Superior Group of Companies, Inc. (NASDAQ:SGC) Q4 2022 Earnings Call Transcript

Superior Group of Companies, Inc. (NASDAQ:SGC) Q4 2022 Earnings Call Transcript March 15, 2023

Operator: Good afternoon, everyone, and welcome to Superior Group of Companies Fourth Quarter 2022 Conference Call. With us today are Michael Benstock, the company’s Chief Executive Officer, 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 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 will, expect, believe, anticipate, think, outlook, hope and variations of such words and similar expressions identify such word 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 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.

With that, I will turn the floor over to Mr. Benstock. Please go ahead.

Michael Benstock: Thank you for your introduction and welcome everyone to our 2022 earnings call. I’ll begin today by sharing the highlights of our Q4 results. I’ll then discuss the performance for each of our three business segments, providing an update on the macro environment and our strategy to grow the business moving forward. After that, I’ll turn it over to Mike to walk us through the financial results in greater detail, and to provide our outlook for 2023. Mike and I will then be available for Q&A. We finished 2022 with continued top line growth in the fourth quarter. Consolidated revenues were $149 million, up 5% over the prior-year quarter, driven by growth in both our branded products and contact center segments. As a result, we achieved full year sales of $579 million in 2022 which was near the top end of our annual guidance range.

Our consolidated fourth quarter adjusted EBITDA was $3 million, down from $8 million in the fourth quarter last year, primarily due to an incremental inventory write down of $6 million in our healthcare apparel segment. Let’s take a closer look now at our quarterly results by segments beginning with healthcare apparel. Revenues came in at $26 million relative to $31 million, the prior year quarter reflecting of the ongoing stock conditions of the broader healthcare market, healthcare apparel EBITDA declined by $8 million compared to prior year quarter, primarily due to the aforementioned inventory write-down. Based on our lower purchasing levels implemented in mid ’22, and adjustments store inventory valuation, we expect to see better inventory equilibrium by the end of the year.

Looking ahead, our strategy involves capturing new customers in new markets primarily through an emphasis, an increased emphasis I should say on digital growth, including the launch of our own direct-to-consumer website during the second quarter. While we recognize that will take time and investment to build consumer awareness and demand, the expansion of digital within our omnichannel approach will enable us to grow our healthcare, apparel business overall with leaner inventories and a revitalized customer facing business strategy including an emphasis on digital growth. We’re confident in the strong growth prospects for healthcare apparel and our own ability to capture market share and prove profitability over time. We provide the widest range of products in the market, with more than 2 million essential caregivers wearing our highly recognizable brands every day.

Branded products, our largest segment generated revenues of $102 million during the fourth quarter, which was up 7% year-over-year benefiting from a full quarter’s contribution from the Sutter’s Mill acquisition made during the fourth quarter of 2021. As well as the guardian acquisition that was completed in May of 2022. Organic demand declined mid-single digits, due in part to subdued demand in the current uncertain economic environment. Fourth quarter EBITDA was $11 million, up from $6 million last year, driven by higher sales, improved gross margin rates and laughing a PPE inventory right down last year partially offset by an increase in SG&A from investments in talent and technology to support future growth. Branded products is an attractive market highly fragmented, with a total addressable size of $26 billion domestically.

Our compelling strategy is to continue to grow our very modest market share of less than 2% by offering unique, customized and high-quality products. Our contact center segment had another strong quarter with revenues of $21 million up 22% over the fourth quarter of 2021. Fourth quarter EBITDA of $4 million was flat to last year as investments in SG&A related to talent, technology and infrastructure to support future growth offset, increase in sales and gross margin. On a full year basis, contact centers finished 2022 with strong annual top-line growth of 31%, achieving our highest EBITDA margin with an SGC of 22%. With our investments in infrastructure combined with a strong pipeline of prospective customers, we continue to see Contact Centers as an exciting and profitable growth business going forward.

I’ll now turn the call over to Mike to take us through our financial results and outlook for 2023. Mike?

Mike Koempel: Thank you, Michael, and thanks everyone for joining the call. I’ll start by walking through our financial results and then I’ll turn to our initial full-year outlook. During the fourth quarter, SGC generated consolidated revenues of $149 million, up 5% from $142 million the prior year quarter. Our gross margin was 30.2% for the quarter, down 80 basis points year-over-year due to the $6 million incremental inventory write down for Healthcare Apparel. Excluding the incremental charge, our gross margin would have been 34%. SG&A expense was 29.8% of sales which sequentially improved from 32% in the third quarter, but was higher than the fourth quarter of 2021 at 26.7%. The improved expense trend from third quarter benefited from an adjustment to employee expense accruals, as well as improved leverage on higher sales and the benefit of cost reductions.

The year-over-year increase as a percent of sales was due to continued deleverage from the decline in Healthcare Apparel sales as well as our continued investments in talent and infrastructure, especially within Branded Products and Contact Centers capitalize on compelling future growth opportunities. Our fourth quarter interest expense was $2.2 million, as compared to $295,000 in the fourth quarter of last year, driven by a combination of higher interest rates and a higher average debt balance outstanding during the quarter. Net income for the quarter was $2 million or $0.14 per diluted share, as compared to net income of $4 million or $0.27 per diluted share in a year ago quarter. During the fourth quarter, the company sold its corporate office building for $5 million in cash proceeds, resulting in a pretax non-operating gain of $3 million.

