Q4 2019 Earnings Call
With that. I'll turn the call over to.
Michael
thank you. Holla 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 invite after which Andy and Mike will provide operational Financial details during their respective remarks 2019 was underscored by many successes during this transformation a year which position 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 I look at the business holistically our key pillars are to strengthen her leadership optimize our organizational structure improve our systems and processes Elevate our Innovation Automation and renew our entrepreneurial drive for our next phase of development and growth. We have been a bit very ambitious in our birth.
taking this past year, but we
Completed much of the heavy lifting to support our long-term objectives and proud of the significant progress made and appreciate the collective efforts hard work and sacrifices of our systems will 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 off.
Excuse me. We restructured the management team at hbi and completed the consolidation of severe ID and HPI as one customer-facing entity with a mortgage discipline sales approach and the robust pipeline that has already accelerated more wins of note the team began its largest rollout refresh ever of a customer program in life, which is now nearing completion next. We realign the management teams at CID and fashion Co health care to elaborate sales and product strategies as well as capitalizing off these Founders product development leadership. We have also utilized the ideas design team to drive cross-selling opportunities particularly with fashion. Co Healthcare another key appointment 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 stc's divisional marketing strategies as
We continue to innovate and differentiate ourselves in very competitive markets are second Haiti Factory & Co Debbie is complete and scaling.
Its Workforce to meet production needs for CID. The office girl is all also opened its newest location in Jamaica and is well-positioned to meet expected strong demand off with finalized the implementation of several system conversions, which Andy will discuss further in a moment.
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 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 and we need to prepare us for our next phase of growth lastly and importantly month. We continue to receive top accolades across our brand-building platform. Our teams were recognized for many awards in 2019, which will highlight just a few months. We again receive top honors at the uniform associations 2019 n a u m d image of the Year Awards. We're honored with the streets and prestigious awards for three of our esteem uniform Brands wage.
best Healthcare wonderwink
And Carhartt three separate Publications including counselor magazine in the Los Angeles Business. Journal recognized babko is being a top place to work in Los Angeles. Now, this is the third year in a row also to note back go one industry Awards awards for for, you know, best home branding pyramid Awards, they call them then and and that that was more than any other distributor in the entire industry one. We're also very excited to say that 2019. The office Cruz is named the best Global Call Center business process Outsourcing Provider by Latin American News. This is an incredible accomplishment. These are all tremendous Honors that page or entire organization and validate or commitment to elevate our customers Brands. However, we touch them as you can see we're taking a very targeted methodical approach to transforming our business hour.
creating an empowered culture and a deeper
No, 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 Corona virus outbreak foremost. Our primary concern is for the health and well-being for those directly affected our employees and partners on the grass or keeping us abreast in 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 changed is that develop and we are assessing possible impacts to raw material sourcing and potential delays. Keep in mind during our almost hundred years in business Superior has been resilient in the club.
Well, 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 US economy and the need for Health Care Professionals is tremendous affecting two of our largest divisions demand that we are seeing in both are promotional products and remote system solution segments are also powerful drivers for the company will now turn the call over to Annie 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 has Michael stated we accomplished a great deal executing against our strategic initiative during 2019 to deliver consistent profitable results for years to come as noted. We finalize the implementation of Key System upgrades with minimal disruption to the business the sap implementation of h p i n a significantly and is nearing completion with only a few customers remaining to transition the WMS and sap implementations for CID are now complete and we'll provide improved efficiencies an image.
Controls we restructured our web services capabilities to achieve better efficiencies by closing our Costa Rican subsidiary and moving support of our Legacy uniform website Tu rndi location off. Additionally, we initiated development of a unified back in for our uniform websites to streamline the website creation process as well as providing for more efficient management of website maintenance package instruction 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 life resource strategy that will support both the uniform and promotional product segments. The expanded facility in cutting-edge technology will yield robust benefits for efficiency and fulfillment capabilities.
