Superior Group of Companies, Inc. (NASDAQ:SGC) Q4 2023 Earnings Call Transcript

Superior Group of Companies, Inc. (NASDAQ:SGC) Q4 2023 Earnings Call Transcript March 13, 2024

Superior Group of Companies, Inc. beats earnings expectations. Reported EPS is $0.22, expectations were $0.15. 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’ Fourth Quarter 2023 Conference Call. With us today are Michael Benstock, Chief Executive Officer, and Mike Koempel, Chief Financial Officer. And as a reminder, this conference call is being recorded. This call may contain forward-looking statements regarding how 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 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 now, I’ll turn the call over to Mr. Michael Benstock. Please go ahead.

Michael Benstock: Thank you, operator. We appreciate everyone being on today’s call. I’ll start with our fourth quarter highlights and some broader perspective on 2023, and then I’ll discuss our go-forward strategies to sustain and accelerate our momentum in the new year and beyond, before I turn the call over to Mike for additional detail on fourth quarter results and our outlook for 2024. We’ll then be happy to take questions. Throughout 2023, we talked about the back-end weighted nature of our financial performance, and that played out with our consolidated fourth quarter results being the strongest of the year. We generated $147 million of revenues during the fourth quarter, up sequentially and down just 1% versus the prior year quarter, which was our strongest year-over-year comparison of 2023.

Fourth quarter adjusted EBITDA came in at $9.9 million, again, our strongest quarter of the year and up significantly from $3.5 million last year. We also produced $0.22 of diluted EPS in the fourth quarter, much improved from the adjusted $0.06 net loss per share last year and again, our best results of the year. In addition to improved earnings, as you can see in our results release today, we continue to drive strong operating cash flow while reducing working capital. As a result, we have strengthened our balance sheet, reduced our net leverage ratio by almost 50% during the year. Similar to what we described in our November call, business conditions have continued to slowly improve. Many clients are gradually expanding activities and while demand certainly hasn’t returned to full strength, we’re cautiously optimistic that underlying trends will continue to move in the right direction and that we’ll continue to see a gradual pickup in RFPs and other leading indicators.

In this still uncertain environment, we have our teams focused on what we as a company can control, most importantly. on quality service that leads to strong customer retention. In addition, we are strategically investing to fully capitalize on the very favorable long-term outlook for all three of our very attractive businesses. For those of you who need a quick primer on SGC and our three segments, we have released a brand-new investor slide deck today that’s available on our website, and I would encourage you to take a look. Shifting gears, I will provide a high-level overview for each business segment and then turn it over to Mike for a deeper dive. Healthcare Apparel, which primarily consists of the Wink and Fashion Seal Healthcare brands grew both revenues and EBITDA year-over-year.

Market conditions for Healthcare Apparel have been improving with more positive signs emerging. Our addressable market for this segment is large and expanding, and our aim is to grow our market share well beyond the more than 2 million caregivers who already wear our brands every day to work. We began this process last year with our rebranding efforts under the Wink trademark and the launch of our direct-to-consumer website, which continues to produce favorable results. To build on this momentum, we’ll continue our digital advertising efforts to further enhance customer awareness and engagement with wind. As with any D2C startup, this required investment is a gating factor on profitability in the shorter term, but one that we firmly believe will establish a foundation for profitable sales growth over time.

Combined with the favorable contribution from our B2B website, which we also launched last year and is adding efficiency to the wholesale process and the strengthening of our relationships with the other digital channels that we service, we see a compelling longer term outlook for Healthcare Apparel. Moving on to Branded Products. During the fourth quarter, we drove our strongest revenue and EBITDA results of the year. The gradual expansion of demand that began in mid-2023 that I referenced on our November call, continued through year end, and we ended the year with a stronger pipeline than a year earlier. Our booking trends have remained favorable so far in the first quarter, albeit with the normal seasonality. Our focus within Branded Products is on strong customer retention and increasing share of wallet, as well as driving RFP activity and sales rep recruiting, while maintaining stronger margins.

We’re confident in our ability to capture share, currently less than 2% of this large, attractive, and growing market. Next up is our Contact Centers business segment, which also grew revenue year-over-year. Increased costs related to labor and talent that first took hold in early 2023, weighed on quarterly profitability, but we will begin to anniversary these higher costs this first quarter. Our focus for Contact Centers is on increasing seats with existing customers and building the pipeline of new customers. We will continue to utilize the latest technology to enhance efficiency and take advantage of our ability to increase prices when possible to improve margins during 2024. Our pipeline of new business remains strong for the office crews, and we’re bullish on the outlook for this high-margin business.

I’ll now turn the call over to Mike, who will walk us through our fourth quarter financial performance in greater detail and provide our outlook for 2024. We’ll then take your questions. Mike, over to you.

