Superior Group of Companies, Inc. (NASDAQ:SGC) Q3 2023 Earnings Call Transcript

Superior Group of Companies, Inc. (NASDAQ:SGC) Q3 2023 Earnings Call Transcript November 6, 2023

Superior Group of Companies, Inc. beats earnings expectations. Reported EPS is $0.19, expectations were $0.11.

Operator: Good afternoon, everyone, and welcome to the Superior Group of Companies Third Quarter 2020 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.

Michael Benstock: Thank you, operator, and thanks, everyone, for joining us today. I’ll start by highlighting our consolidated third quarter results, along with a discussion around our strategies that are setting us up for continued growth and margin expansion. I’ll walk through each of our segments and what we’re doing in more profitably grow each of our businesses. And then I’ll turn it over to Mike to provide additional detail on our quarterly results as well as our updated full year outlook. We’ll then open the call for Q&A. Earlier in the year, we discussed the back-end weighted nature of our financial performance this year. And as expected, our third quarter results were the strongest of the year so far, reflecting sequential improvement across the business.

We generated consolidated third quarter revenues of $136 million, down only 2% year-over-year, which was a significant improvement over the second quarter’s 13% year-over-year decline and up 5% from the second quarter. Our third quarter consolidated adjusted EBITDA of $9.3 million is the highest quarterly result year-to-date, down just slightly compared to the prior year’s $9.7 million, but up $1.8 million from the second quarter. Lastly, diluted EPS of $0.19 was down from adjusted EPS of $0.27 a year earlier, excluding last year’s impairment charge, but up $0.11 sequentially from the second quarter. The effect of economic conditions on our business differs customer by customer, market by market and segment by segment. We see conditions slowly improving as clients are starting to buy more, rebrand more and issue more RFPs than past periods.

Again, it is really on a customer-by-customer, market-by-market basis. While we’re feeling optimistic about the long-term outlook, our success will be determined by our team’s remaining focused on what we can control. This includes continuing to drive positive cash flow and further strengthening our balance sheet while also increasing our investments to support longer-term growth when conditions normalize. Adhering to this focus, year-to-date, we were able to generate operating cash flow of $59 million through continued reductions in working capital and lower capital expenditures. We ended September with an improved net leverage ratio of 2.9 times covenant EBITDA, a full turn better than at the start of the year after significantly reducing our net debt by $48 million year-to-date.

Let’s turn now to our three businesses. Our Health Care Apparel segment, primarily consisting of the Wink and Fashion Seal Healthcare brands produced its highest quarterly revenues for the year at $30 million for the third quarter, essentially flat year-over-year and up from $28 million in the second quarter. Adjusted EBITDA of $3.1 million was up from $2.2 million year-over-year and up from $1.9 million in the second quarter. The Health Care Apparel market remains soft, but inventory equilibrium is getting closer for SEC, and we believe for the broader industry. This remains a large and growing addressable market. We intend to expand our market share well beyond the 2 million-plus caregivers who already wear our brands every day. Back in the spring, we launched our direct-to-consumer website and went through an entire rebranding featuring our Weak product line, and it continues to perform above initial expectations.

This new D2C channel is creating both higher consumer awareness and deeper engagement with our brand. We also launched earlier this year our B2B website, which is now helping wholesale accounts more efficiently engage with us. Overall, we see the improvement in our year-over-year growth rates continuing in the fourth quarter, and we’re optimistic about the longer-term outlook. Turning to Branded products, which is our largest segment, we’re seeing the back-end weighted nature of the year playing out, along with stronger profitability as our supply chain costs have normalized. We produced third quarter revenues of $84 million, while down from $87 million in the prior year, the third quarter result represents our highest quarterly revenues of the year and is up from $80 million in the second quarter.

Our adjusted EBITDA of $7 million was up from $5.6 million year-over-year and about flat to the second quarter. We have seen an upward demand trend now for over 5 months and have no reason to believe this won’t continue. So while the growth in this segment appears subdued, our pipeline and booking trends look very, very favorable, particularly with respect to the first part of next year. While this segment is generally related to HR and marketing spend and has surely been impacted by the ongoing macro environment, our confidence is bolstered by what we have consistently seen over the past months. I should mention that similar to our other business lines, our client retention remains strong, truly indicating it’s a matter of seeing stronger economic conditions for us to further accelerate our growth potential.