When taken as a whole our investments in technology and talent fortify or shared resources capabilities and would 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 segments were relatively flat for the fourth quarter and fiscal year as Michael mentioned the segment benefited from his largest uniform rollout ever of a customer program that was largely completed in Q4 and extends into q1 of this year suc is proud. This is the most eco-friendly it sustainable rolled out in our history with approximately 5.5 plastic bottle recycled in each of the one point six million uniforms that would produce David schachter president of our HPI has re-energized his team creating a robust Pipeline and better operational efficiency in our employee ID channels where you're seeing more business moved for the pipeline stages at an accelerated Pace leading to higher win rates.
H p i s a p 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 binstock as president. He is pulling in the best-in-class resources from both factions to health care 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 Drug selling opportunities are 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 years. 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 the school to six hundred employees by the end of 2020. This facility will benefit Cid in many ways including and gross margin Improvement as a result of the duty-free production there and quicker fulfillment capabilities.
the surely time
Dakshin the 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 wage also allows 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 ND line is ready to go into full production the next couple of weeks and we'll roll out products in third quarter 2020. This new line is generating significant interest and fills a void in the market place for a fashion scrub that can withstand the harsh light of the healthcare laundry system. We are very optimistic about the prospects for this new product offering. We also completed the right size of our domestic Workforce and achieved a multi-million dollar reduction new page.
Shipping to our promotional products segment bamco under Phil coulson's leadership delivered a record year with 32.9% Revenue growth and eclipsing $107 for the year. They had not 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 except his growth and is able to capitalize on our share of resources strategy. We expect to see improved operating margins as well as a balanced mix of customized product offerings. Thereby improving the segment of overall profitability.
our remote Staffing
Segment the office gurus led by Dominic lady continues to grow steadily in our proactive stance to stay ahead of customer demand through capacity expansions positions as well to capitalize on the small side of the market. We serve we expect 2020 to be a very strong year for t o g in summary. We re-engineered a business processes and proved cost controls and implemented a productivity-enhancing collaboration tool across our Enterprise. Now turn the call over to Mike for the financial highlights. Thank you, Auntie and good afternoon. Everyone as noted earlier. We filed our 2019 10K Thursday morning. So I'll limit my remarks to address the 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 dollars. The largest contributor was bamco was 54% quarterly sales growth accounted for twelve point nine million, but the Thirteen point four million dollar increase uniforms quarterly net sales were down 1.1% off.
63.2 million dollars while the office Crews reported a solid 17% gain and as we routinely reported during these calls the comparative impact of ASC 606 during the quarter was faxed to revenues in the amount of $506,000 for the fourth quarter. We reported Consolidated gross margin 32.2% compared to 35.5% a year ago additional inventory charges and reserves within our universe segment and a greater sales mix from bamco which operates a lower gross profit rate than the other two segments contributed to this change cell in general and administrative expenses increased wage twenty nine point three million dollars compared to twenty six point seven million dollars a year ago. The increase is largely due to enterprise-wide investment to support growth service costs and increase bad debt Reserve with form cycle as a percentage of net sales Consolidated STNA improved to 27% from 28.1% in 2018. Operating expense leverage came from greater sales volume down.
We should see further improvements as they're big.
Sense of scale income from operations was five point six million dollars and operating margin was 5.2% for the quarter compared to 7.4% in 2018. The impact of gross margin wage as well as higher overall operating expenses affected these results overall. We reported net income of 2.9 Million dollars compared to four point six million dollars a year ago diluted earnings per share with twenty-five compared to Thirty cents a 2018 earnings were impacted by the aforementioned increase in inventory and service charges plus additional periodic pension costs of $584,000 which in office accounts for a $0.09 swing for the quarter or effective tax rate for the quarter was 25.8% compared to 19.5% a year ago. The change of the race was principally the result of the effect of Florida State and local taxes between the comparable periods. We also pay to regularly quarterly dividend of ten cents 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 Dollars. The increase in that sales is driven by the effect of Eid acquisition in May of 2018, which contributed 5.8% also by lower Legacy uniform sales thirteen point five million dollars of which related to the difference in timing of Revenue recognized her ASC 606 on a year-over-year basis in total uniforms net sales were essentially flat at 237 point six million dollars Banfield closed on a record year posting an increase of 32.9% and t o g 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 operating expense growth and other charges during the years such as Severance birth.
bad debt expenses and not the
Adjustments to acquisition-related contingent liabilities all of which were partially offset by CID acquisition costs incurred in 2018 fiscal year 2019 operating income twenty one point six million dollars compared to $25 a year ago and 2019 operating margins were 5.7% compared to 7.2% in 2018.