Mike Koempel: Thank you, Michael. Rounding out a back-end loaded year as we first referenced a year ago, our fourth quarter results were the strongest of 2023. Our quarterly revenue reached $147 million, which was up 8% sequentially from the third quarter and down 1% from last year. As compared to last year, fourth quarter sales increased in the Healthcare Apparel segment by 6% to $28 million and in the Contact Centers segment by 5% to $23 million. These increases were more than offset by a 4% fourth quarter sales decline in our Branded Products segment to $98 million. While Branded Product sales were down, the fourth quarter results sequentially improved from the prior quarter and represents the strongest quarter of the year.

Our gross margin rate climbed significantly over the past year, up 760 basis points. The margin increase was primarily due to last year’s inventory write-downs of $7.8 million, primarily within our Healthcare Apparel segment and a favorable shift in the mix of pricing and customers and lower supply chain costs within our Branded Products segment. Our SG&A for the fourth quarter came in at $49 million, relative to $44 million a year earlier. While the SG&A rate improved on a sequential basis by 130 basis points, the year-over-year rate increased by 360 basis points, primarily due to expense deleveraging from the sales decrease in our Branded Products segment, employee-related costs and depreciation in our Contact Centers segment. and lapping unrealized gains of $1.6 million recognized in 2022 on written put options.

Our interest expense for the fourth quarter was $2.1 million, a slight improvement over the past year despite higher interest rates due to our successful efforts to reduce debt outstanding by $62 million during the year. Net income for the fourth quarter was $3.6 million or $0.22 per diluted share, up from net income of $2 million or $0.14 per diluted share in the year ago quarter, which included a one-time pre-tax non-operating gain of $3 million or $0.20 per share. Therefore, excluding last year’s gain, our fourth quarter result of $0.22 per diluted share was up significantly from last year’s adjusted results of a $0.06 loss per share. The improved result was driven by the aforementioned increase in gross margin for the quarter. Consolidated EBITDA for the fourth quarter was $9.9 million compared to $3.5 million in the year ago quarter, excluding last year’s gain that I previously mentioned.

The EBITDA increase was primarily driven by the Healthcare Apparel segment, whose EBITDA improved significantly to $1.4 million in the fourth quarter from negative $6.5 million a year ago, mainly driven by last year’s inventory write-downs. Also, despite a sales decrease in the fourth quarter, the Branded Products segment’s EBITDA improved to $11.7 million in the fourth quarter from $10.8 million a year ago due to higher gross margins. These improvements were partially offset by an EBITDA decline in our Contact Centers segment to $2.3 million in the fourth quarter from $3.8 million a year ago, primarily driven by labor increases earlier in the year. Turning to our balance sheet. We’ve continued to successfully reduce leverage, ending the year just under 2.0 times trailing 12-month covenant EBITDA, a significant improvement relative to 2.9 times just three months earlier in September and 3.9 times at the end of 2022.

In other words, we’ve cut our leverage ratio effectively in half over the past year. We also ended 2023 with cash and cash equivalents of $20 million, benefiting from our continued strong free cash flow and our focus on reducing working capital. Our operating cash flow for the year was $79 million. I’ll wrap-up with our full year 2024 outlook, which similar to 2023, we’ll have a back-end loaded cadence due to the underlying nature of the markets we serve. Our outlook calls for full year revenues in the range of $558 million to $568 million, up from 2023 revenues of $543 million. We also expect earnings per diluted share in a range of $0.61 to $0.68, up from 2023 $0.54. And I’ll reiterate that similar to last year, we expect a back-end weighted pattern.

This concludes our prepared remarks. And operator, if you could please open the line, Mike and I would be happy to take questions.

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Q&A Session

Operator: Certainly. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from David Marsh with Singular Research. Please go ahead.

David Marsh: Hey guys. Congratulations on the quarter. Looks really, really good. Just if I could start, I want to talk about the Contact Centers segment a little bit. It was — looks like it was down a little sequentially. And I know you guys have mentioned there were some seats that have lost maybe some contracts that had been need [ph], but it looks like you’ve had some pretty good backfill. Can you just talk about kind of the general cadence of that business and kind of what your expectations are for the year in that particular business?

Michael Benstock: Sure. Thanks for joining us. We’re feeling good about the business. I mean last year was a little bit strange in that we had a lot of long-term customers cut back on the number of new agents that they had and it was tough to make that up as the year went on. But we did make it up. And in the end, we ended up with a net gain of agents that we were able to build out. In addition, last year, we were a little late in putting price increases in, which certainly impacted the first half more than the second half of the year. We’re feeling strong about the business. It’s growing. We — the infrastructure is all in place for it to grow. The sales efforts are yielding our expectations for the business. And there’s really nothing holding us back.

