Good afternoon, everyone. Welcome to the Superior Group of Companies, 2018 Third Quarter Earnings Conference Call. With us today are Michael Benstock, the company's Chief Executive Officer; Andy Demott, its Chief Operating Officer; and Mike Attinella, Chief Financial Officer and Treasurer.

[Operator Instructions] 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..

Thank you. This conference call may contain forward-looking statements about Superior Group of Companies 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 Group of Companies Form 10-Q, in 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..

Thank you Hala and good afternoon everyone. Welcome to our Q3 2018 earnings call. I would like to extend a warm welcome to Mike Attinella, our new Chief Financial Officer and Treasurer who joined us in August and brings a strong complement of financial, governance and operational experience to our team.

As Mike takes the CFO reins, Andy continues his stewardship as our Chief Operating Officer and can now fully focus on our domestic and global operations and strategic growth.

Our call format will slightly change as I'll focus my remarks on our performance, strategic direction and market dynamics, with Andy providing more detail on our operational segments and integration progress, followed by Mike's financial highlights.

Superior Group of Companies third quarter results delivered on revenue and earnings, but we still have work to do to bolster organic growth and manage margins in both our Uniform and Promotional Products segments. The Office Gurus continues to produce successful results and is on track to exceed sales expectations for the year.

As noted last quarter, our pipeline continues to be productive with wins and other opportunities moving forward. We've strengthened our sales organization, particularly adding very seasoned heavy hitters to our BAMKO and Tangerine teams. We are very excited to see them already executing on plan.

I don't want to steal any of Andy's thunder, but we've already – we're already seeing their success as BAMKO closed on their largest booking quarter ever. Andy will provide more detail on that and on our other sales initiatives shortly.

As we've outlined in the past, our strategic growth is rooting in capitalizing on our diversified business model that leverages our three collaborative businesses where we optimize operational efficiencies through a very robust shared services model.

When we take a good look in the rearview mirror of what might have been, we realize that we could have executed on the power of our skills sooner to capture synergies and efficiencies across our platform.

Andy will discuss our plans further in his remarks, but I will emphasize that we are now firmly on an accelerated pace to fully integrate HPI in our employee ID business, as well as the recent Tangerine and CID Resources acquisitions. Before turning the call over to Andy, I'd like to address the effect on Superior of the U.S.

tariffs on Chinese imports. Currently, our exposure to the imposed tariffs is impacting the smallest of categories within our Uniform segment, which is belts and headwear. This represents less than $6 million in sales of our total Uniform business.

We estimate that our exposure from a potential Phase 4 round of additional tariffs, which could be at a 25% rate covering all apparel, if implemented, and we took no action to mitigate it, would cost us nearly $2.8 million on a pretax basis.

We believe that the footprint we have built through our redundant manufacturing strategy, which we've spoken about many times on these conference calls and strong longer-term sourcing relationships will mitigate a significant portion of that.

The Chinese government has and we expect will put further subsidies in place for the manufacturers and adjust currency valuations to offset some of the pressure.

We will utilize all options in front of us, either use our leverage and sourcing for better pricing, move manufacturing to other countries outside of the tariff mandates or through price adjustments to our customers.

To put things in perspective, and this is something that you want to pay attention to, last quarter less than 24% of our uniforms were made in China and that rate has been increasing over the years as we have, in anticipation, already been moving much of that product to other countries.

In fact, planning is already underway and well underway to reduce this product exposure by more than half by the end of Q1 2019. We expect that we can reduce our exposure of $2.8 million by more than 75%. The impact to BAMKO is less significant, even though the bulk of their production is in China.

However, orders are being priced based on the current market cost, and contracts typically include pass-through clauses to manage price increases due to government action. We expect a short-term blip in profitability, but long term we believe they are on equal footing and can adjust quickly.

The bottom line, we expect to pass through price increases and find alternative sources to alleviate the preponderance of any impact of tariffs. We are also very focused on the rising cost of doing business, including sufficiency of foreign labor, wage increases here and abroad and other competitive pricing dynamics.

We have been and will continue to be proactively engaged with our supply chain partners to best address and adjust as needed to rise in costs. The overall market continues to be strong, and our diversified business model is nimble, adaptive and resilient.

I will now turn the call over to Andy, and then I'll return after Mike provides the financial overview with my closing remarks..