2019 periodic pension costs were two million dollars compared to just 400,000 2018 and interest expense was four point four million dollars for the year compared to three point two million dollars a year ago with the effective tax rate rate remained relatively constant at approximately 21% So overall that income for the year was 12.1 million dollars compared to $17 in 2018 adjusted or earnings per share with $0.79 compared to a dollar ten. Net income for 2019 was impacted by the variance of timing revenues recognized under ASC 606 that accounted for twenty two cents wage variance compared with 2018 in which ASC 606 contributed more sense 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.
No for a few balance sheet highlights.
Liquidity remain strong as we conservatively manage working capital working Capital One hundred forty two point four million dollars as of December 31st, 2019 a decrease of 5.6% compared to last year. We finish a year with cash and cash equivalents of nine million dollars an increase of 68.6% and net of cash. Our total borrowings decreased from 112.2 million months in 2018 to a hundred and ten point three million dollars in 2019 during 2019. We paid cash dividends a six billion dollars an increase of 3.4% off our capex investments for the year when nine point seven million dollars compared to four point nine billion dollars a year ago. Our Capital expenditures were lower than our plan of eleven million dollars the higher than our normal spending on maintenance capital of one and half to two percent of sales. Annually Capital Growth projects will continue through 2020 at a rate of 2 and 1/2 to 3 and 1/2 percent of sales to support our infrastructure growth realize costs. And yep.
efficiencies and improve our speed-to-market of
Cross our business segments and I'll turn the call back to Michael for his closing remarks and a general outlook for 2020.
Thanks Mike as we entered the next decade the discipline strategic initiatives put emotion have setup us up as what some have called us in our industry the hundred-year start. We're very proud of our past and we're even more energized by our future our long-term five year goals reflect. Our previously stated objectives of 8.5% of 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 thousand views become a bit muddled and less important than does the entire Suite of services. We render the customer of cost all of our platforms there for overtime segment guidance could become a relevant metric then 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 five-year Revenue Outlook and an effect that hasn't changed.
but we
To bring a bit more clarity for your benefit updated goals or that in January of 2025. When we look back five years. I'm Revenue growth. We expect to achieve Dan organic 5-year skater of 8.5% on a Consolidated basis. Additionally. Our goal is to achieve sustainable operating margins for Arkansas business by 2024 of eight to nine percent.
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 one that would like to open the call for your questions. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. I'm using the speaker phone. We asked you please pick up your handset before pressing the keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster off.
And once more ladies and gentlemen just as a reminder that started in one if you'd like to ask a question.
And today's first question comes from Kevin stanky Berrington research, please go ahead.
Hey, good afternoon, everyone. Good afternoon. So one of the start off by talking about the year uniform segment month, you mentioned in the prepared remarks, seeing more business moved through the uniforms Pipeline and at an accelerated rate off with higher wind rates. And I know you also said maybe over the long term that you know, 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 uniforms organic growth rate kind of trend towards those longer-term targets that you've noted in the past, you know following kind of, you know, flattish two slightly down in in 2019 dead.
certain
Thank you for the question. Yes is the answer. We do expect them to accelerate. We we we have not given up on our original guidance of our uniform business growing at 6% per year. We think that as as highly achievable and we're we're seeing uh, you know light at the end of the tunnel so to speak with with things really I'm moving in the right direction really on all fronts of our uniform business the collaboration between fast and see a healthcare and CID has been phenomenal under Peter's leadership. And we see the same thing under David's leadership at hbi that is a whole new mindset with the new sales leadership. He has their 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 to a close that's been sitting out there for some time, you know, and it stayed of progress towards birth.
finally closing itself
Feeling very very comfortable with that and you know for the for the short-term and long-term quite frankly.
