Hala Elsherbini - SVP, Halliburton Investor Relations Michael Benstock - CEO Andrew D. Demott, Jr. - COO, CFO and Treasurer.

Kevin M. Steinke - Barrington Research.

Good morning everyone and welcome to Superior Uniform Group's 2018 First Quarter Earnings Conference Call. With us today are Michael Benstock, the Company's Chief Executive Officer; and Andy Demott, its Chief Operating Officer and CFO. After the speakers' opening remarks, there will be a Q&A session.

You will receive instructions on how to ask questions at that time. This call is being recorded and your participation implies that you agree to this. If you don't, then simply drop off the line. Now, I will turn the call over to Hala Elsherbini, Senior Vice President of Halliburton Investor Relations, who will read the Safe Harbor statement.

Please go ahead..

Good morning and thank you. This conference call may contain forward-looking statements about Superior Uniform Group's business opportunities and its anticipated results of operations. Please bear in mind that forward-looking information is subject to risks and uncertainties, and actual results may differ from what you hear today.

Many of these risks and uncertainties are described in Superior Uniform Group's annual report on Form 10-K for fiscal 2017, and this morning's news release, and the Company's other filings with the SEC. Forward-looking statements in this conference call are based on management's current expectations and beliefs.

Management does not undertake any duty to update the forward-looking statements made during this conference call or elsewhere. Please note that all growth comparisons that management makes today will relate to the corresponding period in 2017 unless otherwise noted. With that, I'll turn the call over to Michael..

BAMKO, PublicIdentity and Tangerine are synchronizing on course as a cohesive unit, leveraging back-office and key IT functions from our China, El Salvador, and India offices. We have executed on two strategic acquisitions during the past nine months on target with our plan.

We will now take a short pause on our promotional product acquisition strategy to focus more on organic growth, merging recent acquisitions, and strengthening our platform, to grow in a sound and profitable way. Let me shift to the Office Gurus, our Remote Staffing segment, which continues to exceed their expectations.

If you recall, this was created from our necessity to have a captive center for our uniform business, and now we are serving in every [indiscernible] market. Net sales for the quarter increased by 68.8% to outside customers. Growth continues to come from deeper relationships with existing customers as well as new customer engagements.

The Office Gurus is the voice of many small businesses while providing the advantages of scale and expertise to ensure that every customer interaction serves and obeys our customers' brands.

As this segment continues to fill demand, we are increasing capacity and believe with the second location that will be operational in the next few weeks and we expect our El Salvador location to be fully staffed in the coming year, two years ahead of schedule.

We are actively exploring additional near-shore sites for expansion, including Latin America and the Caribbean. We are honing in on the right location that will facilitate efficient business expansion while maintaining our benchmarks for quality. Let's take a closer look at the market trends and the business environment in general.

Broader market trends are positive. Overall, jobs are being created and voluntary employee turnover is up. The January labor report showed U.S. job openings rising to 6.3 million and the tight employment rate held steady at 4.1%.

While the current macro environment is positive overall, our customers are feeling the challenges created by low employment and retaining employees. Branding efforts are one way for our uniform consumers to enhance employee-employer attractiveness, generate loyalty and keep employees happy.

Pricing in our Uniform segment remains fairly rational, though it's always there are some outliers that can contribute to price degradation. We previously have talked about the Green Movement in China where textile environmental compliance is being more closely scrutinized and enforced. This has resulted in some closures of textile mills.

Fewer mills will ultimately mean higher costs. As you know, our redundant manufacturing gives us an advantage to better manage those costs. I'll turn the call over to Andy to provide additional details on our first quarter financial performance and then I will come back with my closing remarks..

Thank you, Michael, and good morning everyone. We filed our Form 10-Q for the first quarter ended March 31, 2018 this morning, so I'll limit my review to key income statement highlights. Before we review first quarter results, I'll start off with a discussion of the new revenue recognition accounting standard, ASC 606, given its impact on our result.

