Q2 2023 Superior Group of Companies Inc Earnings Call
Yes.
Good afternoon, everyone welcome to the superior group of companies second quarter 2023 conference call with US today are Michael Benstock, The company's Chief Executive Officer, and Mike Campbell, Chief Finance Financial Officer.
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 the 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 expect believe anticipate think 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 Companys periodic filings with the Securities and Exchange Commission, including but not limited to the company's most recent annual report on Form 10-K, and quarterly reports on Form 10-Q.
Our holders 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 compare contained herein, except as required by law.
Now I'll turn the call over to Mr. Michael Benstock. Please go ahead.
Okay.
Thank you operator, and thank you everyone for joining today's call I'll begin by.
By reviewing our second quarter highlights on a consolidated basis, including an update on our strategy to navigate the current economic uncertainty and ultimately position the company to capitalize on the compelling growth opportunities ahead.
I'll, then review, our three business segments, and our various initiatives to more profitably grow each business. Mike will then provide more detail on our second quarter results along with an update on our full year outlook. We will then open the call for Q&A.
We generated consolidated second quarter revenues of $129 million compared to $148 million for the same period last year, along with consolidated second quarter, adjusted EBITDA of $7 million compared to $5 million in the prior year quarter, which excludes last year's noncash.
Impairment charges.
We're all financial performance was consistent with the soft market conditions described on our last quarterly call.
In the midst of a challenging market environment. Our team remains focused on delivering on our commitments to drive positive cash flow and strengthen our balance sheet.
As a result, we generated operating cash flow of $38 million through the first six months of the year, we just working capital and improved our leverage ratio, while also strategically investing in the attractive addressable markets across all three of our business segments.
As a result, we believe SDC is in a better position to capitalize on the improved sales trends in the second half of the year and beyond as macro softness and uncertainty ultimately gives way to better economic times with that let's take a closer look at each of our three business segments.
Health care apparel, which primarily includes the wink and fashion seal healthcare brand generated second quarter revenues of $28 million up from $26 million in the prior year second quarter. This 70% increase came despite the continued soft conditions across the health care market set.
Quarter, adjusted EBITDA of $1 $9 million improved from negative $1 $4 million in the year ago period, which included significant inventory write downs last year as you may recall.
With what I've mentioned on our past two earnings calls, we have made and will continue to make progress towards achieving better inventory equilibrium. As a reminder, health care apparel is a large and growing addressable market and our overarching strategy involves growing our market share well in excess of the 2 million plus caregivers, who already where our brand.
Every single day.
Since the launch of our direct to consumer website, featuring a week product line early in the second quarter results have remained above expectations by adding the DTC channel to our business, we have been able to drive higher consumer awareness and engagement with our brand another strategy within health care apparel is the recent launch of our.
B to B website designed to allow wholesale accounts to engage with us more efficiently.
Wrapping up on health care apparel, we see attractive long term growth opportunities and continue to expect stronger year over year results, which have already begun.
Next up is branded products, which is our largest segment generating revenues of $80 million during the second quarter versus $102 million a year ago consistent with the softness that we outlined on our last call.
Branded products second quarter, adjusted EBITDA of $7 million was up slightly over last year with last year's result, reflecting PPE related inventory write downs, while topline headwinds caused by economic uncertainty continue branded products is another segment, which we're effectively managing through this period by improving gross margins.
Carefully managing expenses and developing new sales strategies to overcome the macro environment in other words, we're focusing on what's within our control and these actions will leave us well positioned to capitalize on future growth as the economy improves over time, our long term vision for branded products is to expand our market share currently.
And 2% in this attractive and growing $26 billion marketplace.
Let's move on to contact centers, our highest margin segment.
Second quarter revenues were $23 million up 6% over the past year with adjusted EBITDA of $3 $3 million, reflecting a margin of 14% slightly improved from the first quarter relative to adjusted EBITDA of $4 $9 million a year earlier this quarter reflects higher labor costs and the investments in talent technology.
In infrastructure during the second half of 2022, partially offset by price increases that were implemented at the end of the first quarter.
We continue to build our pipeline of new business, while identifying further pricing opportunities are long term plan is to continue to significantly grow the office gurus tapping into the large addressable market for contact centers, while aiming for EBITDA margins in the high teens I'll now turn the call over to Mike before we take Q&A Mike.
Thank you Michael and thanks, everyone for joining today second quarter results were consistent with the quarterly cadence. We described in our call in May and we continue to expect a backend loaded year, we generated consolidated revenue of $129 million compared to $148 million in there.