Okay, great. So, I don't want to I know you look at things on a longer-term basis, but it seems like you know, perhaps twenty twenty you could perhaps returning a positive organic growth in that business just given kind of the tone. You know, I know their sales cycles and the length of those play into that but I suppose is it a reasonable expectation to to see it better growth in that business in 2020 vs 2019. Yes, you go to give a little bit of color to that. Uh, you know, first quarter off, I you know, we don't usually speak about quarters, but we did speak about a roll out it was you know going to bed extended from fourth quarter last year the first quarter of this year. So we'll get a little bit of a benefit from that job more. So we we see in the second half of the year really things starting to get more exciting and so
You know what our cycle is with.
Talked about it before that, you know the Cycles the sales cycle itself can be two years and then the actual you know manufacturing cycle is generally around six months six to nine months off actually roll out of 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 you know absent any apocalyptic events were feeling pretty good about it.
Okay, great. That's helpful. So I just wanted to Circle back on something that you know impacted third-quarter namely you're a conscious decision to reduce merchandise levels in the uniforms business and you know just giving the mechanics of a month impact that it had on growth in in Prior quarters. Are we kind of have you accomplished everything you want to with the the merchandise inventory reductions and their faith or should we expect to see less volatility related to ASC 606 in the numbers going forward.
This is Michael.
It's all that might jump in the second handy. But you know, our goal is to is to always right size our inventories and also to you know, protect our customers from a risk standpoint in the event of happenstance around the world such as we have now with coronavirus, you know, 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 an 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, you know, somewhat negative with respect to our Revenue, but it's the right decision to make off or shareholders in for us.
And Mike yeah Kevin, this is Michael. Oh, 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 off-roading is as 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 off as we can to increase our terms and keep our inventory are working capital and levels that make sense for us and the tools we've invested in will allow us to do that more effectively.
Okay.
Great that that's that makes sense. All right. So in terms of just the the margins in the uniforms business, you've talked quite a bit about just the overall competitive environment and pricing pressure Etc. I mean, are you seeing any of that having a meaningful impact in your on your business page 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 office. It's it's it's it's 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 life, you know of late at least, you know, looking at past results and more of the same as we've reported in other quarters right now there there seems to be a concern on many people.
part with respect to
Whether they're going to have merchandise or not. Uh, so we're uh, we're seeing more opportunities an error ever that we have not even been able to see in the past month 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 off 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.
Yeah, are you kind of talking specifically about you know coronavirus impact there? I mean I suppose the question is have you have you seen any impact at all from that your supply chain? And you know, I think you've been gradually reducing your exposure to China over time anyway, but just just kind of has there been any impact or are you in any heavily impacted areas in China with your supply base? Maybe just expand. I know it's unpredictable situation. But any more color I guess would be helpful. The good news is as unpredictable as it is. Remember, we have a lot of feed on the ground. We're having our own office in fully staffed and 1,000 Dinah and many of our people are actually working from home right now. We've asked them not to travel but we have a full staff working and staying in touch with all of our supplier wage.
There and so on.
So there's two parts in this question, you know, do we have we seen any other new business opportunities result of this we're certainly getting a lot of phone calls because of this, you know our first month response to anybody calling us. It was not done business with us before is we have an obligation to our existing customer base. And that's our first obligation, you know, people give us business before giving us contracts. We're going to take care of them first. So we're in the process of evaluating. You know, what the effects would be of one week more shut down two weeks more shut down three and suck on batteries coming back now that a hundred percent capacity, but at 90th 68-53 you've never seen more spreadsheets in your life. But if we we have a very very good handle on where I stand and fortunately with the help of our folks in China and the particular the bamco people who who really have their their fingers on the pulse probably better from a dead.
What's really happening?
Around and China, we 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 and 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, you know, I told you we have our we have our office with sourcing office and that office has been there for many many years for Banco 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 China with Factory managers in Factory owners, and the government is very very strong. These are long-term relationships and some of them are quite personal life know their families they know hours and you know, they've met the executives or our company including many many most of these larger suppliers, and you know when things do get back to normal
Well, you know we've been assured.