There’s still a strong demand, pipeline is strong. First quarter should be pretty good. And we expect that that momentum will continue to build throughout the year. Fourth quarter is usually the softest quarter in terms of growth of that business. People don’t tend to put on new seats as their ending the year and looking at their budgets. Usually, that’s when they’re cutting back the most for the holiday season. And so fourth quarter is always kind of a little bit tenuous what’s going to happen, but we’re feeling strongly going into this year that we should see some pretty good growth.

Mike Koempel: And Dave, just to build on that, if you look at the de-build, if you will, from Q3 to Q4, you’ll see it’s fairly consistent last year versus this year to Michael’s point, just around the holidays that we experienced and the fewer hours worked in the month of December in the fourth quarter.

David Marsh: That’s really helpful. Appreciate that. And then just turning to the during to the Healthcare Apparel business, you guys talked consistently about inventory and getting it right. I saw that inventory did tick down a little bit again sequentially in the fourth quarter. Just wondered if you could give us an update there? Just kind of overall feel for your inventory level, what the demand is? And if you feel like you’re pretty close to equilibrium and at a point where you could start to build again?

Mike Koempel: Sure Dave. This is Mike. I’ll take your question. Yes, we talked at the beginning of the year about — it would take us about a full year to get to what you referred to as equilibrium, and we feel like we’ve reached that point here at the end of the year. So, I think with the — obviously, the significant charges that we took in 2022 that proved to be the right decision in terms of helping us to clear through inventory through various channels. And so we’ve worked the inventory down significantly by the end of this year and are shifting our focus really toward new product launches and new introductions as we get deeper into 2024. So, from a working capital perspective and inventory, we’ve really driven a lot of value there. I think that will certainly normalize as we go forward, and we’ll look to invest in inventory where we see the opportunities and growth in certain categories.

David Marsh: Got it. And then just lastly from me. On the SG&A side, a little uptick in the quarter. I’m guessing that’s just typical year-end kind of accruals for incentive comp and things of that nature and sure we expect a reversion back to a level kind of more similar to the prior couple of quarters going forward?

Mike Koempel: Dave, I didn’t quite catch your full question, the very last part in particular. Can you repeat that, Dave, sorry?

David Marsh: Sure, sure, sure. SG&A, just an uptick a bit in the fourth quarter. I just wondered if that was just a typical kind of fourth quarter seasonal kind of incentive comp accrual type action. And if we would be right to expect a reversion back to kind of — I mean, 1Q, 2Q, you guys really had things in check. I just wondered if — where should we expect the level of trend?

Mike Koempel: Yes. No, no. Thanks Dave. I would probably call it a couple of things. It wouldn’t be driven by incentive comp accrual. It would — I call it a couple of things. One, just as a reminder, in the Branded Products segment, the commissions that we pay, which obviously roll through SG&A are based on margin. And so recognizing that the fourth quarter was the biggest quarter for Branded Products, we’ve got a larger commission expense in the fourth quarter, obviously, for good reason. And then one of the things I called out in the script is last year, we had favorability with respect to revaluing a stock put that we have. And actually, in the fourth quarter, we had an expense driven by the fact that our share price did appreciate. So, that was an incremental expense, if you will, in Q4. So, we wouldn’t expect that to be normalized going forward per se, but those were a couple of things that drove the uptick here in the fourth quarter.

David Marsh: Got it. Thanks. I will yield to some of the folks who have questions. Again, congrats on the quarter. Good job guys.

Michael Benstock: Thanks Dave.

Operator: Thank you. The next question comes from Kevin Steinke with Barrington Research. Please go ahead.

Kevin Steinke: Hello. Good afternoon. So, I just wanted to discuss your 2024 outlook. You mentioned expecting the year to be back-end loaded again. What leads you to expect that? And how much improvement in the demand environment might be factoring into that? I know you said business conditions continue — are gradually improving, but maybe not back to full strength yet. So, maybe any thoughts on that, please?

Mike Koempel: Sure. I’d say a couple of things, Kevin. First of all, in terms of the back-end loaded nature, I think a lot of that’s driven by the fact that what we do see in our Branded Products businesses, they typically do have a strong Q3 and partially Q4, just as it relates to some degree to the holiday season, whether that’s gifting for associates or for our customers’ customers. And then also with our Contact Center business, typically, what we see is, as we just mentioned before, on the results for Q4 for the Contact Center is we typically see that business come down a little bit in Q4 as our customers pull back, and we have holidays, we start to add new customers in Q1. And then as we add them and onboard them, that drives more volume toward the back half of the year.