Q3 2022 Superior Group of Companies Inc Earnings Call
Good afternoon, everyone and welcome to Superior group of companies third quarter 2022 conference call.
With us today are Michael Benstock, the company's Chief Executive Officer.
Mike Campbell.
The Chief Financial Officer, and other members of the senior management team.
As a reminder, this conference call is being recorded.
This call may contain forward looking statements regarding the company's plans initiatives and strategies and anticipated financial performance of the company, including but not limited to sales and revenue.
Such statements are based upon management's current expectations projections estimates and assumptions.
Words, such as well expect believe anticipate.
Outlook hope and variations of such words and similar expressions identify such forward looking statements.
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 are further disclosed in the company's periodic filings with the Securities and Exchange Commission, including but not limited to the company's annual report on Form 10-K for the year ended December 31, 2021, and our quarterly reports on Form 10-Q.
Shareholders 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, except as required by law.
And with that I will turn the floor over to Mr. Benstock, Sir may begin.
Thank you operator, and welcome everyone to our third quarter 2022 conference call.
Good afternoon, I will begin as usual by sharing highlights relative to our third quarter results and then I'll discuss the performance for each of our three business segments, including our evolving strategy to capitalize on the growth opportunities ahead of us and how we're managing through the current macro environment.
Mike will then provide more details on our financial performance for the quarter and our outlook for the year, we'll finish with Q&A, which we'll be joined by other members of our executive leadership, including our Chief strategy Officer, Bill <unk>, our CFO Andy demand.
The president of our branded products segment Jake Himmelstein.
And that of our health care apparel segment, Catherine Bell body, Donlin, and the president of our contact Center segment Dominic lighting.
Overall for the third quarter consolidated revenues of $138 $7 million grew 12, 5% versus the third quarter of 2021 led by continued growth in the contact centers and branded product segments.
So holiday did third quarter adjusted EBITDA of $9 7 million decreased from $12 $6 million versus the third quarter of last year, primarily driven by revenue decline in our health care apparel segment due to continued softness in the health care market.
Now looking at the results by segments, we'll start with our health care apparel segment during the third quarter health care apparel revenues up $30 million were down 15% to last year, reflecting continued softness in the health care market.
EBITDA for the quarter was $2 $2 million down from $6 $4 million last year.
While health care results were clearly below our expectations, both revenues and EBITDA did improve compared to the second quarter of this year.
During the quarter, we began to see positive momentum with our institutional customers with that improvement was more than offset by continued challenges in the retail market due in part to saturated inventory levels.
Despite the short term challenges this year, we believe in the long term growth of the health care apparel market and our ability to improve profitability STC operates numerous highly recognizable brands and health care apparel more than $2 billion of central caregivers wearing our brands every day, we continue to offer <unk>.
<unk> shop solutions, and the widest range of products in the market in order to capitalize on what is a large growing market, we're working toward adding new products markets and customers as well as broadening our omnichannel approach.
Turning next to our branded products segment revenues of $87 million were up 21% compared to the third quarter of 2021, which was primarily driven by sales attributable to the southern mill and Guardian acquisitions in December 2021, and make 2022, respectively EBIT.
EBITDA for the quarter was $5 $6 million down from $6 million last year.
The slight decline in EBITDA was due to an increase in SG&A driven by investments in talent and technology to support future growth for.
We're branded products, including branded merchandise and uniforms. The total addressable domestic market up $26 billion remains highly fragmented.
Our quality branded offerings are unique and customized and yet our market share is less than 2% against suggesting a long runway for growth now.
Now turning to our contact center segment during the third quarter, our contact center segment generated third quarter revenues of $23 million for a year over year growth rate of 30%. Our EBITDA margin remained strong at 22% again, reflecting how attractive this high growth businesses for our overall financial performance and create.
<unk> of shareholder value.
Our investments in this business such as opening in our fifth country, a contact center in the Dominican Republic during the quarter, we will drive our ability to grow our existing customers agent counts as well as take on larger customers to accelerate our growth rate our pipeline of potential customers remains very strong with the highest EBITDA.