From the backhoe side and from the uniform side that we're going to be first in line or one of the first in line to run production through their facilities. Now what production we need, we need back and forth quarter less than 12% of our uniform production was actually done in China. So it wasn't significant and they they are not items that we couldn't put somewhere else. So with our redundant strategies, we're not worried about that. What what is a more concern are Fabrics in China are Fabrics in China for the most part come from every day except Wuhan and we actually have 1 million who Bay that we're we're looking at alternative fabric 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 you know, we have an obligation in in at least dead.
with respect to these contract assets that
We keep talking about to have those on the shelf for a customer in generally that's months of inventory sitting on the shelf for our customers for their exclusive use and that puts us in a in a pretty good position. But even behind that we have taken very very long positions as we did years ago during the cotton prices and part of this is a result of these terrorists and not knowing what would happen with the relationship with China. We taking 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, you know, we look at the timeline 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 as pretty low-risk right now for the near future near future being the next three or four months. We're going to be okay beyond that the longer this goes on the longer this could be dead.
It could you know could ultimately impact us.
We feel pretty good till the end of this year. I mean quite frankly, you know, what might we have to do in the meantime if this extends Beyond would say April or May is we might have to Air Freight some Fabrics once these Mills get going and keep in mind that most of the textile mills are not very labor-intensive. They don't have to have a lot of people back to work for these for the 10,000 Mills to get going as opposed to sewing 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 looking at, you know trucks or finding it difficult to travel through China right now to to deliver gray fabric to a die house because truck drivers are being stopped on the road multiple times staff of the temperature Thursday and so on we're hearing all these stories. It's not anecdotal. It's it's people on the ground telling us what's actually happening. So but we we are on top of this month.
We we feel the impact will be less for our uniform business than than it might be for some of our competitors. In fact, when we look at bamco most of them goes production is dependent on China now so did a couple of years ago follow our lead and went and started sourcing elsewhere Bangladesh Vietnam various other places and have moved a fair amount of stress and burden remember their business also changed when we bought the amp go they were 70% customized merchandising and today they're 35% That's half what it off button that's a result of their growth has been primarily in the standard promotional products business with all the Reps they've taken on who and you know, our goal was to ultimately wage convert those reps to to selling customized merchandising which is at a higher gross margin and so on but but that hasn't, you know quite happened yet dead.
So we're going to pretty good.
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 9 a.m. And you know, the good news is that we have very strong relationships with those suppliers. Again, they have assured us that they will take care of our needs they have assured us because I am 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 you know, usually they would they would build up their inventories and they would leave those off over the period through the next year. Those inventories might be blood off in a shorter amount of time. But we feel like they will be sufficient to take care of our needs we have lost wage amount of business at Banfield.
Put it out. There. There were 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 off. Some of that business will just get deferred to another period of time. Some of it has to do with budgets that you know won't be spent but maybe you spent later in the year, but some of that is business that will will not repeat itself. It does 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 cidse normal rollout wage fall season, which we would be selling in which would be shipping in June and July it's a very small part of the newer items a fall season is a very small part of their job.
They are flush 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 reducing it because quite frankly it's it's a little bit of a godson. I don't know. I can't imagine any competitor having more inventory than we have sitting there right now in terms of you know, how it how it matches up or Revenue. We we should be able to take care of customers our customers and our and our competitors customers over these next few months very very nicely. So there's a lot going on here. Uh, 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 too far off this as we do the to anticipate where the outages might come from and to be able to respond from them proactively and very early in the in the process and I mentioned before, you know, we dead
We've gone through crises before the cotton crisis in 2010.
Was pretty devastating to a lot of uniform manufacturers. We in fact picked up marketshare during that time. That was that was a great turning point for the company and being able to sign up customer who we're 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 you have any more let me know.
No, that's great. That's that's helpful commentary on it pretty complex subject. So I appreciate all the color maybe just switching to promotional products. Am obviously very strong quarter there in terms of top-line growth against a fairly difficult year ago comparison. I mean, maybe just talk about strength there. Is that being driven all by this this aggressive hiring strategy where there any unusually large orders in the quarter and I guess home despite that happened despite some slate deferrals of businesses you mentioned so just maybe more color on what's driving that growth right now. Yeah, this is Andy office on Van KO the growth really is coming from the investment that they've made in that Salesforce. There's not any any individually large item you unusual orders that are driving that volume up for the birth.
