Superior Group of Companies, Inc. (NASDAQ:SGC) Q1 2024 Earnings Call Transcript

Superior Group of Companies, Inc. (NASDAQ:SGC) Q1 2024 Earnings Call Transcript May 7, 2024

Superior Group of Companies, Inc. beats earnings expectations. Reported EPS is $0.2378, expectations were $0.07. SGC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, everyone. Welcome to the Superior Group of Companies First Quarter 2024 Conference Call. With us today are Michael Benstock, Chief Executive Officer, and Mike Koempel, Chief 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 profitability. 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 company’s 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 the Quarterly Reports on Form 10-Q. Shareholders, potential investors and others 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 now, I’ll turn the call over to Mr. Michael Benstock. Please go ahead.

Michael Benstock: Thank you, operator, and welcome everyone to our Q1 call. I’ll begin with our first quarter highlights, including our revenue and profitability growth and our improving financial position. I’ll then walk us through each of our three business segments discussing the recent improvement in market conditions and our strategies to maintain our momentum throughout 2024. I’ll then hand the call over to Mike for additional detail on quarterly results and our more favorable outlook for 2024. At the end of the call, we’ll be happy to take your questions. We had a strong start to 2024 with year-over-year improvements across the entire business. For the first quarter, we generated consolidated revenues of $139 million, reflecting a 6% year-over-year increase.

Our EBITDA climbed 40% over the prior year quarter to $9.6 million. We generated $0.24 of diluted EPS, up sharply from $0.06 a year ago. On top of the improved operating results, we enhanced our financial position by generating solid operating cash flow that enabled us to further reduce our net debt and improve our net leverage ratio. This enhanced financial flexibility, ensures we can continue to make prudent investments to further grow our business organically, while also capitalizing on any market dislocations that could produce attractive M&A opportunities. Turning to market conditions. I’m pleased to say that so far in 2024, we’ve seen continued improvement in the end markets we serve. Our clients are generally increasing their spending.

For now, we remain cautiously optimistic on the durability of underlying demand in each segment. But even more important for our shareholders to understand is the reality that we operate in huge markets and have a very small but growing share. Our success will be determined by remaining laser focused on new customer acquisition and our continued strong customer retention. To accomplish our goals, we’re also investing in people and technology, in our very attractive businesses. We are optimistic about the markets in which we operate, confident in our own ability to execute, and therefore excited about the future. Let’s have a look at how each of our businesses performed during the quarter. Starting with Healthcare Apparel, we grew top line revenues by 4% year-over-year and EBITDA grew by 68%, mainly driven by improved gross margins.

Demand strength has improved since last year and opportunities continue to be uncovered. As I’ve outlined on recent calls. Last year, we kicked off rebranding efforts under the Wink trademark and are now entering year two of our direct-to-consumer efforts. Simultaneously, last year’s launch of our B2B website is adding efficiency to the wholesale process, while we further fortify our relationships with other digital channels. All-in-all, we are seeing improved market conditions to Healthcare Apparel. This is a large, resilient and rapidly expanding addressable market and we’re looking to grow our market share well beyond the more than 2 million caregivers who already wear our brands to work every day. Next up is our Branded Products segment, which generated 6% revenue growth during the first quarter as compared to the year ago quarter, along with 32% year-over-year growth in EBITDA, driven by continued gross margin improvement.

The demand environment has been improving, continuing the positive trajectory we first noticed last summer. Our key to success for Branded Products emphasizes strong customer retention, growing our share of wallet, driving greater RFP activity and increasing our sales rep recruiting. This is a $24 billion and growing market and we intend to continue expanding our market share currently at less than 2%. Rounding out our business segment discussion, Contact Centers grew revenue 7% over the prior year quarter and EBITDA up 5% from last year. As we’ve indicated on prior calls, we’re now beginning to anniversary the higher labor and talent costs that have been with us since early 2023, along with our move over the past year to raise prices, which should bring stronger margins going forward.

Demand drivers remain solid and our pipeline of new business remains strong. Our focus is on increasing seats with existing customers, continuing to build our pipeline of new customers and leveraging the very latest technology to enhance efficiency. With that, I’m going to hand the call over to Mike for a closer look at our first quarter performance along with our stronger outlook for 2024. Mike, go ahead.

