Good afternoon, everyone. Welcome to the Superior Group of Companies’ Second Quarter 2023 Conference Call. With us today are Michael Benstock, the Company's Chief Executive Officer, and 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 plan, 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 expect, believe, anticipate, think, outlook, hope and variations or 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 we are cautioned not to place undue reliance on such forward-looking statements.

The Company does not undertake to update the forward-looking statements contained herein, except as required by law. And now, I’ll turn the call over to Mr. Michael Benstock. Please go ahead..

Thank you, operator, and thank you, everyone, for joining today’s call. I’ll begin by reviewing our second quarter highlights on a consolidated basis, including an update on our strategy to navigate the current economic uncertainty and ultimately position the Company to capitalize in the compelling growth opportunities ahead.

I'll then review our three business segments and our various initiatives to more profitably grow each business. Mike, will then provide more detail on second quarter results along with an update on our full-year outlook. We'll then open the call for Q&A.

We generated consolidated second quarter revenues of $129 million compared to $148 million for the same period last year, along with consolidated second quarter adjusted EBITDA of $7 million compared to $5 million in the prior year quarter which excludes last year's non-cash impairment charges.

Our overall financial performance was consistent with the soft market conditions described in our last quarterly call. In the midst of a challenging market environment, our team remained focused on delivering on our commitment to drive positive cash flow and strengthen our balance sheet.

As a result, we generated operating cash flow of $38 million through the first six months of the year, with just working capital and improved our leverage ratio while also strategically investing in the attractive addressable markets across all three of our business segments.

As a result, we believe SGC is in a better position to capitalize on improved sales trend in the second half of the year and beyond, as macro softness and uncertainty ultimately gives way to better economic times. With that, let's take a closer look at each of our three business segments.

Healthcare Apparel, which primarily includes the Wink and Fashion Seal Healthcare brands generated second quarter revenues of $28 million, up from $26 million in the prior year second quarter. This 7% increase came despite the continued soft conditions across the healthcare market.

Second quarter adjusted EBITDA of $1.9 million improved from negative $1.4 million in the year ago period, which included significant inventory write-downs last year, as you may recall. Consistent with what I've mentioned on our past two earnings calls, we have made and we’ll continue to make progress towards achieving better inventory equilibrium.

As a reminder, Healthcare Apparel was a large and growing addressable market, and our overarching strategy involves growing our market share well in excess of the $2 million plus caregivers who already wear our brands every single day.

Since the launch of our direct-to-consumer website featuring our Wink product line early in the second quarter, results have remained above expectations. By adding the D2C channel to our business, we have been able to drive higher consumer awareness and engagement with our brand.

Another strategy within Healthcare Apparel is the recent launch of our B2B website, designed allow wholesale accounts to engage with us more efficiently. Wrapping up on Healthcare Apparel, we see attractive long-term growth opportunities that continue to expect stronger year-over-year results, which have already begun.

Next up is branded products, which is our largest segment generating revenues of $80 million during the second quarter versus $102 million a year ago, consistent with the softness that we outlined on our last call.

Branded Product second quarter adjusted EBITDA of $7 million was up slightly over last year, with last year's result reflecting PPE related inventory write-downs, while topline headwinds caused by economic uncertainty continue, Branded Products is another segment which we're effectively managing through this period by improving gross margins, carefully managing expenses, and developing new sales strategies to overcome the macro environment.

In other words, we're focusing on what's within our control and these actions will leave us well-positioned to capitalize on future growth as the economy improves over time. Our long-term vision for branded products is to expand our market share currently less than 2% and is attractive in growing $26 billion marketplace.

Let's move on to Contact Centers, our highest margin segment. Second quarter revenues were $23 million up 6% over the past year with adjusted EBITDA $3.3 million reflecting a margin of 14%, slightly improved from the first quarter.

Relative to adjusted EBITDA of $4.9 million a year earlier, this quarter reflects higher labor costs in the investments and talent, technology and infrastructure during the second half of 2022, partially offset by price increases that were implemented at the end of the first quarter.

We continue to build our pipeline of new business while identifying further pricing opportunities. Our long-term plan is to continue to significantly grow The Office Gurus tapping into the large addressable market for Contact Centers while aiming per EBITDA margins in the high-teens. I'll now turn the call over to Mike, before we take Q&A.

Mike?.

Thank you, Michael, and thanks everyone for joining today. Second quarter results were consistent with the quarterly cadence we described in our call in May, and we continue to expect a backend loaded year. We generated consolidated revenues of $129 million compared to $148 million in the prior year quarter.

Our gross margin expanded to 36.8%, up 430 basis points over the past year. This improved gross margin was primarily driven by last year's inventory write-down of $4.5 million, which accounted for 300 basis points of the expansion and a significant improvement in the Branded Products gross margin rate due to favorable pricing and customer mix.

While second quarter SG&A costs of $43 million were improved from last year. SG&A expenses as a percent of sales increased to 33.6% for the quarter, compared to 31.1% for the second quarter of 2022.

