Superior Group of Companies, Inc. (NASDAQ:SGC) Q2 2023 Earnings Call Transcript

Superior Group of Companies, Inc. (NASDAQ:SGC) Q2 2023 Earnings Call Transcript August 7, 2023

Superior Group of Companies, Inc. misses on earnings expectations. Reported EPS is $0.07523 EPS, expectations were $0.09.

Operator: 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 Koempel, the Chief Financial Officer. As a reminder, this conference call is being recorded. This call may contain forward-looking statements regarding the Company’s plan, 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 or 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 other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein, and we 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 thank you, everyone, for joining today’s call. I’ll begin 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 in 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 second quarter results along with an update on our full-year outlook. We’ll 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 non-cash impairment charges.

Our overall financial performance was consistent with the soft market conditions described in our last quarterly call. In the midst of a challenging market environment, our team remained focused on delivering on our commitment 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, with 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 SGC is in a better position to capitalize on improved sales trend 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. Healthcare Apparel, which primarily includes the Wink and Fashion Seal Healthcare brands generated second quarter revenues of $28 million, up from $26 million in the prior year second quarter. This 7% increase came despite the continued soft conditions across the healthcare market. Second 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. Consistent with what I’ve mentioned on our past two earnings calls, we have made and we’ll continue to make progress towards achieving better inventory equilibrium. As a reminder, Healthcare Apparel was 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 wear our brands every single day.

Since the launch of our direct-to-consumer website featuring our Wink product line early in the second quarter, results have remained above expectations. By adding the D2C channel to our business, we have been able to drive higher consumer awareness and engagement with our brand. Another strategy within Healthcare Apparel is the recent launch of our B2B website, designed allow wholesale accounts to engage with us more efficiently. Wrapping up on Healthcare Apparel, we see attractive long-term growth opportunities that 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 Product 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 less than 2% and is attractive in 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 $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 in the investments and talent, technology and 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. Our long-term plan is to continue to significantly grow The Office Gurus tapping into the large addressable market for Contact Centers while aiming per EBITDA margins in the high-teens.

I’ll now turn the call over to Mike, before we take Q&A. Mike?

Kiselev Andrey Valerevich/Shutterstock.com

Mike Koempel: 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 revenues of $129 million compared to $148 million in the 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 Products 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 percent 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 headcount 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 $0.08 per diluted share compared to the prior year quarter’s net loss of $26.7 million or a $1.70 per diluted share. In the year ago second quarter of 2022, the Company recognized pretax non-cash impairment charges related to goodwill and trade names of $30 million or $28 million net of tax 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 $0.08 per diluted share was about flat to last year. Moving on to 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 operating cash flows to 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 a result of these efforts, our net leverage ratio has improved slightly from the first quarter to 3.7 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 $0.45 to $0.55 relative to our original range of $0.92 to $0.97. Note that our updated outlook still calls for a backend weighted year with both the third and fourth quarters stronger than both quarters in the first half. Finally, on a business segment basis, for Healthcare 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.

For 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, if you could now open the lines, we’ll be happy to take questions.

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Q&A Session

Operator: Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Kevin Steinke with Barrington Research. Please go ahead.

Kevin Steinke: Good afternoon. Just wanted to start-off by asking about, what’s changed, I know you’re still expecting a back half weighted year and an uptrend in the second half of the year. But, just kind of curious what you’re hearing from your clients, on the Branded Product side, that might have changed your outlook, and if they’re just being, I suppose, a little more cautious than previously anticipated?

Michael Benstock: Yes, Kevin. Hi, thanks for the question. And I’ll jump in. Mike, can add anything that he sees. We have started to see some positive signs of budgets opening up in the market spending the past few months. 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 is, was up significantly, June of 30, over the end of March. And we’re seeing good signs. What we’re not seeing is a return to any kind of normalcy, that we would have expected sooner, then we’re seeing it. All the predictions that we heard in the latter part of last year is what will bring you live most of our first half and second half outlook on, and we expected that the second half would come back a little bit stronger as the economy was predicted to come back stronger, and we seem to be just in this malaise of uncertainty, where some budgets are opening up some budgets aren’t.

But, we aren’t seeing positive signs. I think we’re taking a conservative approach to this. We don’t want to disappoint, and we want to be certain that our targets are realistic for the second half of the year. Still second half of the year, if you do the math, is up significant double-digits 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, it’s really a mixed bag. It truly is. We’re seeing within, you guys 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 merchandises, even though that’s a smaller part of our Branded Product segment today. And then you look at, Healthcare was up in fact, second quarter, but there’s still a lot of product in the marketplace that’s being sold by our competitors.

I have no visibility to how much excess product they have left to sell. And those ours is coming down significantly. We’re looking to get 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, 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 on a lot of customers, in the first half of the year. I think, an unprecedented rate. Unfortunately, we also had a lot of customers, who cut back on the number of agents that they required because they have uncertainty in their business as well. Mike, do you want to jump in on that a little bit?

Mike Koempel: Sure. Yes, I would just add, Kevin. 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 we 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 of our customers cut back on seats. And so, that cut back with some of our customers is what tampered the growth a little bit in the second quarter. As, 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 the pipeline. So, we feel good about the back half of the year for Contact Centers.