On January 1, 2018, we adopted ASC 606 using the modified retrospective method. With this method, prior year's data is not restated but rather a single net adjustment of approximately $11.2 million has been made to opening retained earnings, representing cumulative impact of ASC 606.

As I mentioned on our fourth quarter call, a significant portion of our net sales come from the sale of customized products and related inventory we carry for our customers, particularly in our Uniform segment and to a lesser extent in Promotional Products.

Revenue from Remote Staffing is recognized as services are delivered and were not impacted by the adoption. For Uniforms and Related Products we have recognized an increase in net sales of $3.0 million and a net sales increase of $0.7 million in Promotional Products as a result of following this new standard.

Now let's move on to our quarterly financial highlights. As Michael noted, net sales for the first quarter of 2018 were $73.1 million, an increase of 19.8% over last year, with acquisitions in our Promotional Products segment adding 15.9% to the increase.

Remote Staffing Solutions contributed 4.2% with overall gains partially offset by a decline in Uniforms and Related Products which were essentially flat and contributed a decrease of 0.3%. On a year-over-year basis, net sales declined 0.4% in the Uniforms and Related Products.

Specifically, the decline was due to the loss of one of our large customers in 2016 and while we were notified of the loss of this customer in 2016, the prior program was not completely wound down until the end of the second quarter of 2017. However, as we previously stated, we are continuing to service the customer at a reduced rate.

For the quarter, the net reduction from this customer was approximately $1.3 million. Additionally, as Michael mentioned, timing of customer programs and working through deferred decisions that occurred last year also impacted sales results.

Overall, the sales decrease was partially offset by the impact of adopting 606, which as we said recognized an additional $3 million in this segment. In Remote Staffing Solutions, quarterly sales to outside customers grew significantly by 68.8% from a year ago.

We continue to see solid penetration within our installed base as well as new customer engagements. Promotional Products net sales increased 109.1%, largely due to our two acquisitions completed in the latter half of 2017, which contributed 97.1%.

Additionally, the impact of adopting 606 added 8.2% to the increase and new customers and expanded programs with existing accounts contributed an additional 3.8%. Gross margins decreased to 34% compared to 36.4% in the year ago period.

A large portion of this decrease in consolidated gross margins is attributed to the inclusion of Tangerine's results in the current quarter. Tangerine's business carries a lower gross margin than the rest of our business. Gross margins in our Uniform segment were 34.4% compared to 35.1% in the first quarter of 2017.

As a result of the hurricanes last year, our inventory levels related to programs produced in Puerto Rico were at reduced levels at the end of 2017.

During the first quarter, we were able to normalize inventory levels to a pre-hurricane base and as a result of the adoption of 606 this increase in inventory resulted in recognizing additional revenue in the quarter.

However, most of this inventory and these sales are of lower gross margin product and this along with customer mix resulted in the overall decrease in Uniform margins. Also, as we noted during our fourth quarter of 2017 call, we expected some margin pressure from rising cost.

As a Michael mentioned, our sourcing group has executed well in saving off price increases in the near term. However, environmental compliance and regulation are taking some mills out of service in China. Although we do anticipate pressures in the future, we are confident our scale will insulate us better as our competitors face the same challenges.

SG&A expenses increased by 21.5% in the latest quarter to $21.2 million. As a percentage of net sales, SG&A increased to 29% compared to 28.6% in the 2017 quarter.

At the segment level, SG&A in our Uniform segment increased as a percentage of net sales primarily related to $0.4 million spend on a special project as well as the impact from lower sales to cover operating expenses, partially offset by lower salaries and wages.

SG&A as a percentage of sales for BAMKO was 27.8% compared to 31.4% in the year ago quarter, as higher net sales helped to cover operating costs. This was partially offset by higher amortization expense due to our 2017 acquisitions. And in our Remote Staffing segment, SG&A was approximately 34.4% as compared to 36.6% in the prior period.

