE -- customary part of a uniform program? Yes, that's anticipated. But any large PPE orders that we get, and trust me, they seem to come out of the blue. We have a customer that we've sold over $10 million of PPE to, who's come back to us twice for additional multimillion-dollar orders. Actually, we have a few customers like that. So there are -- there's going to be other PPE opportunities. We just have no way of knowing. We have no way of putting that into our numbers. So we essentially left that out of our numbers for next year in order to keep it as transparent, as pure as possible, the numbers. If -- I would welcome doing another $50 million of PPE next year and doing over $500 million again.

Yes. So none of that potential, which it's like you said, hard to predict, is in that $450 million number for 2021?

Right. That's correct.

All right. Okay. All right, great. Well, I think that's all I had for today. But again, congratulations on the strong results.

Thank you very much, Kevin.

[Operator Instructions] And our next question will come from [Fred Foulkes] with Boston University.

This is Fred Foulkes, a Boston shareholder. Congratulations on the quarter. You guys are going gangbusters. I have 3 questions. One is what's your own experience with your own employees, and so COVID-19 and testing, tracing? Second question, in terms of the hiring. Are the people being hired sort of in a temporary category? Are they permanent and hope they have a permanent job? And the third is acquisitions continue to be attractive. What kind of companies are -- would be the best fit? Whether they're bolt-on acquisitions, what are you sort of looking for in terms of acquisitions?

All right. Our own experience in testing and tracing is we -- and contact tracing, we have been doing it in all of our locations since early on when we sent people home March 17. From that point forward, anybody who entered any of our facilities was being tested as long as tests were available. We had some experience in our distribution centers, as you can imagine, with some COVID. At one point, we had out of about 500 people, we probably had as many as 45 people at home. Not because they all had COVID, but some of them had come in contact with somebody who had and they're awaiting testing. But we've had a couple of dozen people who had COVID have that to stay at home and isolate. We've done contact trace. We did done a fabulous job with contact. My hats off to our HR department, our Director of Safety, too. George Schools and [ Ann Gutierrez ] and Lois Ashley at our distribution center in Arkansas. These people worked tirelessly, literally day and night, to make sure everybody was contacted to make everybody know. We arranged testing for all of our employees. I mean locally here in Florida, Atlanta, all of our other place -- there's plenty of local testing. But in the rural south where our distribution centers, particularly in Arkansas, there wasn't a lot of testing available. And thankfully, we have nobody -- in our uniform business, we have nobody who passed away from COVID. We had -- I guess we had some people hospitalized. I'm not sure of that. I was getting a daily report for a long time. And I don't get a daily report anymore because we're not having any new cases. So we're very happy about that. On the…

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Michael Benstock for any closing remarks.

Thank you very much. We appreciate you all taking the time to join us for our call today. I appreciate always your continued support. We look forward to updating you on our fourth quarter year-end 2020 results in February 2021. Please stay safe and healthy over the holiday season. And we'll speak with you next year. Best wishes.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.