Margin among our three segments. The continued strong growth of our contact center segment will have positive implications for our overall FCC margins and profitability with that I'll turn it over to Mike to review our financial results in greater detail.
Thank you Michael and good afternoon, everyone turning to the financial highlights of the third quarter STC reported consolidated revenues of $138 $7 million versus $123 $3 million during the third quarter of 2021, an increase of 12, 5%.
Our gross margin was 36, 5% for the quarter compared to 37, 1% in the third quarter of 2021.
The decrease in gross margin was driven by incremental inventory reserves for slow moving items and manufacturing variances, resulting from lower production volume and our Haiti facility, which was planned as part of our inventory reduction initiative.
SG&A expenses as a percent of sales or 31, 6% for the quarter compared to 28, 4% for the third quarter of 2021.
Third quarter SG&A includes a $1 8 billion dollar benefit associated with a fair value adjustment of our stock put liability.
Overall, the increase as a percent of sales was due to expense deleverage, resulting from the 15% decrease in health care apparel sales.
In addition.
We had higher expenses associated with additional head count and infrastructure costs to support growth in our branded products and contact center segment, depreciation and amortization and severance.
Interest expense for the quarter was $1 $8 million compared to $320000 last year. The increase is driven by the write off of approximately $550000 of deferred financing costs related to our debt refinancing in August .
And increased interest rates on higher average debt outstanding.
The net loss was $12 $7 million or <unk> 80 per diluted share compared to net income of $8 $2 million or <unk> 51 per diluted share for the third quarter of 2021.
During the third quarter of 2022, the company experienced a decline in market value, thereby triggering the requirement to perform a quantitative goodwill impairment test.
Based on the analysis, we recognized a pre tax noncash impairment charge related to our remaining goodwill of $21 $5 million or $17 $1 million net of tax or $1.07 per diluted share.
This charge does not affect the company's cash position cash flow from operating activities or bank debt covenants and has no impact on future operations.
Excluding the impairment charge third quarter net income was $4 $4 million or 27 cents per diluted share compared to net income of $8 2 million or <unk> 51 per diluted share for the third quarter of 2021.
S. T C remains well capitalized and continues to operate effectively across all of its markets.
S. GC has shown its resilience by managing through challenging times with a continued emphasis on profitable growth opportunities and by focusing on improving operational and financial efficiencies.
In terms of the balance sheet and cash flow cash and cash equivalents as of September 32022 were $18 $9 million.
<unk> with prior quarters operating cash flow continues to be negatively impacted by elevated inventories as a result, we continue to significantly reduce our buying levels, which will enable us to reduce and optimize our inventory levels in 2023.
Our net leverage ratio of three four times, our covenant EBITDA is elevated but remains below our covenant limit.
We remain focused on our expense management and inventory optimization efforts in order to reduce our leverage over time.
Consistent with our focus on inventory, we are tightly managing our capital spending with an emphasis on business critical investments only as a result, our year to date capital expenditures are down over 20% from last year.
Also S. GC remains committed to returning capital to our shareholders and announced a dividend of <unk> 14 per share during the quarter.
As we mentioned in our second quarter earnings call, we identified at least $8 million in annualized cost savings.
Recognizing the challenging macroeconomic environment, we remain committed to delivering the savings and we will continue to evaluate all areas of our business for any further operating efficiencies.
Lastly in terms of guidance, we are updating our full year 2022 sales guidance to reflect sales ranging from $570 billion to $580 million as compared.
To our previous range of $575 million to $590 million with that I would like to ask the operator to open the line for questions.
Ladies and gentlemen at this time, we will open the floor for questions to ask a question you May Press Star and then one using a touchtone telephone to withdraw your question you May Press Star two.
You are using a speaker phone, we do ask that you. Please pick up the handset prior depressing the numbers to ensure the best sound quality.
Once again that is star and then one to join the question queue.
We will pause momentarily to assemble the roster.
And our first question today comes from Kevin <unk> from Barrington Research. Please go ahead with your question.
Hey, good afternoon.
Just wanted to start off by asking about.
Overall demand environment as you see it for branded products.
Given current economic uncertainty if you.
Seen any meaningful pullback in.
Our customers marketing budgets yet.
Sure.
