Q1 2024 Superior Group of Companies Inc Earnings Call

Participants

Michael Benstock; Chairman of the Board, President, Chief Executive Officer; Superior Group of Companies Inc

Michael Koempel; Chief Financial Officer; Superior Group of Companies Inc

Jim Sidoti; Analyst; Sidoti & Company LLC

Kevin Steinke; Analyst; Barrington Research

David Marsh; Analyst; Singular Research

Presentation

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 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 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 health care 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 continued to be uncovered.
As I've outlined on recent calls, last year, we kicked off our rebranding efforts under the Wincor trademark, and they're 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 health care 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 where 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 improvements. 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.

Michael 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.
Health care apparel up 4% to $29 million and contact centers up 7% through 24 million. This was profitable growth as well, with our consolidated gross 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 health care apparel segment 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 and 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. Health care 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.
It 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 1.6 times trailing 12 months covenant EBITDA up a substantial improvement from 3.8 times 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 $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, Micron, I would be happy to take questions. If you could please open the lines.

Question and Answer Session

Operator

(Operator Instructions) Jim Sidoti, Sidoti & Company.

Jim Sidoti

Hi, good morning.
Good afternoon.
Thanks for taking the questions. I hope I hope everyone's well there from you had growth in all three businesses, but the one that really struck me was branded products was that more attributable to better pricing and 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 a 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. And I wouldn't say that we've been able to from quarter to quarter raise prices substantially. We last year, you know, 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 business is contract business to that. So that gave us no opportunity to raise prices. So that was all new business or more business from existing customers.

Michael Koempel

And I think, Jim, I know there's still 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 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 have you been able to hang on your hold the price increases that you put through there?

Michael Benstock

Yes, we did put through the price increases. You know, 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. And so we're starting to anniversary some of those costs going forward, and we should see some improvement accordingly.
But yes, there will, 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 that we were employing, which which actually help bring down their costs overall.

Jim Sidoti

Okay. And then the balance sheet has made a lot of progress over the past 12 months to your leverage ratio well under 2 times and it has been no while since since you've done a deal, you know, how active are you on that front?

Michael Benstock

And are there a lot of opportunities out there right now is a lot of opportunities we are on. We are very open to look at them. We haven't found anything that excites us very much yet. We had it. We're really focused 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.
And whenever we get into these tough economic environment, where as the macro environment has been for the last year or so, there's 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 drive that, 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, but 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 I know 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. I mean, are there I would imagine that you're not going to have four quarters like this or are you anticipating a pickup in CapEx spending or any other anything else that would affect the rest of the year.

Michael Koempel

But from a CapEx standpoint, we would expect a pickup in CapEx CapEx, Jim, if you look at quarter end, the 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 through from the second quarter and through the balance of the year.
In terms of in terms of the cadence for the year. And 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 will 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 the some of our businesses in future quarters.

Michael Benstock

I think also I'm going to jump in and just say we're in a we're in an election year and where things happen sometimes in the quarters prior to an election, a major distraction for a lot of people, lot of companies and uncertainty. And you know, 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 so Scott's going to be a good year. I'm glad we smooth it out a little bit where we don't have we're not going to have, but that said, as Mike said, 75% of our earnings happened in the second half of the year, more likely to be a lot more balanced.

Jim Sidoti

Thank you.

Operator

Kevin Steinke, Barrington Research.

Kevin Steinke

Good afternoon and congratulations on the strong start to the year. I'm just wondering wondering what Tom is trended, maybe a little bit better, a little bit better than expected thus far in the year that enabled you to increase the guidance just at one quarter into the into 2024?

Michael Koempel

Yes. I think, Kevin, we've you've seen in previous quarters, we've we've grown our margin. Our margin rate has improved proved 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 up seeing so many some momentum in the health care side of our business growth, both in terms of sales growth, again as well as seeing margin benefit.
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 as starting to to grow. So I think we're seeing continued signs of momentum that obviously translated into strong results in the first first quarter, which we believe will lead to stronger results for the year.

Michael Benstock

Yes. And I guess it's Mike did mention contact centers, contact centers you know, had some tough comps for the quarter and I didn't quite grow as we had expected. But part of that, it was a timing issue. I think you're going to see greater growth from our contact center business going forward already in second quarter, we know that our growth is going to be better than what we're able to show in Q1 so we're optimistic about that business as well.
And getting back to the cadence, we've spoken about of high 10s to low I'm sorry, high single digit to low teens growth in the and high teens EBITDA margin.