This segment showed solid improvement from increased operating efficiencies with continued significant sales growth. First quarter 2017 results included a pre-tax gain of approximately $1 million from the sale of our original call center building in San Salvador.

Our operating income decreased to $3.7 million from $4.8 million last year, which led to an operating margin of 5.1% versus 7.8% for last year's three months.

We should see a return to historical operating margin levels as we continue to integrate recent acquisitions, increase our scale and leverage synergies across our platform, and [indiscernible] while the Promotional Products segment reported a loss from operations in the current quarter, we still expect the recent acquisitions to be accretive to our operating results in 2018.

Our effective tax rate for the quarter was 26.2% versus 29% for the prior year with improvement primarily due to the reduction in the federal corporate tax rate, partially offset by the impact of higher taxes related to our foreign earnings, again coming from the new tax law.

Additionally, the rate was also negatively impacted by 3.4 points due to lower tax benefits related to the share-based compensation exercises in the current year quarter. Net income reflected our softer results and declined 36% to $2.4 million or $0.16 per diluted share, compared to net income of $3.8 million or $0.26 per diluted share.

Of note, our 2017 earnings would have been $0.21 per diluted share exclusive of the gain on sale of building in San Salvador. During the first quarter of 2018, the Company paid cash dividends totaling $1.4 million, a 13.9% increase when compared to the first quarter 2017. Now, I'd like to address some balance sheet items.

You will notice a new line item on the balance sheet for contract assets with a balance of $36.4 million. This is the asset related to unbilled contract amounts related to the adoption of ASC 606. There is also a corresponding significant decrease in inventory from $65 million in December, 31 to $36.4 million at the end of the first quarter.

Again, this is primarily attributed to the adoption of 606 and represents the customized inventory that we hold with no alternative use for which customers have contractual obligations to purchase.

Our long-term debt increased to $39.9 million, a 21.3% increase resulting from higher borrowings on our revolver to fund operations and 2017 acquisitions, partially offset by scheduled repayments on our term loan. Our cash position remained solid at $10.4 million and increased by 28.4% compared to last year.

Our capital structure is sound and positions us to continue to support our long-term growth strategy. Capital expenditures remained at normalized levels of about $1 million, funding our ongoing maintenance needs. I'll turn the call over to Michael for his closing remarks..

Thanks Andy. We remain excited about our future and the opportunities in front of us. There is still a great deal of heavy-lifting to do but we are confident in our collective abilities to execute our integration plans, achieve synergies across our platform, and create value for our shareholders.

Currently, our long-term outlook remains unchanged from what we provided earlier this year during our fourth quarter 2017 earnings call. Through our rich history, we have carefully crafted our future and built our business methodically with appropriate risk to gain optimal rewards.

Our entrepreneurial spirit is intentionally [indiscernible] with our broader direction as a brand elevation leader. We will rename our Company, Superior Group of Companies, pending shareholder approval tomorrow. Our corporate name change better reflects the multiplicity of our offerings and a best of approach across our business.

With the new name, we will be launching new marketing and branding initiatives reflective of our broader market presence and the diversity of our brand elevation offerings.

Superior's profitable growth strategy is always anchored by our team's continual drive to enhance our customer experience, our operational excellence, our products and our competitive position. We are thankful to them for their passion and continued hard work. Now we'd like to open the call for your questions..

[Operator Instructions] Our first question is from Kevin Steinke of Barrington Research. Please go ahead..

I wanted to start off by talking about you talked about seeing some buying decisions in the Uniform business accelerate and you continue to talk about the strong pipeline, larger opportunities.

So, kind of what's your expectation as you move throughout the year? I know kind of closing deals is also always kind of unpredictable and depending on length of sale cycles, but just maybe a little more color on how you see the pipeline moving and progressing as we go throughout the year..

That's a good one. We forecast from customer and prospect [down up] [ph] looking at our business. We measure the time opportunities are in our pipelines. How long it does take to get to all the different stages of the pipeline through our CRM.