Mike Koempel: Thank you, Michael. We generated solid first quarter results with quarterly revenue of $139 million, up 6% versus the year ago quarter. All three of our business segments grew with Branded Products up 6% to $87 million, Healthcare Apparel up 4% to $29 million, and Contact Centers up 7% to $24 million. This was profitable growth as well, with our consolidated growth margin up 380 basis points over the prior year, reaching nearly 40%. All three of our segments demonstrated improved gross margins versus the prior year quarter, particularly our Branded Products and Healthcare Apparel segments. Branded Products was up 480 basis points, continuing the trend of year-over-year margin rate improvement and reflecting favorable pricing and lower supply chain costs.

Healthcare Apparel was up 350 basis points, primarily driven by lower costs, including improved manufacturing efficiencies in our Haiti facilities, improved market conditions and higher margin sales from our direct-to-consumer channel that launched in the second quarter of last year. Our first quarter SG&A was $49 million, flat sequentially from the fourth quarter, but up from $43 million a year earlier. As a percent of sales relative to the year earlier quarter, SG&A was up about 2 percentage points to 35%. This was primarily driven by increased employee related costs, an increased charge to recognize the fair value on written put options and lapping the benefit of a reduction in acquisition contingent liabilities from the first quarter of last year.

In terms of EBITDA, we generated $9.6 million during the first quarter, 40% above the prior year’s $6.9 million. All three of our businesses contributed to this strong EBITDA performance, with Branded Products up 32% to $9.9 million, Healthcare Apparel up 68% to $2.6 million and Contact Centers up 5% to $2.9 million, despite the higher labor costs we’ve yet to fully anniversary. Our interest expense for the first quarter was $1.8 million, which improved by $800,000 from the year ago quarter, driven by our efforts to significantly reduce debt over the past year. Our first quarter net income was $3.9 million or $0.24 per diluted share, not only up slightly on a sequential basis, but up significantly from $900,000 or $0.06 per diluted share in the year ago quarter.

The improved result was driven by the increased sales and gross margin rate improvement across all of our segments. Shifting to the balance sheet. We’ve continued to make improvements with cash and cash equivalents of $22 million, up from $20 million in the fourth quarter and debt outstanding lower by an additional $4 million during the quarter following the significant reduction in 2023. Additionally, we generated approximately $9 million of operating cash flow during the quarter, on top of significant operating cash flow generation last year. Based on lower debt outstanding combined with improved profitability, our net leverage ratio ended the quarter at 1.6x trailing 12 months covenant EBITDA, a substantial improvement from 3.8x a year ago.

Turning to our updated full year 2024 outlook. We remain cautiously optimistic on the demand environment, continuing to slowly improve and on our own ability to push pricing when possible. We’re raising and tightening our 2024 revenue range to $563 million to $570 million versus the prior range provided in March of $558 million to $568 million and up from 2023 revenues of $543 million. In addition, we’re raising and tightening our full year earnings per diluted share outlook to a new range of $0.73 to $0.79, which reflects our updated sales guidance and better than expected gross margin performance, partially offset by incremental stock compensation expense from the May issuance of performance-based stock awards. Our updated outlook is up significantly from the prior range of $0.61 to $0.68 and reflects meaningful improvement over 2023’s $0.54, despite the estimated incremental non-cash stock compensation expense of $0.04.

From a quarterly progression standpoint, we expect a more balanced performance throughout the year as compared to 2023’s heavily back end weighted results. With that operator, Michael and I would be happy to take questions if you could please open the lines.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Jim Sidoti with Sidoti & Company. Please go ahead.

Jim Sidoti: Hi. Good morning. Good afternoon. Thanks for taking the questions. I hope everyone’s well there. You had growth in all three businesses, but the one that really sets me was Branded Products. Was that more attributable to better pricing or better volume? Or can you give us some sense on how pricing affected that?

Michael Benstock: It’s a mix, certainly pricing effective, but we’re still in a pretty competitive environment. So it’s not just we don’t have freedom to price to the extent we’d love to, but it’s definitely a mix of new customers as we’ve added on more salespeople, which you know, has been one of our goals, they brought new customers to us as well. So it’s really – it’s a good mix. I wouldn’t say that we’ve been able to from quarter-to-quarter raise prices substantially. We – last year, on some of the ad-hoc business we did, which we do on a regular basis, we are able to price those appropriately for the opportunity. But a lot of our businesses, contract business too that gave us no opportunity to raise prices. So that was all new business or more business from existing customers.