I think they've been very successful and what they've been able to do as far as gaining from the momentum of those of the the new sales.
Grabs as well as the other becoming more seasoned with the company. I mean, I think they done very well in that regard.
One of one point to clarify for you though on the deferrals that Michael referred to those are affecting first. What are they were they were none that affected the fourth quarter for for bamco? Yeah. Okay. Okay. Okay. Yeah, go ahead the good news on what's happening in the marketplace Thursday. We have no shortage of sales people that we can put on I mean both vehicles reputation of being the best employer in L. And you know now they've expanded to Texas and they suspend it to to Colorado and and you know, eventually will I presume will have people in every single state but we just branded bamco, Texas and we expect that to go very well and with the reputation of receiving the most wage everything else we've spoken about bamco. I mean all the accolades are getting from all the Publications in that industry. We have we have a a lineup of sales people who are dying to come work for us and birth.
This coronavirus unfortunately is going to make that line longer because the smaller competitors are going to Real.
He struggled and keeping up with this with their supply chain, and we're going to be able to take care of itself. You know, they may be at a point a Tipping Point of making a decision. But when they can't get product through their own current employer to take care of their customers, they're going to come looking for a new employer. So, you know, we we this is this we want to be opportunistic as well as long as 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 wound up on the other end of it stronger than ever.
Okay, great. Just yeah following up on so I was interesting to hear that, you know, the mix change out from you have custom or customized has gone down by about half just as you've hired more but have you seen is is reps are in that business wage, you know, is there a 10-year increases are they selling more customized products? Just you know, did you would you hope to get that mixed back up again over time? Well, it sounds like you would like to to improve margins. But what what are the trends you're seeing in terms of individual reps is there they you know, they're in tenure increases in terms of how much customized business they sell. Yeah, Kevin as their tenure increases they they will sell more of the customize and I don't think Michael was intending to lead you to the conclusion.
You were failing in that regard. It was more a matter of who were fortunate that we were early in the process.
Relative coronavirus and where we're at from a from a source introspect. We feel very comfortable that those reps over time. We'll get to a higher much higher mix off of customize 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 address as we go along. So there'll be a mix of more seasoned and mature newer reps. That'll be coming in with the last customized product to start with but over time. It was definitely increased back out it keep in mind when we bought bamco in 2016. They're trailing 12-month 32 month. And so 70% of that was was customized and they stayed very much in line with that until we began the strategies of birth of really hyper growing that business and yes reps do come in with with more of a mindset of selling, you know things out of the catalog from suppliers in the Dead.
But one of the reasons why they come to Vamp goes because they have that custom.
Capability which is something that most promotional products distributors do not have it kind of makes Bank go a hybrid supplier distributor, which there are many of those out there, but they can be all things to all people in that respect. And so yes, you know over time. I mean that's why many of them come to work for us. Now they have to work their book a business office to get people to convert to more customized material which requires, you know, 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 of their hundred and seven million dollars last year if you say 35% of it was I still double nearly double what they were doing when they were 70% and thirty two million dollars. So it definitely is coming up.
Okay. Got it. Just maybe talk. Let's talk a little bit about margin side of things here. So, you know wage sounds like you're wrapping up some of these implementation projects, you know sap and the dummy Ms. Done at CID nearing completion of a PHP. I should we think about any also put out that longer-term margin goal. But but should we think about maybe twenty twenty as a year? We're off you start making some progress towards that long-term goal as you get past some of these implementation costs and investments. Just what's wrong. What's what's kind of the the outlook for profitability in in margins in 2020 from a higher level anyway,
Yeah.
Certainly, we we plan to make and and attempt to Grant gain as much upside as we can as we move forward with our profitability calls and respond. We will find ourselves in a position with our you know, with systems and Technologies and capabilities and it's you know, a single Erp system across a uniform divisions and Platforms in place during 20-25 expect to be able to take advantage of those opportunities and upsides to manage our our Effectiveness from an operating margin standpoint in twenty-twenty and as wage you to move forward the you know, we also expect to see, you know, as bamco continues to grow and it's damn code continues to you know, grow with respect to their top-line sales. We've seen at 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 and finally with rtog business. We we continue across
To see that growth as well you saw this.