Kevin Steinke

Okay, great. And you spoke there to the continued strength in gross margin and the improvement in gross margin. Really it stood out in both branded products and health care apparel. And it sounds would you say like there is some sustainability to it is gross margin levels going forward?
Or I think I asked a similar question last quarter, but how are you thinking about that for the remainder of this year?

Michael Koempel

The remainder of the year, we expect margins to still reflect improvement over last year. I'm like it not necessarily to the level of the first quarter, but I would say, Kevin, as you're looking at the balance of the year, again, we would we would expect to continue to reflect margin rate improvement and driving the business.

Kevin Steinke

Okay, great. And on the SG&A side, you mentioned I think a couple of items that increased SG&A in the first quarter and you talked in the earnings release about some investments so on, is this a reasonable run rate for SG&A for the remainder of the year? Or how are you thinking about that over the next few quarters?

Michael Koempel

Overall, Kevin, I would say it's a reasonable, a reasonable proxy. Yes, we have made investments continue to make investments in talent on and also obviously as the business improves, and we're recognizing additional expenses as it relates to just associate payroll and whatnot.
So some of those will be will be consistent of the things we called out, for example, in the fair value put option that we had an adjustment to this quarter that that obviously wouldn't wouldn't repeat itself. So there could be a little bit of variability quarter-to-quarter, but it's a good proxy for the balance of the year.

Kevin Steinke

Okay. And you mentioned starting to as we lap some of the higher labor cost and contact centers and perhaps increasing price there, what's your ability to increase price or plans to increase price over the course of the year in that business?

Michael Benstock

I think it would be less frenetic that on pause last year, we're not in a position to really have to raise prices dramatically to get where we want to go. We've done some small price increases already this year but we'll continue to do them as necessary. Contracts allow us to do so and where we can gain efficiencies in some other way, create a more bottom line for that business.

Kevin Steinke

Okay. Thank you for taking the questions. I'll turn it back over to you.

Operator

David Marsh, Singular Research.

David Marsh

Hi guys, congratulations. A really fantastic quarter.

Michael Benstock

Thank you.

Michael Koempel

Thanks David.

David Marsh

Great print here. Yes, just following up on some of the earlier questions. I mean, this 40% gross margin is a slide just looking back last few years, I don't think you guys ever been this high. And is this is this it sounded like your in terms of the response to the last caller, you maybe feel like that could come back in a little bit. But you sounds like you also may feel like you could stay in pretty close to that range. Maybe you could just provide a little bit more color there.

Michael Benstock

If you remember on an earlier call, I don't quite recall when it was last year, we spoke about the fact we had shed some customers who were very, very low gross margin and were no longer accretive. And that's helped us a great deal of focus on the customers that are profitable and the margin improvement. I mean, it's been a it's been a it's been kind of a buyer's market out there, as you know, with with a pullback from most of our companies from from Asia.
Our Asian factories are going for where they're all underutilized. So the pricing has been very good in our own factories in Haiti. We've seen great efficiency gains and really operating them in a much, I would say, a much more profitable manner to the company with less variances and so on to standard costs. So all in all, I mean, it's all come together.
We've got a good pricing environment with our customers. I've got a good costing environment with our vendors and our own factories are doing very well and that's allowing us to do invest in a lot of talent in the business. And the talent obviously is to even create more efficiency within the business. So we're feeling good about where our margins are at a slight pullback could go.
It could go either way. I wouldn't necessarily bank on it pulling back. It could just as easily be even a little bit higher, not much than it currently is.

David Marsh

That's great. Great color, really helpful. Yes, the other thing, I think that you guys should definitely be commended for his and the inventory reduction you guys have been able to achieve over the last 12 months looks like that's $30 million to a 24% reduction.
And I know, last year you guys had talked about feeling as though the inventory was a little bit above where you wanted it to be. Or would you say that you're kind of where you wanted to be now? Or do you think you could still perhaps Whittle a little more away on that?