Hi.
How do you view.
Your ability to continue driving share gains.
Just I guess any more flavor for.
Demand environment and sales trends.
See them.
Going forward.
We have Jacob Nicole so Jacob.
Take that one for me Kevin Kevin Thanks for joining us Jay.
<unk>.
Hey, Kevin Thanks for the question, we do continue to operate in a challenging environment.
A lot of events in person conferences have returned rates coming out of Covid.
Q2, Q3, and a return to events and conferences, which generally is a good signal for branded products, but the flip side of that is higher interest rates and recession concerns.
The first thing to pull back as marketing spend.
But with every other time, we've seen this in our history, we can Baptist and getting a bigger share of wallet from our existing clients and pursuing new clients. So referrals rfps talked about it in prior quarters Kevin.
<unk> pipeline has been really really strong.
And.
That strong pipeline from the past couple of quarters has pulled through to some big RFP wins in the last couple of months and those will start delivering revenue in 2023. So.
It's really acquiring new clients growing market share being really active and our sales rep recruiting.
Our competitors struggle more than we do in this kind of operating environment.
We know how to react they pull back support either the lesson there tech investments.
We were really appealing landing spot for our sales reps and clients in a difficult operating environment. So that that will be a really strong growth path for us over the next couple of quarters and the other thing. We look at is right tax taken a really big hit in this year to date, and we're pretty diversified in terms of industry across branded product and brand in uniform.
So that allows us to kind of shield any any single industry from having too big of a weight on our results overall.
Okay. Thank you for the color Jay.
Mhm yeah.
I wanted to.
Also asked about the health care apparel segment you noted.
Some improvement on the institutional side.
Offset by some continued softness in retail due to elevated inventories do you.
Any further visibility perhaps just on.
Levels of inventory in the retail channel.
Kind of timeline to some of the oldest being worked down.
Or is it still fairly murky at this point.
Catherine I'll, let you jump in on that.
Sure Hi, Kevin.
Thanks for the question from an overall health care standpoint, and I wish I had a crystal ball on when we're going to see.
A shift from an overall economy marketplace standpoint.
We are very similar to many consumer brands out there that are working through elevated inventory level.
As consumer demand on really stabilizes, we hope stabilizes in the future.
What I would say Kevin is you know, we quite frankly have really focused on and thinking about where and how we wanted to take the health care business in the future and are really doubling down on our initiatives to you now.
We sat and reignite our brand to really drive our omni channel presentation and to really approach our marketplace and with much more at that okay.
<unk> invest to grow strategy with our retail partners. So.
My long winded way of answering is on while we are hopeful we don't have.
Any insight into the overall macroeconomic conditions that may provide a timeline for relief.
Okay.
Okay I understood understand that.
Yeah Kathryn as.
As long as you're talking.
Talking I mean I wanted to ask about also you mentioned there the army.
Channel.
<unk> in health care, and now that Youre, a few more months into the job I don't want to any extent that you can.
Discuss any plans or more vision for.
Where are you going to take that business from.
Sales channel Omni channel perspective, but I'd be interested to hear any thoughts.
Yeah absolutely.
We have really been focused on investing in talent as well as digital tool and when I first starting to get kind of like standpoint, I believe I mentioned last time that we brought on.
And SVP of digital Holly Raymer, who is leading our effort. She started and I wanted to say at the beginning of September . So we're really thrilled to have her on board and she is going to help not only create but also drive our digital strategies, whether that's with market.
This is whether that's with our retail partners.
But she is focused on elevating how we tell our story and how we show up in the marketplace and we see that as a primary growth in Michigan.
And the other thing that we're really focused on is resetting in reigniting, our wonder Wank branch, we are taking this opportunity.
We have brought and silica plenty, who is that fees and brand and marketing executive.
Who is helping us.
Work on our positioning and brand strategy. So we are looking forward to bringing that elevated level of storytelling to the marketplace and when I think about the marketplace, we're really trying to focus on.
This invest to grow strategy really trying to narrow in on our key partners by channel of distribution, where we believe that we have on the vast opportunity in partnership cacao arent branded story and create more of a consumer environment.
Yeah.