Thank you, Mike and good afternoon to everyone. The company's consolidated net sales for the third quarter 2018 increased 41.5% to $95.9 million, marking our 24th consecutive quarter of year-over-year net sales increase.

The Uniform segment, which includes HPI, Fashion Seal Healthcare and CID delivered a net sales gain, primarily from the inclusion of the CID acquisition. As Michael mentioned, we are taking lessons learned from the HPI and employee ID business integration as we work on our strategic integration road map for CID.

We will provide an update on this as we finalize planning, but we expect to accelerate CID's conversion to SAP with the expectation that they will be on our ERP system in the next 12 to 18 months. As we stated, CID is one of the fastest-growing providers of branded medical uniforms.

Their sales and marketing per hours paired with our operational expertise is a powerful combination. We see significant cross-selling opportunities between CID and Fashion Seal Healthcare.

We are excited to strengthen our ability to handle the direct sales channel in healthcare, in coordination with the retailers in CID's customer base and our relationship with our laundries and dealer network offering CID's highly recognizable brands.

Some of CID's functional operations have already transitioned under SGC, allowing the CID team to focus on identifying and capitalizing on these cross-selling opportunities, as well as expanding brand exposure. The pipeline is strong and we continue to increase our conversion rate.

HPI's integration is now well underway with the ERP implementation expected to be completed by mid-next year. We are on an accelerated pace at all levels to realize operational efficiencies across all segments.

We are maximizing warehouse space and further streamlining systems, making necessary upgrades and ultimately making facilities available to all divisions.

In addition to shared warehousing, we are bringing to bear strong technological foundations to introduce more automation in order to ensure we can operate effectively in any labor market environment.

We are continuously enhancing our strong value proposition through excellent fulfillment capabilities and the ultimate goal of superior customer experience. Turning to BAMKO, efforts on sales initiatives are bearing fruit as evidenced by the third quarter 2018 being their largest bookings quarter-to-date.

We have recently fortified the sales organization with established industry veterans who'll bring tremendous expertise and who can quickly deliver and create solid sales traction. As we intensify our efforts to drive top line growth and solidify synergies across our businesses, we are effectively taking a short pause on acquisitions.

However, we will continue to take compelling opportunities into consideration. The Office Gurus, our Remote Staffing segment, continues its remarkable growth trajectory. We are successfully driving increased market penetration and our customer retention is strong. Additionally, the anticipated expansion to Jamaica is moving forward.

Now, I'll turn the call over to Mike for the financial highlights..

Thank you Andy and good afternoon everyone. I'm both honored and excited to join the Superior team. While I've only been here for a short time, I'm impressed with the passion, dedication and integrity of the entire organization. This is an exciting time for Superior as we continue to execute our long-term growth strategy and diversify business plan.

I look forward to getting to know our shareholders and prospective investors. Now, on to the financial review. Since we filed our third quarter 10-Q this morning, I'll limit my review to key income statement and balance sheet highlights for the period. Net sales for the third quarter increased 41.5% to $95.9 million.

This sales increase was largely the result of the 2017 acquisition of Tangerine in our Promotional Products segment, and our 2018 acquisition of CID in our Uniform segment, which together represented 38.7%. Our Remote Staffing segment contributed 2.7% to our sales growth, and the change in accounting for revenue recognition contributed 4.4%.

While lower organic sales in our Uniform segment offset these increases by 4.3%, we achieved new customer wins, and our opportunity pipeline continues to build. Additionally as Andy noted, our Promotional Products segment had its largest bookings quarter-to-date.

At the segment level, Uniforms quarterly net sales increased 34.6% compared to last year, largely due to our acquisition of CID, which contributed 34%. The change in accounting of revenues added 6.3%, and these are partially offset by 5.7% of other sales decreases.

Our Remote Staffing segment continues to deliver solid results with a 35.3% increase in sales to third-party customers. The segment growth continues to accelerate in both new customer acquisitions and existing customer volumes. Our Promotional Product segment sales increased by 77.5%, with 2017 our acquisition contributing 79.8% of the increase.

This growth was slightly offset by the change in accounting for revenues. Organic sales were essentially flat this quarter, a result of product – project timing and variability. However, the pace of bookings has significantly improved and as this segment grows and scales larger, quarterly volatility will improve.