Michael Koempel

Yes, David, we last year we talked about setting the goal for ourselves by the end of the fiscal year to rightsize inventories. And as you said, we made significant progress. And so we by the end of 2023, we were able to achieve our goal of getting inventories more in line.
And as we look forward on as we're as we're looking to fuel the business, yes, I see us making certain investments in inventory to support sales. So going, I'd say a little bit more on the offense in some cases as opposed to we're pulling back on inventory, but we feel good about where we are on.
And I think we'll be focusing on inventory turns going forward and obviously going forward, keeping that in line with the demand curve. So and yes, again, as we look ahead and look at the trend of the business, we'll make investments and continue to make investments in inventory. But again, overall, feel good about the position we're in.

Michael Benstock

It's also I'm just going to add a couple of points to that. There's particularly in the healthcare side of our business, which carries a lot of our inventory and was most of our pain last year was in working really hard to reduce that. But there's an awful lot of turmoil in that business right now, a positive to us, the competitive landscape is getting smaller. We've had that major competitors file bankruptcy.
We've had turnover of CDOs in multiple businesses that compete with us, and that are really just still trying to figure out what they're going to do. I think there's an opportunity for us to take greater market share. And so we're going to we're going to respond to that as necessary on this timely a basis as we can. And that could include not only being aggressive from a sales standpoint, but having to support a slightly higher level of inventory than we're currently sport and then Dave, I'll just add one more thing, and that would be again, this would apply to the healthcare business.

Michael Koempel

I think as we move forward, the mix of the inventory is better. And so we're introducing we're introducing a new product into our into our offering from our new design team. So we're excited about not just the fact that the inventory is leaner, but also that the mix is with newly developed product entering the market.

David Marsh

Got it. That's helpful. And just one last question again, just on the balance sheet, because I think that it really deserves a lot of a lot of call out and a lot of a lot of opportunity for some some fanfare, if you will, you guys achieved a 40% year-over-year debt reduction from now pretty elevated levels down the $84 million. And as you go forward and you generate free cash flow, I mean, could you talk about priorities for cash flow, will it be continued debt reduction perhaps of revisiting the dividend maybe for an increase?

Michael Koempel

Or are you perhaps maybe share versus now or something of that nature Yes, Dave, I will certainly continue to I'd say in a way, chip away at the debt. You can see in the first quarter we reduced the revolver by another $3 million or so as we generate additional free cash flow will continue to pay down some debt, some portions of that debt down as we move forward.
In terms of the other ideas you mentioned as well, whether that's the dividend for a previous question was around M&A. Those, of course, are all all things that we discuss with with our Board, and we'll continue to evaluate and the merit of other uses of those cash as we move forward as part of our capital capital allocation strategy.

David Marsh

Great. That's all for me. Thanks very much, guys.

Operator

Kevin Steinke, Barrington Research.

Kevin Steinke

Thank you. Yes, just one follow-up. I wanted to ask about just the improving market conditions. You referenced then specifically in branded products, you know, certainly there's still some macroeconomic uncertainty out there around interest rates, et cetera. But Tom, just maybe that kind of the overall tone you're hearing from your customers and maybe there, are they just becoming more comfortable operating in this sort of environment?

Michael Benstock

Yes, we're seeing some pretty positive signs and increased spend with our clients and our prospects, there's still quite a bit of uncertainty due to higher interest rates.
Upcoming elections. Clients continue to be somewhat apprehensive, Kevin, about fully opening up their budgets due to the economic and political uncertainty. But what we've said in the past, none of this is really an excuse for not growing our sales.
These are this is a huge market, $24 billion market that we have a very, very small share in. And so we have loads of market share to take from our competition and who we believe is not generally as well positioned as we are to do so. So we can't we can't use customer sentiment or economics as an excuse for not growing our business. It might grow at a small at a slower pace than it would in a robust economy, but it's going to grow because we're going to continue to take market share.

Kevin Steinke

Okay. Thank you.
That's helpful commentary.
Appreciate it.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Michael Benstock for any closing remarks.

Michael Benstock

Thank you, operator, very much. Appreciate everybody being with us today. 2024 is off to a strong start. And our entire team, as you can well here in our voices is energized about the opportunities ahead and we look forward to meeting with investors at the many upcoming conferences that we'll be doing, and we'll keep you posted on our progress as we move through the year.
As a reminder, you can find our latest investor presentation, which was just completed on our very updated website. Also just completed and stay safe, please don't hesitate to reach out with any further questions, and thank you as always, for your interest in SGC.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.