Okay. Thank you.
I just also wanted to hit on the contact center segment as well, obviously some continued strong growth there.
Is Dominican Dominican Republic operation up and running now and maybe just an update on.
Number of billable agents added year to date and.
Plans for adding capacity as.
As we move over the next few quarters here.
Dominant that's all yours.
Eric Great question, Kevin So on the Dominican Republic, Yes, we are operational.
It was actually a slower start than what we hoped for.
A fair amount of bureaucracy, but now that that's out of the way we started hiring in October just roughly a month behind schedule, but but were rocking and rolling out we're really excited about the potential for the Dominican Republic for for the office Gurus.
In terms of additional capacity.
Right now I think we're well positioned.
To support the growth from both existing customers and potential customers that we have in the pipeline.
So we don't we don't see any immediate future investment in capacity additional capacity right now Dan.
Okay. Thank you and then just lastly, I wanted to ask about.
Any supply chain issues.
If you are continuing this.
Here in Sydney.
No meaningful disruptions.
There's a lot of headlines around China.
And then I guess connected to that.
Our inflationary headwinds trending for you now as they kind of come down or how elevated do they remain for you.
Okay I get to take the question. This is Michael Thanks, Kevin.
We are not having any supply chain issues.
Related to China or anywhere in Asia, or really related to anywhere that we're currently.
Sourcing raw materials or producing garments or promotional products of our own ports in the U S.
Definitely the traffic has eased up there's still a.
Fair amount of.
Cassie shortage in the United States, just getting things from the port, but that usually results in a few days up to a couple of weeks delay it most and not always but sometimes.
There is certain uncertainty about that but it's really not in our way at all as far as inflationary pressures yes.
We saw the I'll just give you a couple of examples we saw fabric from the beginning of 2021 to the end of 2020.
One go up by over 16%.
Hi.
And it has eased down as this year has moved on.
It's in the single digits now in the mid single digits compared to what it was.
Uh huh.
Year end so.
We're definitely seeing an easing their logistic costs.
Have come down of course that doesn't affect us necessarily our inventory sitting on the shelf and the cost of our inventory on the shelf. Unfortunately carried a lot of those higher logistic costs as well as the higher fabric costs.
So.
That's something we've got to deal with and we dealt with that through raising prices to customers.
To offset most of that and.
So.
Our own cost of employment in the U S are higher than they've ever been.
Both in our distribution centers as well as support functions.
There is <unk>.
Fortunately for us.
A lot of the hiring that we do for our.
Uniform divisions, and our branded merchandise divisions are actually done offshore where there is a larger abundance of help that is not at such a high rate of pay but.
It definitely there are challenges.
With respect to pay.
Round, the world and whether it's logistics or raw materials or our garment manufacturing that are going to continue but as they continue for us. They also continue for all of our competitors.
I would hope and I presume that we are doing a better job with this and most of our competitors, which ultimately should make us more competitive when we get to the competitive situations.
Okay. Thank you.
For all the insight and.
I'll pass it along thanks.
Thanks, Kevin.
Our next question comes from Tim Moore from EF Hutton. Please go ahead with your question.
Yeah.
It was nice to see the sequential margin improvement for both gross margin and EBITDA and given that some of my questions were already asked I just wanted to start out with.
Separate from health care apparel, which you commented on what's.
What's the general sentiment for the other branded uniform side when you keep in touch with your customers and see their behavior.
There are some layoffs, obviously being announced.
They were they are sharing with you and has their behavior changed a lot since the end of the summer.
Jake wants to jump in on that so thats part of them coming in.
Hi.
It relates to branded uniforms, typically higher churn higher turnover amongst employees actually good for US right. It means that there is no wear uniforms being purchased.
So we typically see that in times, where there is higher turnover people are leaving jobs at a higher pace. That's good for us in this space like the airlines or in <unk>.
Someone might trade down uniforms go from a more expensive garment to a less expensive garment that might be using more of them.
I don't want to call the Brent and uniform segment completely recession proof.
But typically not as significantly impacted in a recession than you might see in the overall overarching branded merchandise case, which we talked about earlier and how were attacking that by gaining market share, but on the uniform side as well.