And we have spoken about it in past conference calls, how long it was taking the delays last year and that certainly is impacting us now, but as now we are starting to see things move through the pipeline, even though we are seeing this turnover effect which has a downside, people we have dealt with for a long time are certainly not in place to be redeployed in the business to fill another position where somebody left or they are leading the business themselves, and we have new people that we are facing in many situations, more than I remember ever.

But the flipside of that is, so these new people are more open perhaps to talking to somebody other than us but that same thing is holding true at our prospects. People are not doing business [indiscernible] a lot more prospects out there.

People are willing to talk to us who maybe have had the same condition happen, there is new people in place who are not as allied with their current vendors. So, the flipside is, I'd say we have got a 5% market share and obviously we have tremendous room for growth.

So, we are talking to a lot more people there are potential opportunities for us as opposed to the number of people that we feel could be at risk down the road.

Having said that, I see third and fourth quarter brightening up a little bit from just the business that we are moving through the pipeline, particularly it will more impact us in coming years, next year in particular. I'm very little concerned with respect to next year in business, but this year is pretty well set at least for the next six months.

We are firing up in the year to say that the year is pretty well we can plan it out and know exactly where it's going to wind up or at least kind of close to it. I'm still confident. I mean, if we weren't, we would be changing our guidance, although our guidance is of course longer-term and longer period of time of five years.

But I don't see anything on the horizon that should give us concern with respect to our guidance..

Okay, good.

Can you just remind me again the headwind from the lost customer as we move throughout 2018, did that customer contribute about 5 million last year, is that sound right?.

Yes, that's about right. And really when you look at it, Kevin, through the years, the biggest quarter for that customer was really in the second quarter where they took out the inventory obligation. I think for the second quarter they were probably $2.5 million in that one quarter.

First quarter [indiscernible] we said it was $1.3 million impact this year in the decrease. Now we are continuing to service the customer at a reduced level but that is the exposure on it. I think once you get past the second quarter, it should be more than what the normalized level of business we are doing with that customer..

Okay, all right, that's helpful. So, you talked about some of the rising costs I guess from environmental compliance and plants closing, et cetera. Although you also said you have been able to mitigate those rising costs I think at least in the near-term.

So, is it possible to call out any impact that those types of items might have had on the first quarter or what it should mean going forward now that you have been able to mitigate those costs?.

Relative to the current quarter and the impact, that's really a relatively small part of what happened in Uniforms. I wouldn't consider it significant. It really was as I said tied to the mix of customers with a large amount of inventory on a low-growth customer that we did relative to 606 as well as customer mix.

Looking at it on a customer basis, our margins are individually on the customers as they are, those are mostly up slightly to flat. I mean, it's not hitting us there.

Michael, do you want to add?.

Yes, let me give you some color on that. I spent with our sourcing group, we had extensive meetings, marathon meetings with many of our vendors in Guangzhou, China.

They came from India, Bangladesh, China to meet with us and multi-days meetings, and every one of them started off by, at least the Chinese vendors did showing us what was happening, and remember, the textile vendors as well, not just selling vendors, they showed us what has happened to the RMB and they showed us what was happening with compliance, all wanting a price increase.

The good thing is that because we have been growing over the years and they have been growing with us and we tend to be very loyal to our supply chain and they also know that we have redundant sources, we actually wound up leaving those meetings with no price increases, where I can tell you every single one of them wanted a price increase.

So, I feel confident and as you go look at this in six month buckets, that at least what we will be purchasing over the next six months will not be at higher prices than we are paying for the most part, and what we purchase in the next six months is what we will be shipping a year from now, or six months from now would be a year from now.

So it would be from six months to a year from now. But what we have sitting on the shelf right now is substantially at the same cost as they were just a few months ago.

So, as Andy said, that shouldn't change very much, but I left very confident that our sourcing group had done a great job in leveraging all the strength we have today to hold on to the pricing that we have..