Prior year quarter.
Our gross margin expanded to 36, 8% up 430 basis points over the past year.
This improved gross margin was primarily driven by last year's inventory write down of $4 $5 million, which accounted for 300 basis points of the expansion and a significant improvement in the branded product gross margin rate due to favorable pricing and customer mix.
While second quarter SG&A costs of $43 million were improved from last year.
SG&A expenses as a percentage of sales increased to 33, 6% for the quarter compared to 31, 1% for the second quarter of 2022.
The increase as a percent of sales was due to expense deleverage, resulting from the sales decrease in branded products and higher expenses associated with additional head count and infrastructure costs to support growth in our contact centers segment.
Second quarter interest expense of $2 $6 million was consistent with the first quarter, but was up $2 million from last year due to higher interest rates.
Rounding out our income statement discussion.
Second quarter net income was $1 2 million or eight cents per diluted share compared to the prior year quarter's net loss of $26 $7 million or $1 70 per diluted share.
In the year ago second quarter of 2022, the company recognized pretax noncash impairment charges related to goodwill and trade names of $30 million or $28 million that attacks or $1 78 per diluted share.
On an adjusted basis, which excludes the prior year charges. This quarter's net income of $1 $2 million or <unk> <unk> per diluted share was about flat to last year.
Moving onto the balance sheet, our cash and cash equivalents grew slightly since start of the year as Michael mentioned, while we navigate challenging market conditions, we have made meaningful progress towards strengthening our balance sheet by continuing to reduce debt and working capital as well as driving $38 million in op.
<unk> cash flows through the first two quarters of the year.
We remain focused on these areas and we'll also continue our tight management of expenses and capital expenditures as.
As a result of these efforts our net leverage ratio has improved slightly from the first quarter to three seven times, our trailing 12 month covenant EBITDA and was well within our covenant requirements.
Turning to our updated full year outlook, given the persistence of soft and uncertain macroeconomic conditions. We now expect a revenue range of $550 million to $560 million relative to the range issued in March of $585 million to $595 million.
For earnings per diluted share our outlook now reflects 45 to 55 relative to our original range of 92 to 97 cents.
Note that our updated outlook still calls for a back end weighted year with both the third and fourth quarters stronger than both quarters in the first half.
Finally on a business segment basis for health care apparel, we continue to expect low single digit sales growth for the full year that reflects gradual improvement through the balance of the year as inventory levels and customer demand approach normalized levels.
Branded products, we expect a high single digit sales decline for the full year again based on an improved sales trend during the second half.
Lastly for contact centers, we anticipate improved sales and profitability in the second half of the year compared to the first and second quarters, resulting in double digit sales growth in the low teens for the full year. Operator, you can now open the line we'd be happy to take questions.
Thank you very much we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys.
Cause that you're asking the question queue. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Today's first question comes from Kevin Steinke with Barrington Research. Please go ahead.
Good afternoon.
Just wanted to start off by asking about.
Yeah.
Changed I know, you're still expecting a back half weighted year in an uptrend in the second half year, but just kind of curious what you're hearing from your.
And on the branded product side.
That might have changed your outlook.
And if they are just being a I suppose a little more cautious than previously.
We anticipate it.
Yeah, Kevin Thanks for the question and I'll jump and Mike can add anything that he sees we have started to see some positive signs of budgets opening up in marketing spend in the past few months.
Yeah. The large tech companies continue to report pretty strong earnings.
Which overall bodes well for us.
Our backlogs in fact.
Which is representing orders received but not yet delivered as you know it was up significantly.
June 30th over over the end of March.
And we're seeing good signs we're not seeing.
It is a return to any kind of normalcy.
That we would have expected it sooner.
Sooner.
And we're seeing it all.
All the all the predictions that we heard.
In the latter part of last year is what were you like most of our first half second half.
Outlook.
And we expected that the.
Second half will come back a little bit stronger as the economy was predicted to come back stronger and.
And we seem to be just in this in this malaise of uncertainty.
Where some budgets are opening up.
Some budgets aren't.
But you know where we are seeing positive signs I think we're taking a conservative approach to this we don't want to disappoint.
We want to be certain that our targets are realistic.
The second half can you still second half of the year. If you if you do the math.
It was up significant double digits over.
Over the first half of the year in order to achieve those results and I would expect that that will happen at this point, but you know it's.
It's really a mixed bag.
Truly is.