Mike Koempel: And I think, Jim, also there’s still some favorable mix as well, both from a product as well as customer standpoint, where in addition to some pricing, we’re also seeing again favorability from a cost standpoint, some of which we started to realize in the back half of last year.

Jim Sidoti: Okay. And how about for the call centers? Have you been able to hang on – hold the price increases that you put through there?

Michael Benstock: Yes. We did put through the price increases. We spoke about that I think on last February’s calls and we implemented price increases, which were primarily effective beginning in the second quarter of last year. So we’re starting to anniversary some of those costs going forward and we should see some improvement accordingly. But yes, whatever little bit of pushback we have, we certainly were to explain through the inflationary environment. We were in from a labor standpoint, as well as the fact that our metrics were getting stronger and stronger with some of the technology we were employing, which actually helped bring down their costs overall.

Jim Sidoti: Okay. And then, the balance sheet has made a lot of progress over the past 12 months. Your leverage ratio well under 2x. It has been a little while since you’ve done a deal. How active are you on that front and are there a lot of opportunities out there right now?

Michael Benstock: There’s a lot of opportunities. We are very open to look at them. We haven’t found anything that excites us very much yet. We had – we’re really focused on organic growth right now and trying not to distract ourselves from what we believe is a pretty ripe environment in each of the markets that we serve. Whenever we get into these tough economic environment whereas the macro environment has been for the last year or so, with a lot of uncertainty, our competition tends to get weaker and we tend to get more aggressive. So we’re behaving very aggressively in the market to try to accelerate our organic growth and not be distracted by acquisitions. But there will be acquisitions in the future. We certainly have the horsepower to do it and the dry powder to do it, but we’re just going to wait until we find the right ones. There’s plenty of them out there in each of our verticals.

Jim Sidoti: And it really was a stellar quarter in terms of sales, in terms of EPS and free cash flow. You said the year would be more even this year, but are there – I would imagine that you’re not going to have four quarters like this. Are you anticipating a pickup in CapEx spending or any other – anything else that would affect the rest of the year?

Mike Koempel: From a CapEx standpoint, we would expect to pick up in CapEx, Jim. I mean, if you look at the quarter, we had low capital spending for the quarter. We still expect to spend more this year than we did last year. We consciously pulled back last year. So you’ll see a pickup on that just based on the timing of projects here, Q2 from the second quarter through the balance of the year. In terms of the cadence for the year, if you look back to last year, 75% of our earnings were in Q3 and Q4. So I think what we’re saying is we’ll be more balanced than we were last year, but there’ll still be some seasonality, if you will, that we’ve seen in some of our businesses in future quarters.

Michael Benstock: Yes. I think also – I’m going to jump in and just say we’re in an election year and weird things happen sometimes in the quarters prior to an election. It’s a major distraction for a lot of people, a lot of companies and uncertainty. And as this election gets more heated, it’s probably going to be a little bit more distracting than most elections, I would imagine. And so we’re couching the year a little bit and being certain that we’re putting out guidance that we feel very comfortable in being able to hit. So it’s going to be a good year. I’m glad we smoothed it out a little bit where we don’t have – we’re not going to have that step as Mike said, 75% our earnings happen in the second half of the year. It’s more likely to be a lot more balanced.

Jim Sidoti: Okay. All right. Thank you.

Operator: The next question is from Kevin Steinke with Barrington Research. Please go ahead.

Kevin Steinke: Good afternoon and congratulations on the strong start to the year. Just wondering what has trended maybe a little bit better than expected thus far in the year that enabled you to increase the guidance just one quarter into 2024.

Mike Koempel: Sure. I think, Kevin, you’ve seen in previous quarters, we’ve grown margin. Our margin rate has improved, improved in the third quarter, again, the fourth quarter. So I think getting another quarter of margin growth where we’re really seeing that growth across all three of our segments has been obviously a real positive for us. Seeing some momentum in the healthcare side of our business, both in terms of sales growth again, as well as seeing margin benefits. So we’re seeing the benefit of cleaner inventories. As I mentioned in our prepared remarks, starting to see some margin benefit from our direct-to-consumer businesses that’s starting to grow. So I think we’re seeing continued signs of momentum that obviously translated into strong results in the first quarter, which we believe will lead to stronger results for the year.