For the third quarter 2018, we reported a gross margin of 35.3% compared to 36.6% a year ago. We saw a higher mix of lower-margin customers and product sale through the quarter.

This, combined with increased freight costs, the change in segment mix and the effect of new revenue recognition standard on gross profit, all contributed to the change in gross profit between periods. As a percentage of net sales, consolidated SG&A was slightly higher at 26.6% compared to 26.2% a year ago.

As we discussed last quarter, CID's business model carries higher SG&A than our other Uniform businesses. Additionally, investments to support growth within our Remote Staffing segment, amortization of intangibles relating to our acquisitions and acquisition-related expenses, all contributed to increase SG&A.

Of note, our Promotional Products segment reported a fair market value adjustment for acquisition-related contingent liabilities, resulting in a 2.5% reduction in SG&A. Income from operations increased to $8.2 million and operating margins were 8.6% in Q3 of 2018 compared to 10.4% in Q3 of 2017.

This outcome was largely the result of the aforementioned acquisitions and the change in our gross margin rates in our Uniform and Promotional Products segments. Our effective tax rate for the quarter was 15.9% contrasted with 27.5% a year ago.

This decrease in effective rate is generally attributed to the reduction in the federal tax rate of 13% and foreign tax differences between periods resulting in a reduction of 2.7%. State tax expenses increased 2.8% and compensation based taxes of approximately 2.2%. Overall, net income rose 23.4% to $6.1 million compared to $5 million a year ago.

Diluted earnings per share was $0.39 versus $0.33 in the year ago period on 1.8% of higher shares outstanding. Now for a few balance sheet highlights. Our financial condition remains strong and we continue to focus on optimizing our balance sheet to maintain ample liquidity and financial flexibility.

With the acquisition of CID, our current leverage is just under 3x trailing 12 months EBITDA. We are very focused on reducing our leverage and we are actively exploring alternative refinancing options for the $85 million two year term loan. We continue to return value to our shareholders in the form of quarterly dividends.

During the first nine months we paid cash dividends of $4.3 million, an increase of 11.9%. Additionally, we repurchased 74,395 shares under our share buyback program through October 24. I'll now turn the call back to Michael for his closing remarks and a general outlook for the remainder of the year..

Thanks Mike. Having just completed what was a record quarter for earnings and growth, there's still much work to be done. We are and will continue to make the necessary investments for demonstrable and sustainable growth.

We are beefing up and allocating the human resource and capital resources on all fronts needed to accomplish our goals, while aggressively seeking operational efficiencies. As the benefits of our shared services platform cascade throughout the organization, we will capitalize further on every synergy available.

We are resolved to integrate acquisitions faster, squeeze efficiencies and move forward to grow our business and drive revenues and higher levels of sustainable profitability, and as such, our long-term guidance outlook remains unchanged.

I want to thank all the SGC team members all over the world for their dedication as we continue to grow and serve our valued customers. We will continue to diligently execute on our long-term vision, while generating shareholder value. With that, we'd like to open the call for your questions..

[Operator Instructions]. The first question comes from Kevin Steinke with Barrington Research. Please go ahead..

Good afternoon everyone. I wanted to talk – start by talking about you mentioned I think the pipeline moving forward, I believe in reference to the Uniform segment.

So is that continuing to track in line with your previous thoughts on recent calls in terms of how you might see new business rolling out as we move into 2019 and beyond?.

I would say to you Kevin, first of all good afternoon and thanks for joining us. I would say to you that in fact I'm more optimistic. The organization is more optimistic. There's a lot of clutter out of the way now. Things are moving forward and not just in our Uniform business, but in each of our segments. We're very busy right now and it feels good.

Hasn't felt this good in a while. We're seeing a light at the end of the tunnel, but we certainly have moved down the tunnel considerably and are feeling much more at ease with what we're seeing in the future. So I would say to you that nothing's changed. If anything, we're feeling better about the future..

Okay, great. So I was curious about your comments that you're really fully focused on integration now. Maybe you could have executed on synergies earlier as you kind of analyzed the past.

But is that just in reference to how far are you going back, like in talking about HPI, I mean BAMKO or just kind of the whole collection of acquisitions you made?.

Yes, talking particularly about HPI. When we bought HPI, if you recall they were on a very, very aggressive trajectory, nearly doubling their sales on a trailing 12, 18 months after we bought them. So it was – you know we stayed out of their way and didn't do any integration during those 18 months.