The increase as a percent of sales was due to expense deleverage resulting from the sales decrease in Branded Products and higher expenses associated with additional headcount and infrastructure costs to support growth in our Contact Centers segment.

Second quarter interest expense of $2.6 million was consistent with the first quarter but was up $2 million from last year due to higher interest rates.

Rounding out our income statement discussion, second quarter net income was $1.2 million or $0.08 per diluted share compared to the prior year quarter's net loss of $26.7 million or a $1.70 per diluted share.

In the year ago second quarter of 2022, the Company recognized pretax non-cash impairment charges related to goodwill and trade names of $30 million or $28 million net of tax or $1.78 per diluted share.

On an adjusted basis, which excludes the prior year charges, this quarter's net income of $1.2 million or $0.08 per diluted share was about flat to last year. Moving on to the balance sheet. Our cash and cash equivalents grew slightly since start of the year.

As Michael mentioned, while we navigate challenging market conditions, we have made meaningful progress towards strengthening our balance sheet by continuing to reduce debt and working capital as well as driving $38 million in operating cash flows to the first two quarters of the year.

We remain focused on these areas, and we’ll also continue our tight management of expenses and capital expenditures. As a result of these efforts, our net leverage ratio has improved slightly from the first quarter to 3.7 times our trailing 12-month covenant EBITDA and was well within our covenant requirements.

Turning to our updated full-year outlook, given the persistence of soft and uncertain macroeconomic conditions, we now expect a revenue range of $550 million to $560 million relative to the range issued in March of $585 million to $595 million.

For earnings per diluted share our outlook now reflects $0.45 to $0.55 relative to our original range of $0.92 to $0.97. Note that our updated outlook still calls for a backend weighted year with both the third and fourth quarters stronger than both quarters in the first half.

Finally, on a business segment basis, for Healthcare Apparel, we continue to expect low-single-digit sales growth for the full-year that reflects gradual improvement through the balance of the year as inventory levels and customer demand approach normalized levels.

For Branded Products, we expect a high-single-digit sales decline for the full-year, again, based on an improved sales trend during the second half.

Lastly, for Contact Centers, we anticipate improved sales and profitability in the second half of the year compared to the first and second quarters, resulting in double-digit sales growth in the low teens for the full-year. Operator, if you could now open the lines, we’ll be happy to take questions..

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Kevin Steinke with Barrington Research. Please go ahead..

Good afternoon. Just wanted to start-off by asking about, what's changed, I know you're still expecting a back half weighted year and an uptrend in the second half of the year.

But, just kind of curious what you're hearing from your clients, on the Branded Product side, that might have changed your outlook, and if they're just being, I suppose, a little more cautious than previously anticipated?.

Yes, Kevin. Hi, thanks for the question. And I'll jump in. Mike, can add anything that he sees. We have started to see some positive signs of budgets opening up in the market spending the past few months.

The large tech companies continue to report pretty strong earnings, which overall bodes well for us, our backlogs, in fact, which is representing orders received but not yet delivered is, was up significantly, June of 30, over the end of March. And we're seeing good signs.

What we're not seeing is a return to any kind of normalcy, that we would have expected sooner, then we're seeing it.

All the predictions that we heard in the latter part of last year is what will bring you live most of our first half and second half outlook on, and we expected that the second half would come back a little bit stronger as the economy was predicted to come back stronger, and we seem to be just in this malaise of uncertainty, where some budgets are opening up some budgets aren't.

But, we aren't seeing positive signs. I think we're taking a conservative approach to this. We don't want to disappoint, and we want to be certain that our targets are realistic for the second half of the year.

Still second half of the year, if you do the math, is up significant double-digits over the first half of the year in order to achieve those results. And, I would expect that, that will happen at this point. But, it's really a mixed bag. It truly is.

We're seeing within, you guys spoke about the branded merchandise Branded Products in particular, but when you look at, the uniform side of that, that's a little bit slower than the branded merchandises, even though that's a smaller part of our Branded Product segment today.

And then you look at, Healthcare was up in fact, second quarter, but there's still a lot of product in the marketplace that's being sold by our competitors. I have no visibility to how much excess product they have left to sell. And those ours is coming down significantly.

We're looking to get past our issue of any kind of product overhang by the end of this year, which I think we've been pretty clear on. And, lastly, when we get to the call center business, interestingly, Mike can probably share exact statistics a little better than I can, but we did put on a lot of customers, in the first half of the year.

I think, an unprecedented rate. Unfortunately, we also had a lot of customers, who cut back on the number of agents that they required because they have uncertainty in their business as well.

Mike, do you want to jump in on that a little bit?.

Sure. Yes, I would just add, Kevin. I mean, Michael covered it well in terms of Branded Products, nothing to add there. On the Contact Center business, you'll recall we mentioned at the end of the first quarter that we on-boarded quite a few customers in the first quarter, and we certainly saw the benefit of that in the second quarter.