We're seeing within that I spoke about the branded merchandise branded products in particular, but when you look at.
The uniform side of that that's a little bit slower than the branded merchandise, there's even though they are smaller parts of our branded products segment today.
Right.
And then you look at no health care was up in fact second quarter.
But there's still a lot of product in the marketplace, that's being that's being.
<unk> sold by our competitors I have no visibility to how much excess product. They have left to sell those ours is coming down significantly we're looking to get passed.
Past our issue.
Of any kind of product overhang by the end of this year, which I think we've been pretty clear on and.
Yes.
Lastly, when we get to the call Center business.
Interestingly, Mike can probably share exact statistics, a little better than I can but.
We did put out a lot of customers are in the first half of the year I think at an unprecedented rate. Unfortunately, we also had a lot of customers.
Who cut back on the number of agents that are required because they have uncertainty in their business as well, Mike do you want to jump in on that a little bit.
Sure Yeah, I would just add Kevin I.
I mean, Michael covered it well in terms of branded products nothing to add there on the contact center business, you'll recall, we mentioned at the end of the first quarter that we on boarded quite a few customers in the first quarter and you certainly saw the benefit of that in the second quarter.
And while we still had some growth within our existing customers.
We also had.
Some cut some of our customers cut back on seats.
And so that that cut back with some of our customers is what tempered the growth.
A little bit in the second quarter.
As I noted in my guidance, we expect.
The sales trend to improve with contact centers as we continue to get the benefit of those added customers plus customers in our pipeline. So we feel good about the back half of the year for contact centers.
Great. Thank you for all the insight there.
Nice job on the cash.
Cash flow and the financial leverage ratio.
Didn't spike up as March or didn't you really move as much as I thought it might based on you know they had a man.
And then to your credit agreement you had executed so.
Hmm.
But how should we think about that.
Rich and cash flow as we.
A look to the second half of the year and relative to <unk>.
Covenants.
I had been in place for the remainder of this year.
Sure Yeah, Kevin well, all I'll say, we clearly exceeded our expectations in the first six months as we've talked about really starting last year really focused on inventory in particular and cutting back on purchasing that we felt would drive improvement this year and clearly we see that happening.
But we're obviously really satisfied with how we ended the first six months I think there's still there's still room for improvement in the balance of the year are not.
Not to the magnitude obviously that you've seen in the first six months, but.
Inventory levels, while we're making progress.
I'll have more progress to go for the balance of the year, particularly in health care.
So our expectation is to still make some let's say modest improvement balance of the year.
And it obviously with the improvement that we've made in terms of working capital and the reduction of debt.
And the improvement in our leverage ratio, where we're feeling more comfortable about our covenant position going forward, but still have work to do to hit what Michael what I would say is our target net leverage ratio, which is to be two and a half or lower.
That will that will take some time, but we're we're obviously feeling more positive as we move forward.
Okay, well that's good to hear.
So you mentioned.
The.
Some some customers and contact centers.
Pulling back kind of the number of agents in.
I know you're implementing some price increases to offset.
Some higher labor costs, you had seen in that segment, what's what's the status of pricing there and.
You know does.
The fact that there's maybe less demand for agents currently takes some of that pressure.
Pressure off of labor.
Labor cost at least in the short term.
So I'll, let you jump in on that.
And then Mike can add again.
We're not seeing we had a few clients who decided to reduce their head count.
And we haven't lost clients, which is always a good thing.
Spectation, Kevin is when Theres more clarity to the future and when when things do turn the corner.
From an economic standpoint, right, we will get those seats back in the meantime, you know that was not contemplated.
With that we would do the kind of head count reduction that we did with.
Particular customers during Q2, and obviously you know that affects our growth overall for the year.
And so that's the first part of it I wouldn't say that there is a that there's a lesson demand for new customers and new agents.
The places where we operate in fact I would say near shore is as robust as it's ever been but when you have close to 300 seats that you cut back.
In a single quarter that youre not going to see revenue from those for the.
Wonder of the year it doesn't impact you we've tried to redeploy many of those people into other.
It seems that we have won and we have won a fair amount of seats. So we haven't had to really cut back our head count that much.
It's one offsetting the other instead of having growth we're just basically.
I have had to temper our expectations with respect to growth right now because of that.
Mike do you think you are.
Okay you cover.
Okay.
Okay. Good thanks.
I just wanted to ask about health care apparel, you mentioned some positive early results on the.
Direct to consumer initiative and maybe.
Just talk more about how that's trending and how you think.