All right, good. Andy, could you just review again, you said there was one low-margin customer in the customer mix that impact on the first quarter. I want to make sure I had that all done correctly..

That's what I was referring to, that was relative to the inventory that we built back up. It's made in Puerto Rico which was impacted by the hurricanes last year. Inventory levels were down.

And now with this ASC 606, as we produce that inventory because it is custom for the customers, there is no alternative use and they have a contractual obligation to take it, we are recognizing the revenue as it happens.

And that in that particular case happened to be probably $2.5 million of that $3 million increase was at this customer which made in Puerto Rico is basically it's a made in U.S. program and we talked about it before, that is a low, the gross margin on that account is a low growth..

Okay, got it. All right, thanks. Can you just give me a little more sense of the seasonality of Tangerine. I know you talked about their revenue is typically lower in the first and fourth quarters. Sales volume goes up in the second and third quarters.

Does that also apply to their gross margins, that is they will make higher margins when their sales are higher, or I know you said gross margin for that business is lower overall relative to the Company but just trying to get a better sense as to the seasonality I guess of profitability for Tangerine..

I mean I think the issue there with what led to the operating loss in the current quarter is that low volume isn't sufficient to cover the operating expenses.

And also you got to remember, these three months or the four months, it's only four months since the acquisition, so we are still working to kind of get them in with our operations and to pull the two companies together more efficiently, and then we'll see that as we go forward. Their gross margin is going to be a lower gross margin most of the time.

They do have a lower service component of those as well, which is why they are able to do that business at a lower gross, no different than some of our Uniform customers where we talk about that. It's really just a matter of the volume with a large portion of it having in that second and third quarter for them.

You are going to see us skewing on the profitability for that particular part of the segment..

Okay, got it, all right. Did you have the revenue contribution from just I guess acquired revenue in the quarter? I think you said organic sales were flat overall. I don't know if you had a specific revenue number..

We broke it out in the percentage of the change. I mean, 97%, there was 109% increase in Promotional Products. Of that 109 points, 97 of those points were from acquisitions. There was probably another 8.2 that came from adopting ASC 606 and revenue for that particular division was up little over 3.8% I think it was with the organic growth.

The other segments are all organic..

It's going to become a little muddled over time with respect to organic in that business because as they put the businesses together, there are some places where they were actually competing with each other and they are taking business and obviously not going to handle that at two separate divisions of our Promotional Products business.

So it will be moving back and forth. So when it moves, is it still organic or is it not, and it is going to become a little bit more difficult to report what's organic and what's overall. Their [indiscernible] opportunities have been moved to Tangerine.

Quite frankly there have been opportunities that had been moved to HPI and vice versa that would have been handled by Tangerine before, by BAMKO. So, we are trying to figure out how best to report that in the future but it is going to become more difficult..

Okay, yes, that makes sense. On SG&A, I think you mentioned $0.4 million for a special project.

What are you thinking for SG&A as we move throughout the year if it might come back a little bit, come down a little bit after the first quarter, or what's your thinking on that front?.

I would say, the second quarter productivity will include a little bit more expense relative to that special project, but as we have talked about in the past, whenever [indiscernible] especially on our Uniform side of the business, when we are not growing – when we are growing at fixed portion of our cost, it really helps us from a perspective when you see leveraging and then when you have a quarter like this where it was down a little bit, you kind of pay for it a little bit with that percentage going up.

Our expectation as the year goes along is that SG&A will be more in line with the way it normally is with us..

Okay. So I think you talked about Haiti continuing to expand at a deliberate pace. I think last quarter you talked about potentially producing more products there. Maybe that provides you with more of a cost advantage.

What's the current thinking in that regard?.

The desire there is still to expand what we are doing. We do feel we have grown pretty quickly there in two years to over 300 people.

I was there not very long ago and I'm very pleased with many respects of what we have done and I see a lot of opportunities still from an efficiency standpoint to gain some efficiencies with the people we already have, which will lend itself obviously to doing more product without having to add people, but ultimately we will once we get to the efficiencies that we are planning out, we will be looking at expanding that further.