Here they are gross margins. They're they're gross margins that they're operating margins grow. And you also see that you know as we talked about in the past we've made growth Investments a t o g that will position ourselves as well move forward as well. So we have every intention, you know to move forward and and try to maximize our operating margins every year from here as you move toward that 2024 Target of 89% and log into that that you know, we did expand our call or code everyone or our first factory and their capacity in the last just a few months to be able to produce more for us in 2020, which will definitely improve margins and code every two is on track and is producing a product now on you know, obviously it will be a small amount of product for the first six months of this year. But you know in the second six months of the year become more and more once we have six hundred dead.
It will be the end of this year. It's certainly are.
Make an impact later on in the year in terms of our gross margins significant gross margin improvements. All that is later on in the office more than is right. Now you should see you know, operating margins improved just through some of the riffs that we did last year. So when you looking at comparative periods, you should see them in the first and second quarter some improvement to that provided us to sales hold up. And so we're we're pretty excited. We're headed on contract for sure.
Okay, great. And I think my kind of reference this in terms of you know, where where you expect the margin expansion over this time Horizon to come from and and you know, so so as you think about just what it was eight to nine percent and twenty twenty four operating margin see that is kind of a 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 towards that your three year and maybe just again expand on you know, the sources of that margin expansion in terms of the segments or or what-have-you as you move forward.
Michael but you jump into that. Yeah. So no says we build are like we like we discussed you know, as far as how we like to look and try to provide guidance on that growth, you know to 8 to 9 % operating margins. We talked about it on a five-year timeline because they are going to see abs and flows in our in our business and we are going to see that I'm very on a year-in and year-out basis. You don't want an overall basis if you you know drew a straight line from where we are now to five years out. You see it certainly see a trend that is odd upwards like moving throughout the course of that time, but there are going to be points in time. I would expect given that 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 five-year period where we met see declines in our operating margins from where they are from the year prior where we may not dead.
You know, it just depends but we do expect.
We are planning for a you know, a trend is straight line growth basis over the course of time from now through 2024 toward that eight to nine percent operating margins Carolyn when when you look at it, if you were to look at on an individual segments basis, we expected really see the operating margin in each one of those segments trending upward the whole time capsule any unusual Events off what will affect that swing in different years is a year like this where bamco 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 two cycles back to the fax you an individual individual years.
Okay. Got it. Thanks. That's helpful. I get just one last question here. I might have missed this is just the numbers question. Did you give the at least as calculated according to your faith covenant What where your debt to ebitda ratio currently stands? No, actually we didn't where we're at 4 four times. Okay. All right. How are you? Trying to thinking about leverage and debt pay-down et cetera As you move forward capital allocation wage. Maybe as you move past some of these larger Investments you've done in the last year or two.
Yes.
So so as we you know, as we mentioned during the my prepared remarks and we actually did Drive our we did bring our net debt down slightly during the course of this past year and that's even with significantly higher investments in cat facts that between 2018 and 2019. So we're particularly proud of that, you know, we were able to manage our working capital down. We were able to manage the back 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 a tour bus slightly above where we are this year. So when the eleven or twelve million dollar range, so we do expect from a capital allocation standpoint to still find ourselves leaning in on the capex side. You continue to expand our abilities in our yard or facility and continue to invest in what we have underway until Debbie plus the month.
roll investment so as we look in
The 2020 capex is still a priority for us and we we will find ourselves in position or that that is one of our primary objectives with respect to Capital allocation.
Okay. Got it. All right, that's helpful. Thanks for taking all the questions.
Thank you. Ladies and gentlemen, that's all the time. We have allotted for Q&A. So this concludes our question-and-answer session. I would like to turn the conference back over to Michael been stock 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, which time we will be speaking about how we will celebrate our hundredth your birthday 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 not concluded. We thank you all for attending today's presentation. You may not it's not your lines and have a wonderful day.