We supported them as best we could in some ways with distribution and other ways, but stayed out of their way and I think that would have been the right time to jump on some of the things that we've only jumped on in the last six months or a year.

I think we've left a full year of integration on the table there could have been and perhaps we are a little bit too conservative and they were doing too well for us to believe that we could have still helped them. But we could have and it certainly has changed our mind about how we approach integration in the future.

We're already starting in some sense, certainly in HR and legal and accounting and other places at CID. We're at the beginning of the integration, already working towards how we’ll integrate our IT, in particular all the technology and information systems and that will be done on a much more accelerated basis than what's done to HPI.

BAMKO, I think the amount of integration we've done with them has been on the right schedule and the right amount.

I do believe that there's – if we could be criticized for anything at BAMKO, it was not putting enough pressure on them early enough to go out and expand their sales force for an expanded organic sales profile and they have done that now and continue to do that. I'm very, very happy that they've done it.

But we you know again probably lost – we probably should have been more aggressive a year sooner. I don't mind falling on the sword for all of this. Ultimately, the buck stops with me and at the time it looked like we were doing the right thing, but sometimes hindsight is a lot clearer than it was at the time, so that's how it's looking..

Sure, sure. I appreciate those comments.

So as you move through the various integration processes, HPI, CID and Promotional Product side, what's the long-term impact on margins? I mean, is there a meaningful opportunity to move the needle there in terms of profitability?.

Good question, Kevin. This is Andy. As we look at that business, particularly with respect to CID, I think we've said on previous calls that their strength really was on the sales – was and is on the sales and marketing side.

From an operational efficiency side, there definitely was a lot to be – that we would be able to bring to the table to help them.

I think that, combined with the integration of HPI into Superior ID or Superior ID into HPI really from a combination perspective, there is significant amount of opportunity there as you pull back from two separate $70 million-ish size businesses into one of $140 million, $150 million. There definitely is scale to be achieved there..

Okay. Touch on promotional products here in terms of the sales talent that you mentioned, bringing on some strong people and a record bookings quarter.

Do you feel like you're at the right level now of sales talent for that segment or are you going to continue to look to add as you move forward?.

I would say we're at the right segment to achieve the outlook, the guidance that we've already announced, but we're not done.

We believe there's more opportunity there and we're going to – we've begun a very interesting process of recruiting salespeople from our competitors, and I don't want to go into it on the phone or at all, because I think we've really hit on something to entice competitor salespeople to come work for us.

We believe that reputationally we positioned ourselves to be the promotional – at least one of the top five promotional product companies of choice that salespeople would like to work for.

So we have no shortage of candidates and we're going to make sure that we bring them on in an organized fashion that we can absorb them and train them on our systems and get them rolling and also make sure we keep any complex out from a territory standpoint, geographies, that we straighten that out as we are bringing people on.

But we – I don't think there's any end to how many people we could put on and you know what our organic guidance is, but obviously we're here to beat that. So we're going to work really hard to do so..

Okay. And in terms of the significant bookings in the third quarter for promotional products, I know you don't necessarily give quarterly guidance or forward guidance, but just any sense in terms of how that maybe rolls out as we move through the next, I don't know several months or several quarters.

I know it can be a lumpy business, so there might be some timing variability, but does this give you some good visibility at least for the next couple of quarters?.

Kevin, you know with their business, I mean I think you're really looking at a nice uptick in the fourth quarter and in the first quarter as a result of these things and obviously we expect that momentum will continue.

But with those bookings being with a much shorter sales cycle as opposed to the Uniform side where you land an account today, you may not ship it for six months or nine months or even longer. They have a much quicker turn time on their volume and we expect you'll start seeing that come through this quarter..

Okay. You mentioned cross-selling between CID and Fashion Seal Healthcare.

Can you just talk a little bit more about the opportunities, how far you're along in terms of that cross-selling and any meaningful wins beginning to bubble up from cross-selling there?.

I can tell you this Kevin, that from the day after this acquisition we were already having cross-selling opportunity meetings. Peter Benstock who runs Fashion Seal Healthcare has been driving this, a lot of this with his team. H.P.

Park on the other side and members of his team have gotten together between then and now probably a dozen times for partial-day or all-day or even multi-day summits. There is a lot of cross-selling going on. We're bringing them into opportunities on the Fashion Seal Healthcare side, particularly on the laundry side of our business.