In the meantime, within branded products, we’re focused on managing expenses and further expanding our margins such that we’ll be ready to fully capitalize on even stronger demand ahead. Longer term, our aim is to significantly grow our branded products market share, now at less than 2% of this very, very large $26 billion market. Our third segment to review is contact centers, which continues to generate our highest EBITDA margins as we push towards the high-teens goal that we mentioned on our prior earnings call. Our third quarter revenues of $24 million were up approximately $1 million both year-over-year and from the second quarter and represents the highest revenue quarter in the office goers history. Our third quarter adjusted EBITDA was $4.1 million, down from $5 million year-over-year, but up from $3.3 million in the second quarter.

While we’ve incurred higher costs related to labor and talent, we’re continuing to increase prices whenever possible to employ technology to create more efficiency as reflected by our higher gross margin for contact centers, which expanded nearly 2 percentage points from the second quarter to 55.5%. As a result, the third quarter EBITDA margin sequentially improved to 16.8% from 14.3% in the second quarter. Overall, we continue to add to our pipeline of new business for the office crews, and we see compelling longer-term opportunities to grow this segment at attractive margins. With that, I’ll turn it over to Mike for a closer look at our financial performance and our updated outlook for the year before we take your questions. Mike?

Mike Koempel: Thank you, Michael, and thanks, everyone, for joining the call. Our third quarter results were the strongest so far in 2023, reflecting the back-end weighted pattern we described earlier in the year. Our quarterly revenue reached $136 million, up about $7 million from the second quarter. And importantly, we recorded stronger margins as well. Our gross margin came in at 39.1%, which is up 260 basis points versus a year ago and up 220 basis points from the second quarter. The margin expansion from last year was primarily led by our Branded Products business segment, which drove a 450 basis point improvement due to favorable pricing and customer mix and lower supply chain costs. Our third quarter SG&A cost of $47 million were up $3.4 million from last year and increased as a percent of sales to 34.7% for the quarter compared to 31.6% for the third quarter of 2022.

The increase in SG&A was driven by a $1.8 million fair value benefit on written put [ph] options in the third quarter of 2022, combined with current quarter increases in acquisition-related earn-out liabilities, bad debt expense and professional fees. Our interest expense for the third quarter was $2.5 million, up from $1.8 million in the prior year quarter due to higher interest rates. Interest expense did improve slightly from the second quarter, reflecting lower debt outstanding, as I’ll discuss in a moment. Third quarter net income of $3.1 million or $0.19 per diluted share compared to the prior year quarter’s net loss of $12.7 million or $0.80 per share. In the prior year third quarter, the company recognized pretax noncash impairment charges related to goodwill of $21.5 million or $17.1 million net of tax or $1.07 per diluted share.

On an adjusted basis, which excludes impairment charges made in the prior year third quarter, this quarter’s net income of $3.1 million or $0.19 per diluted share was down from $4.4 million or $0.27 per diluted share in the prior year but up significantly from $1.2 million or $0.08 per diluted share in the second quarter. Turning to our balance sheet. We continue to make meaningful improvements. We continue to drive significant free cash flow, enabling an additional $19 million reduction in our debt outstanding during the quarter while maintaining our cash and cash equivalents balance of $18 million, about flat with the start of the year. Since the beginning of the year, our focus on reducing working capital and generating strong operating cash flow has resulted in $59 million of operating cash flow, as Michael mentioned.

Therefore, as of September 30, our total debt outstanding of $108 million improved from $156 million at the start of the year, representing a 30% reduction. Wrapping up on the balance sheet, our net leverage ratio ended the quarter at 2.9 times trailing 12-month covenant EBITDA much improved from the net leverage ratio at the beginning of the year of 3.9 times. I’ll conclude with our updated full year outlook, which as we’ve indicated throughout the year, remains back-end loaded. We expect a full year revenue range of $538 million to $545 million relative to the earlier range of $550 million to $560 million, which continues to reflect back half improvement, albeit at a lower growth rate. However, for earnings per diluted share, we’re tightening our outlook range to $0.46 to $0.53 relative to the prior range of $0.45 to $0.55, reflecting continued sequential improvement from the first half of the year.