I can't tell you to what extent we are capable of expanding.

A lot of it depends on whether we actually move some of the functions that are being done there to another facility, and what we are talking about is really storage of our fabrics that are also being done in that location, whether they could be stored across the board or in the Dominican Republic, which would open up a great deal of space in that factory for additional operators, no shortage of operators.

We are just making sure we do this in a very planned progressive way to ensure that we get the best benefit from our investment..

Okay, good. On Remote Staffing, obviously that continues to grow very nicely and you talked about [indiscernible] being staffed maybe a couple of years ahead of schedule looking at expanding I think to other parts of Latin America. I know your business typically has gone through some peaks and valleys in terms of capital expenditure.

So what's the outlook for CapEx, maybe especially given the strong growth in Remote Staffing you are seeing and the possibility of expanding your facilities?.

I think that the CapEx guidance we gave at year-end where we said it is going to be in that 1.5%, 1% to 1.5% of revenues, [indiscernible] you're not going to see us go and build another $10 million call center.

I think where we have talked about going to other countries, typically there has been we start on a smaller scale similar to what we did in [indiscernible]. You're not going to see it have a major impact on our capital expenditures.

Fortunately, I mean most likely we will end up leasing space where we start out before we will just make sure we are in the right place and it is growing well before we consider investing in additional CapEx, and it's not that high..

Just as we did in El Salvador when we started..

Okay, that makes sense.

Now you talked about low on employment and turnover I guess in your key context at some customers being a bit of a challenge, but should I also think of turnover being a tailwind for you as well in that when employees are turning over, the uniform wearing employees are turning over, that that is going to drive some more business for you?.

Absolutely. That's a given. We have discussed that many times and it's a great point. People are doing – and it helps us in a lot of ways. Yes, there is high employee turnover, which means more people are leaving, which means more people are being hired, and therefore more people are being given uniforms.

But it also helps from the standpoint of I think there is a high level of recognition on employee satisfaction with respect to what they are wearing, and I don't want to point to anything in particular that's been written recently because [indiscernible] written about some of our uniform, some of our competitors' uniforms as well, but there is no doubt that employee who feels like they are dressed professionally and appropriately serves their employer better and tends to be happier on their jobs.

It's not obviously the only thing that makes them happy but it is a portion of what makes them happy. So, I think the recognition that a company can make their employees somewhat happier by putting them in the right clothing, the right work clothing, leads to higher employee satisfaction, and therefore for us means the sale of more uniforms.

So, overall it's a good thing for us..

Okay.

On the made in Puerto Rico or made in America customer, that particular customer, that particular program, should we think about that having any further outsized impact on the second quarter as well or any other point during the year or is that kind of past you at least in terms of the magnitude of the impact in the first quarter?.

I mean obviously we can't control what the customer ultimately buys but for some reason they end up buying more, it could have an outsized approach. But our inventories were up to the levels that they need to be. We are no longer building to get back to the levels we need on hand to be able to comfortably service them.

So I don't see it having an impact as we go forward..

There is a second part to that and we were early in the process last year when that hurricane hit us of creating the redundancy that we needed for that supply chain for that customer, and we have since created redundant supply chain for that in different parts of the country, Puerto Rico being one and U.S. [indiscernible] being the other.

So, even if there were another hurricane in Puerto Rico, which we certainly hope doesn't happen to them, as tragic as the last one has been and still remains, we do have other sources now, so it would not impact us as greatly..

Okay, great. I think I will wrap it up there. Thanks for taking all the questions..

Thank you very much. Gentlemen, it would appear that we have no further questions in the queue.

Do you have any closing comments?.

Great. Thank you very much. Andy and I appreciate everybody's time today. We look forward to updating you on our progress for the second quarter in July..

Thank you very much. Ladies and gentlemen, that concludes this conference call and you may now disconnect your lines..