Could play out and potentially contribute to the second half of 'twenty.
2023.
Yes, as we said in the past, we don't expect it to have a big impact on this year.
We did a soft launch in April we didn't see it.
End of April .
We've had three and a half months added so far.
Every month is better than the prior month right, we're getting much better at that.
Keeping our customer acquisition costs in check and a return on AD spend wherever.
Where we want it we're not disclosing what those metrics are because it's not significant enough to really.
Speak about I would expect that that's sort of the latter part of 2024, you're not going to hear us speak about actual numbers and maybe even beyond that from a competitive standpoint, we're best off not speaking to that but I can tell you it is exceeding our expectations.
Very happy with the gross margins, it's bringing the business, we're very happy with our ability to move clearance merchandise through that which we did if we said we have a lot of and.
So we're excited about the channel and it is everything we had hoped it would be.
And I'm looking forward to two sometime in the future being able to report a one that is a more significant part of our business, which will be a question of time.
Yeah.
Okay. Thank you for taking the questions I'll turn it over and I'll get back in the queue. Thanks.
Thank you.
The next question comes from Jim Sidoti with Sidoti <unk> Company. Please go ahead.
Hi, good afternoon, and thanks for taking the question.
Okay.
Hi, Jim.
You know Hugh Hugh.
Yeah.
You've guided for Oh, you based on your guidance it sounds like Youre looking for the top line to turnaround and grow low single digits.
In the second half of the year.
After falling you know roughly 10% in the beginning of the year or are you starting to see any evidence of that now in the third quarter or do you think thats, primarily a fourth quarter event.
Yeah, you go ahead Mike.
Yeah, I'll start I think I think Jim.
Michael alluded.
To this a little bit in the previous question I think worse, we're seeing signs.
And in our businesses that.
There is an improvement in the trend from what we saw in Q1 and Q2.
Branded products space, we've seen.
A trend improvement and the backlog of orders that are coming into the business.
We're obviously encouraged with the positive comp in health care in the second quarter.
I don't want to get ahead of ourselves there is a lot of the year to go but.
That business.
Driving an increase over last year.
Making placing an emphasis in digital not not to some extent the D C. But overall in our digital business, which includes our wholesale business I think is helping to create a little bit of momentum in that business.
And then lastly, what we talked about the contact center business. We are seeing the benefit of the new customers that that were added in the first quarter.
And we're seeing traction.
They are in terms of added seats, which we think will provide an incremental lift to the back half of the year.
So it sounds like you're seeing some evidence in this quarter, but.
Do you expect it to continue to build in Q4 is that accurate.
Yes, I think it would be a build between Q3 and Q4.
Alright and.
Despite the decline in revenue you had been.
You really haven't seen a huge drop in earnings generated significant cash flow.
What's the plans for that cash right now is that all going to debt pay down.
Our focus is still primarily on bringing our debt levels down.
I mentioned are our target is to get our net leverage ratio down into somewhere between two and two and a half.
Yes, we've been there historically and we would like to get back into that position, which then would enable us to consider other uses of capital. So we're we're happy with the progress we've made in six months, but we've got unfinished business and will remain focused on bringing those debt levels down.
Okay, Alright, and then last one for me and the branded products business here. It sounds like that has a lot of potential for you to grow you can pick up some share.
What are the one or two things you need to do to to pick up that you are adding people.
Increased promotional.
<unk> activity, what do you think the key to growing share in that market.
Yeah, that's that's a great question.
<unk> grown share in that market means we have to take business away from one of our 22000 competitors right are the easiest way to do that is to take their salespeople, who come to us with a book of business and.
Generally within 18 months of.
80% of their book of business to us and with the support we can give them we can help them grow even.
Double their business with us versus their prior employer, so that that's the easiest and least expensive way.
The second.
Most favorable.
Favorable way to do it.
Is to is too.
Really produce a marketing effort.
<unk>, which we have done very very little marketing in the past.
But we are starting to spend some money on marketing to.
To drive people to us.
Perhaps I've never heard from us before and the third the third probably the way we've done it in the past it's.
So successfully as we bought <unk>.
We bought some of our smaller competitors.
And roll them up under Bansko and that's been a very successful strategy, obviously with our leverage ratio is.
Where it's at right now we're not comfortable doing that we are talking to people. We continue to speak to them so that when things ease up from a covenant.
Perspective, we'll be able to go ahead and and actually close deals.
I can tell you that.
You know because of the way the economy is because.