See the same thing across the board where our competition.
Is is downsizing and so they might put out a tech build or they might.
Leave a warehouse or an international location and that leaves us where we've invested heavily in our technology and have it in our in our people.
Is it really appealing landing spot for a lot of these big Rfps, we've been working on the last couple of quarters.
Great that's really helpful color and things for whatever.
I think investors are missing it.
It's not recession proof, but yeah turnover it can actually be helpful for you.
Just switching gears, maybe for Katherine I'm, just thinking back to this time last year or so.
My memory serves me correct I think maybe by this upcoming Thanksgiving that was around the time that your retail health care business was maybe starting to see some of the decline.
On the apparel and scrub side. So I'm just wondering now that you've been there for several months.
Are you able to leverage the Pos data anymore.
And I'm thinking kind of the opposite here in case there is a.
Sizable step up in demand in February or March to really go and fulfill some of those depleted stock levels at customers.
Distributors.
Just wondering.
I don't think they'll turn on a dime, but even if they do play some catch up would you be ready to be able to supply that if things turn sharply the other direction positively.
Winter.
And Oh.
No go ahead.
I would just say, yes, that's a great question and one of the disciplines that we've really installed base, ensuring that we are not only analyzing our pls data back how we act upon it.
Internally through <unk>.
Lamenting a <unk> process, but also externally with recommendations to our customers. So we are working on that now and quite frankly, where it becomes the most impactful is with new products that we have introduced to the market, where we're starting to see some nice.
<unk> adoption through our pass rate. So our focus is to continue to make sure that we are investing from an inventory standpoint on.
Really those collections.
That we know that the consumer is.
Are you leaning toward and showing us that they are purchasing.
Typically the POS data so in terms of being able to act on it.
I am confident that we are on.
What we know today in terms of that trend in consumer purchase.
Yes, I'll jump in.
Also Katharine wasn't here last November when things started to fall off but.
That definitely about mid November last year was when we started seeing some impact from the fall off in sales in the surplus in the economy, starting to turn to Europe at that point of another strain of Covid I don't remember if it was.
145, whatever it was.
But what I can assure you is we are sitting with a lot of inventory.
And we are well positioned for whatever spike should happen and we are doing everything we can to try to create that spike.
For our products and that demand for our products.
We will be able to service.
Okay.
That's a comforting part I wish we weren't quite frankly, I wish we had a bigger challenge in handling the spike.
As we are sitting with inflated inventories as a result of all this falloff in purchasing.
Thanks, Catherine and Michael for the detail and color, maybe just switching gears I know Dominic spoke earlier about this.
I'm just trying to wrap my head around the office gurus in the contact center.
Even if the Dominican Republic started a little bit late because of regulation and pushed it out a few months.
Do you think that Dominican Republic can get up to maybe <unk>.
500 seats, and then I'm just trying to think about the incremental value over time, if you look out maybe.
18 to 24 months, maybe 24 months from now.
If it's available seats, something like 30000 per region.
Could the Dominican Republic add 45 million in revenues, if it catches on quite well and get the 500 seats.
Dominic.
Sure.
I'll take that one that's a good question.
As of right now the D R.
Still in its beta phase.
Which it will remain there until probably mid next year and then we'll make a decision on whether or not we can expand there are not like I said earlier, we're really bullish on the Dr. We think it's going to be a great location for us.
But time will tell starting up the center take some time, we got to get a feel for the labor force.
What we've seen with the group that we've hired so far.
Are really eager labor force that once they come try out our brand.
So we believe we're going to have a good future there how big will be and the Dr time time will tell.
And just maybe as a quick follow up.
How is it going with the seats added in El Salvador believes in Jamaica. This year are you seeing that being a pretty strong uptake.
Yes were still going strong.
I believe in all of our current countries right now we still from a capacity standpoint, we still have.
63% of our agents working from home.
And performing very well I mean, the good news is we have multiple paths to ensure.
We have the capacity we need it if things start to shift and we need to bring more of our agents back to the building.
But yes, right now believes in El Salvador are still going strong.
Still modeling everything out.