Excluding the gain in the prior year fourth quarter’s pension termination charge, the fourth quarter 2022 net loss was $1 million or a $0.06 loss per share, compared to net income of $5 million or $0.31 per diluted share the prior year period. The decrease in adjusted results was primarily driven by the incremental inventory write down and increased interest expense. Turning to the balance sheet. Cash and cash equivalents as of December 31, 2022 increased to $18 million from $9 million last year, due in part to the sale of our corporate office near year end. In terms of our debt position, our net leverage ratio of 3.85 times, our covenant EBITDA remains elevated. Based on the fourth quarter inventory charge and the calendarization of our 2023 forecast, it is more likely than not that we will exceed our net leverage covenant ratio of 4 times covenant EBITDA.

As a result, we have initiated discussions with the lending agent on ways to address a potential amendment should it be needed in order to maintain compliance throughout the year. We will continue to focus on cash flow enhancement by improving our working capital position, particularly by optimizing our inventory levels within our Healthcare Apparel segment as well as scrutinizing our operating expenses and capital expenditures. I’ll conclude my prepared remarks with our initial financial outlook for 2023. Overall, we expect current slow economic conditions to persist and are cautiously optimistic that business conditions will gradually improve throughout the year. With that in mind, we are forecasting full year 2023 sales to be between $585 million and $595 million versus 2022 sales of $579 million.

And earnings per diluted share between $0.92 and $0.97, compared to adjusted earnings per diluted share of $0.62 in 2022, which reflected significant inventory write downs. At the segment level, our 2023 forecast assumes that healthcare apparel sales will be up low single digits versus last year, and will gradually improve throughout the year as inventory levels and customer demand returned to normalize levels. For branded products, we estimate segment sales to be flat to download single digits, as we expect the continuation of the challenging market conditions from the fourth quarter of 2022 into the first half of the year, with meaningful growth in the back half of 2023. Lastly, we expect the contact center segments to continue to grow well into double digits, consistent with a fourth quarter performance reported today.

Given these expectations for our three business segments, we expect our 2023 results to be relatively back end loaded as underlying market conditions gradually returned towards equilibrium. We are confident in our ability to execute on our strategic plan to capitalize on multiple growth opportunities and enhance long-term shareholder value. That concludes our prepared remarks. And operator if you could please open the lines, we’d be happy to take questions.

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Q&A Session

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

Kevin Steinke : Hi, good afternoon. I wanted to start off by asking about the outlook for 2023. You mentioned that you expect lower economic conditions to persist. But at the same time, you express some optimism that business conditions should gradually improve throughout the year for healthcare apparel. And that momentum will build and branded products leading to significant growth in the second half of the year. So, I’m just, if you could discuss more kind of line of sight to that improvement throughout the year or what do you think will drive that improvement? Are you seeing a clearing up of inventory in healthcare or building pipeline and branded products? I guess any color you can offer on that, overall outlook for 2023 would be helpful.

Michael Benstock: Unfortunately, the answer is going to be a little bit longer because of the three segments. So, it’s a little different in each of our businesses. branded products has been affected mostly by people holding back on buying marketing budgets being curtailed or being put on pause. Mostly, we have a lot of clients in the tech space and gig economy that have experienced some mass layoffs and not spending a lot of money. But, as the year goes on, they’ll say this about each of our businesses. As the economy improves, which is expected later on in the year. Certainly, in the second half, we expect to benefit from that improvement as well as there will be pent up demand. You can only hold back so long before you have to buy uniforms for employees, and before you have to start gifting your employees and looking at how you create brand allegiance among your customers.

And people have held back now for some time. We can’t control the macro environment. Obviously, we all read the diverse opinions about what to expect in 2023 and certainly the most, the latest banking crisis, who knows how that might impact things in the future? Now, when you get to our call center business, we certainly feel strongly that we’ll have continued growth throughout the year, the demand is very strong. It’s not weakening, because of the current economic conditions. In fact, it’s strengthening and typically in a recession, and especially a recession, where it’s so hard to hire in the United States right now, which is an entry level positions, which is kind of a unique situation. We’re seeing a demand, like we haven’t seen before.

Healthcare apparel, it’s all a question of timing of when we’re able to completely right size our inventories, move past, what we’re sitting with, still in inventory, turning a lot of that to cash. And being able to present a lot of newness. Keep in mind that third quarter and fourth quarter will be slightly impacted by our favorably by our direct-to-consumer launch that we spoke about, as well as our continued omnichannel approach in those businesses, but we can control only what we can control. Our view of things is it’s going to be a tough year, but it’s going to be better in the second half of the year, then it will be in the first half.

Kevin Steinke : All right. Thanks for the insight there. And also following up just on the outlook for 2023. You can maybe talk about assumptions you’d have baked in for operating margin and interest expense, do you think you’d get some margin expansion based on some of the cost savings actions you’ve taken? How meaningful the bike do you expect interest expense to be I guess?