Maybe interest rates being what they are and expectations being lower than they might have been a few years ago I think the valuations will come in very very well to our favor when we do go out and do acquisitions again, but in the meantime, we're sitting tight and trying to work through.
Our Oh, our capital requirements are very very carefully, but I would expect sometime next year.
We will be back in M&A.
Hum.
No movement I can't say, we're close any deals, but we certainly will be a lot more active.
And but there's never a shortage of opportunities out there. So those are really the three ways.
Okay alright, thank you.
Sure.
The next question is from David Maris with singular research. Please go ahead.
Hey, guys. Thanks for taking the questions.
A good start kind of at the macro.
The revenue guidance is.
A pretty meaningful reduction from what you guys provided last quarter.
Yes. The question is do you feel like the numbers that you've put out are conservative enough that.
You'll be able to hit that range here as we sit here.
A part of the way through the third quarter and really you know we're the only about five months left in the year.
Yeah, David I would say, we're obviously, we're comfortable with the range.
As we approached got closer to the to the third quarter, a little bit into the third quarter can't get some sense of what's in the pipeline across our segments.
We felt that the range that we just got it too is a good range. We're certainly going to work very hard to to not just meet that range, but that range, but.
We feel like it's it's it's an appropriate range based on the trends that we've that we've seen in the business more recently.
Yeah.
Okay, and then just turning to the inventory issue.
You guys have talked about now for a little while I mean.
Can you give us a sense of you know.
How close do you feel like you are to kind of an equilibrium inventory level. I mean is it still a long way to go or are you pretty close I again appreciate the.
Color provided there about being able to move through clearance through the website, that's really helpful to understand but how are you.
Or are you pretty close to being at a and then equilibrium level, where you can kind of get back to your normal purchasing.
We're definitely making progress Dave.
And as you know Michael alluded to on the digital space within health care.
I think our our emphasis on digital both the DTC as well as our wholesale has helped us to to liquidate some of the underperforming inventory and we'll obviously continue to do that.
As we talked about last year. When we were looking forward. We felt it was going to take the better part of the year for us to really reach what we would call our inventory equilibrium Liberty M or our targets. So I think the next two quarters will be critical obviously, we're expecting.
An improved an improvement in the trend of the health care business, which will help us facilitate moving the inventory to reach our target.
So the next two quarters will be important and you know our goal is to to reach.
Our inventory equilibrium.
You know around the year end period, and we'll remain focused on liquidating those inventories over the next few quarters.
And from a supply perspective, you haven't seen any meaningful disruptions correct. You can still purchase that you know whatever kind of whatever level you would like to from your supply base is that a fair statement.
Yes, yes it is.
Okay.
And then I, just kind of reading I'm trying to read the tea leaves here there.
I'm kind of dancing around it but I just wanted to get a definitive answer.
As you sit here today with some performance metrics that you have do you feel like you'll remain in compliance with the covenants or is it still you know kind of you know.
Are you still kind of feel like it's maybe 50 50 that might need to do another amendment.
We feel comfortable with you know with the amendment that we have in place.
And our current standing in the business.
So at this point.
I would not anticipate any any additional amendments that would be necessary. Obviously, we we looked at that hard at the beginning of the year itself based on how we were viewing the the the cyclical nature of the business. We felt like it was appropriate to put an amendment in place that we felt would.
<unk> would cover any potential increase in the ratio.
Obviously, we've outperformed that and so at this point, we feel comfortable as we move forward.
That's really helpful. Appreciate it and let me yield the floor to the general I'd call. It.
Seeing no further questions in the queue I would like to go ahead and turn the call back to Michael Benstock for closing remarks.
Great.
Operator before we end this call I'd be remiss, if I did not mention that we announced last month, the passing of our chairman Emeritus of the Board My father, Jerry Benstock, whose vision and long career with spirit stand over 60 years and led to many of the successes we've enjoyed over the last many decades that truly loved to superior family in every key.
And indeed that we operated in and did much to tangibly improve the lives of so many will be deeply missed by all who knew him. We mourn his loss I want to thank all of you again today for joining our call as you heard from US today, we continue to aim at profitably capturing share and creating long term value for our shareholders. Even as we continue to navigate these uncertain times.
We're excited about the opportunities ahead, and we look forward to keeping you updated on our progress. Please don't hesitate to reach out with any questions and I hope everyone enjoys the rest of this very hot summer. Thanks again.
The conference has now concluded. Thank you for your participation you may now disconnect your line.
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Okay.
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