We're in the process of developing products.

Product development takes a little longer on the laundry side because you've got to make sure that the items that you're presenting to laundries is actually laundry-friendly from a colorfastness standpoint, durability standpoint that it will hold up in a commercial laundry setting, so it takes a little bit longer.

We're well into the development process of those products.

We won't realize any benefit from that until probably late third quarter, early fourth quarter next year when product starts arriving, but you know some of that will be presold for sure and then the opportunities on the other side, where other products that are – our fashion health care products, current products that aren't necessarily geared only for laundries are going into retail stores.

We're bringing even retailers – some of their retailers into opportunities with us to sell directly, so that they can be the face of that relationship because as you understood, we were backing off the direct health care channel and that's going well.

There's more activity between Fashion Seal Healthcare and CID in three or four months than there probably was in the first 18 months of HPI and Superior I.D. It is very, very active and a week doesn't go by where our people aren't at CID in Dallas or they're not here or meeting actually in front of the customers.

So very encouraged by that and the leadership that our team has taken here to execute what we think is a pretty bold plan. I can tell you that in discussing this with H.P.

Park, he certainly knew of our capabilities on the laundry side, but in putting this transaction together, I don't think any of us realized the unintended, I'd call it consequence – positive consequence of this acquisition. There is a lot more opportunity than we even realized and so we're excited..

That's good to hear. In Remote Staffing, you mentioned Jamaica expansion moving forward. So maybe just give us an update on what's going on there in terms of maybe getting some office space in place and hiring or what you're working on there right now..

Yes. We're going into Jamaica with kind of a two-pronged approach. We're going into a situation that is much smaller than we'd normally go in to kind of test the waters and make sure we figured everything out and while that's going on we'll be looking for bigger space and more space.

We have a little bit of cushion of time, not a lot, less than two years I can tell you before we're actually going to have to have that space, because we will have no space elsewhere. So we are aggressive, but we are trying to be very careful and make sure that the country is right for us and our customers.

We already have customers who have told us they will place work with us in Jamaica once we move. We'll be operating there plus or minus a week or two within the next 60 days and we've got our banking for everything almost set up for our LLCs, everything we need to do that.

So certainly before the end of the year, we'll be operating in Jamaica on a smaller scale, less than 50 people and learning about the country along the way..

Okay, good. And on the tariff discussion, thanks for that detail; that was helpful in terms of your exposure. And kind of a worst-case scenario, it seems overall that the risk is pretty well contained and not overly meaningful.

But did – have you been able to measure anything in your numbers this quarter in terms of an impact from tariff or if so, I mean is that something you can overcome relatively quickly? It sounds like you can and you're going to reduce your exposure to China further. But it sounds like overall it's a pretty manageable situation for you..

I'm going to let Mike answer that, because I'm going to let him answer one question as he's the new CFO. Go ahead, Mike..

Kevin, hi. First of all, I look forward to meeting you. We don't – we didn't see any real impacts at all as it relates to tariffs in the third quarter and as you mentioned and as Michael said during his remarks, we do believe that it is relatively contained and containable as we move forward.

As was mentioned, the Phase 2 tariffs impacted a small part of our business, and we haven't really seen any significant or even relatively insignificant impacts during the third quarter..

Okay, great. Well, I look forward to meeting you in person as well in the future. I mean, I guess just following up, I'll ask you a question as long as you had a chance to answer that one.

But as you've come into the organization based on your prior experience in I think some retail and other areas, what – do you see opportunities or what's kind of your assessment of the business and areas for improvement or initiatives you'd like to work on?.

Good question. You know what I saw coming into the organization was a tremendous opportunity to expand into market share, specifically as it relates to direct – the direct health care part of the business that the company has captured with the acquisition of CID and with the integration of the CID and HPI businesses together with Superior.

And I think that the areas of opportunity have been very well laid out as it relates to the integration opportunities that exist between all the collective businesses. I think the company is doing a great job of accelerating the focus on the integration opportunities that exist and I look forward to continuing to succeed in getting those completed.

Good, fantastic! Well, that’s all I had for today. So yeah, thanks for taking all the questions as usual..

Well, thank you very much. We appreciate all of your time today, and we look forward to updating you on our year-end results in February..

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