For Health Care Apparel, we expect to finish 2023 with low single-digit sales growth for the year as inventory levels and customer demand begin to normalize. For Branded products, while we look to finish the year stronger with sequential sales improvement in the fourth quarter, we expect a low-teen sales decline for the total year, primarily driven by the first and second quarter results. Lastly, for contact centers, we expect to achieve full year sales growth in the high single digits. With that, operator, we can now begin the question-and-answer session, if you would please open the lines.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question here will come from Kevin Steinke with Barrington Research. Please go ahead.

Kevin Steinke: Good afternoon. Congratulations on the sequentially improved results. Just as we look to the full year outlook, you adjusted the revenue range a bit. So just wondering that still, again, represents a stronger sequential quarter. You mentioned the upper demand trend in Branded products I guess the outlook came down just a bit. So I don’t know – I’m just trying to put my finger on maybe what changed relative to your last outlook as this quarter progressed?

Michael Benstock: Sure, Kevin. This is Mike. I’ll take that question. As you said, obviously, we pulled the sales guidance down a little bit. It still reflects continued growth in the fourth quarter within that range. Within branded products, as we said in our prepared remarks, they had demonstrated growth in the third quarter. We expect to see that growth continue into the fourth quarter. I think part of what plays into the range, particularly in branded products, we have a fair amount of volume in the back half of December, which we plan to deliver on, but could create some variability in the fourth quarter. And as it relates to our Contract business, we’re also – as we manage our cash flow and manage inventory tightly, we’re managing the build of our contract assets, which ultimately turns into revenue as well.

So as we’ve been heightening more on the working capital front, that’s also had a little bit of a pullback on revenues. But again, I think as we look to the fourth quarter, we still see growth in the business. Again, as I said, albeit at a slightly lower rate than we originally expecting, but again, still anticipate that growth coming in the fourth quarter.

Kevin Steinke: Okay. Good, thank you. And touching on Health Care Apparel, you mentioned there, the market still remains a bit soft, but you did have some pretty good sequential growth there in that segment. And I believe you mentioned that the market appears to be approaching inventory equilibrium. Do you think end of 2023 is still the way to think about the inventory coming back into balance? Maybe it’s harder to read in the overall market, but just for you internally, how are things trending on the inventory side?

Michael Benstock: Kevin, from an internal standpoint, we are trending toward our goal by the end of the year. We see – you could see in the aggregate, our inventories across the peer group were down about $20 million from the beginning of the year, and that would obviously include our health care inventories coming down. So we’re happy with the progress we’ve been making. We’ve got a little bit yet to go here in the fourth quarter. And again, our intent is to end the year in a much cleaner position than we did last year and entering 2024 in a way that we can really focus most of our energy forward rather than looking to reduce inventories and liquidate inventories. I think we’re seeing the market in general, improved to some extent. But I can only, at this point, speak for ourselves. And again, we’re satisfied with the progress we’ve made and feel good about where we’ll end the year from a health care perspective.

Kevin Steinke: Okay. Thank you. Also following up on Health Care Apparel, you mentioned the B2C e-commerce initiative continuing to trend well ahead of expectations. Maybe just any update on the outlook there and it starts becoming a more meaningful part of the business and potential growth in 2024 and beyond?

Michael Benstock: Kevin, this is Michael. Good question. We’re excited about the progress we’ve made even when you take it one step further and say the broader digital market, which includes all those wholesale customers that we sell online as well, like amazon.com, walmart.com, and target.com and so on, obviously, inclusive of both the direct-to-consumer and the B2B channels. We’re very, very excited about the whole — what’s happening to us digitally. More people are buying online than ever. And while store traffic is still down, and certainly, the smaller retailers are struggling more than the larger retailers. Our emphasis on — at least on the investments we’ve made in our digital capabilities certainly has paid off somewhat this year.