Let's see what this deal because we don't know what the future is going to hold in terms of a steady state work from home Slash in center ratio, but we definitely have the capacity right that we need to support whichever way it goes.
That's terrific.
Phenomenal business I think some investors don't appreciate as much as they should but I really appreciate that color Dominic and that's it for my questions.
Thank you.
And our next question comes from Chris Sakai from singular Research. Please go ahead with your question.
Hi, Juan yes.
Yes, I just had a question on branded products can you talk about.
The order sizes Youre seeing there.
And.
Are they growing or are they stagnating and I'll provide some color there that'd be great. Thanks.
Hey, Chris This is Jake we are seeing order sizes dropped certainly with.
As the economy goes as marketing budgets are cut but that's more than made up for with more orders increased order size, winning new customers, but certainly when.
You look kind of sequentially year over year.
Youll see marketing budget cut in a recession right and someone might order 100, if something one year they might order 90 over the next year. So as an example.
But typically we make up for that with a larger share of wallet with our existing clients and winning new clients.
Okay, Alright, Thanks, and then.
What are the growth drivers for health care.
And how should we view that and going forward.
Yeah.
Chris I think I will take that then you know when we think about what growth drivers from a healthcare standpoint.
We're looking at a couple of different things and I think it starts with what I referred to earlier about resetting in reigniting, our windowing brand, we're really excited about.
Just.
Elevating our storytelling and really being able to communicate why there is such tremendous consumer benefits to our innovative product. So I would start with that is first and foremost and most important.
Secondly, what's really important is we're really focused on accelerating our connectivity through digital.
And that refers to how we're thinking about the digital ecosystem.
It got severe weather at screening the market prices are.
You can't partners.
And really elevating how we.
<unk>.
Bring product to market and how we talk to the consumer whether it's about our brewery are wondering brand or within our portfolio of brands.
I would say the other.
Focus from a growth driver standpoint, and if I think about overall from the health care.
We are really doubling down on what we call our invest to grow partners.
And that is ensuring that we are focused investing planning, putting together sort of mutually beneficial growth plans from a distribution and channel standpoint.
So that we are able to come together and go to market.
As a unified brand from a storytelling standpoint, which gives us the opportunity to really create much more of that share of mind insurance space within the retail standpoint.
And lastly.
Certainly not least is new products and new innovation, we're really focused on.
Developing our spring 'twenty for align and bringing newness to market from a material.
In fit innovation standpoint.
Okay, Thanks and.
Lastly for me I know you mentioned I know, Mike mentioned that there you're passing on pricing and price inflation to the customer I wanted to ask is that all is it a 100% of the inflation or can you provide any color there.
Yes.
We actually I think spoke about earlier.
Earnings calls about the fact that we had done a price increase at the beginning of this year. We also did one in mid last year.
And we've tried to stay ahead.
For most customers we go through a process, where most large deals most cars large customers are going through a <unk>.
Cost analysis on activity based costing analysis, it actually pin down the exact cost of that customer, including all of the services that we provide not just products but services.
We provide them.
We think we've stayed mostly ahead of it obviously the supply chain initiatives.
Sometimes slowed down our ability to do that sometimes product has come in earlier.
We've been able to work through that pretty quickly but.
We believe that in the long haul we have.
We've compensated and mitigated most of the risk.
That inflation would.
To eat away at our margins.
Okay. Thanks for the answers.
And ladies and gentlemen, with that we will be concluding today's question and answer session I'd like to turn the floor back over to Mr. Benstock for any closing remarks.
Yes, Thank you very much and I want to thank all of you for joining our call I do want to mention that my brother, Peter Benstock. After nearly a 40 year career retired last week.
Prior to retiring he was the president of our healthcare divisions.
Did a wonderful transition with.
With Kathryn.
So that you could hit the ground running which she certainly has we want to wish him well in his retirement.
Please don't hesitate to reach out with any additional questions.
We certainly look forward to keeping you posted on our progress in the coming months as we continue to capitalize on the many growth opportunities ahead for all three of our business segments and thanks again stay safe and have a great evening, thanks for joining us.
And ladies and gentlemen, with that we'll conclude today's conference call and presentation. We do thank you for joining you may now disconnect your lines.