And while we still had some growth within our existing customers, we also had some of our customers cut back on seats. And so, that cut back with some of our customers is what tampered the growth a little bit in the second quarter.

As, as I noted in my guidance, we expect the sales trend to improve, with Contact Centers as we continue to get the benefit of those added customers plus customers in the pipeline. So, we feel good about the back half of the year for Contact Centers..

Great. Thank you for all the insight there. Nice job on the cash flow and the financial leverage ratio, that didn't spike up as much or didn't you really move as much as I thought it might based on, that amendment to your credit agreement you had executed.

So, what -- how should we think about leverage and cash flow as we look to the second half of the year, and relative to the covenants you have in place, for the remainder of this year?.

Sure. Yes, Kevin, I'll say, we clearly exceeded our expectations in the first six months, as we talked about really starting last year, really focused on inventory in particular and cutting back on purchasing that we felt would drive improvement this year and clearly we see that happening.

But we're obviously really satisfied with how we ended the first six months.

I think there's still room for improvement in the balance of the year, not to the magnitude, obviously, that you've seen the first ix months, but inventory levels while we're making progress, still have more progress to go for the balance of the year, particularly in Healthcare.

So expectation is to still make some, I'd say, modest improvement balance of the year, and and obviously with the improvement that we've made in terms of working capital and the reduction of debt and the improvement of our leverage ratio, where we're feeling more comfortable about our covenant position going forward.

Still have work to do to hit, what Michael and I would say is our target net leverage ratio, which is to be [2.5] (ph) or lower, that will take some time, but we're obviously feeling, more positive as we move forward..

Okay. Well, that's good to hear. So you mentioned, some customers in Contact Centers pulling back on the number of agents. And, I know you're implementing some price increases that offset some higher labor costs you had seen in that segment.

What's the status of pricing there? And, does the fact that there's maybe less demand for agents currently take some of that pressure off of labor costs at least in the short-term?.

No, I'll jump in on that. And then Mike, can add again. We're not seeing -- we had a few clients who decided to reduce their headcount, and we haven't lost clients, which is always a good thing.

Our expectation, Kevin, is when there's more clarity to the future and when things do turn in the corner, from an economic standpoint, that we'll get those seats back. In the meantime, that was not contemplated that we would redo the kind of headcount reduction that we did with these few particular customers during Q2.

And obviously, that affects our growth overall for the year. And, so that's the first part of it. I wouldn't say that there's a that there's a lesson demand for new customers and new agents in the places where we operate. In fact, I would say near shore is as robust as it's ever been.

But, when you have close to 300 seats that you've cut back, in a single quarter, but you're not going to see revenue from those for the remainder of the year, it does impact you. We've tried to redeploy many of those people into other seats that we have won. And we have won a fair amount of seats.

So, we haven't had to really cut back our headcount that much. It's just -- it's one offsetting the other instead of having growth, we're just basically, had to temper our expectations with respect to growth right now because of that..

Okay. Thank you..

Mike --.

You covered..

Okay..

Okay. Good. Thanks. I had just one last about Healthcare Apparel.

You mentioned some positive early results on the, direct-to-consumer initiative and maybe just talk more about how that's trending and how you think that could play out and potentially contribute to the second half of 2023?.

Yes, as we said in the past, we don't expect it to have a big impact on this year. We did a soft launch in April, I believe it was the end of April. So we've had three and a half months added so far, every month is better than the prior month.

We're getting much better at keeping our customer acquisition costs in check and a return on ad spend, where we want it. We're not disclosing what those metrics are because it's not significant enough to really speak about. I would expect today until the latter part of 2024, you're not going to hear us speak about actual numbers.

And maybe even beyond that, from a competitive standpoint, we're best off not to speak to that. But I can tell you it is exceeding our expectations. We're very happy with the gross margins, it's bringing the business. We're very happy with our ability to move clearance, merchandise through that, which we -- we could at least said we have a lot of.

And so, we're excited about the channel and it is everything we hoped it would be. And I'm looking forward to sometime in the future being able to report, when it is a more significant part of our business, which it will be, just a question of time..

Okay. Thank you for taking the questions. I’ll turn over for now. I’ll get back in the queue. Thanks..

Thank you..

The next question comes from Jim Sidoti with Sidoti and Company. Please go ahead..

Hi, good afternoon and thanks for taking the question..

Hi, Jim..

You've guided for -- or you're based on your guidance. It sounds like you're looking for the top-line to turn around and grow low single digits in the second half of the year, after falling roughly 10% in the beginning of the year.

Are you starting to see any evidence of that now in the third quarter? Do you think that's primarily a fourth quarter there?.

You go ahead, Mike..

Yeah. I'll start. I think, Jim, I think Michael alluded to this a little bit in the previous question. I think we're seeing signs in our businesses that there is an improvement in the trend from what we saw in Q1 and Q2 and the branded product space, we've seen a trend improvement in the backlog of orders that are coming into the business.

We're obviously encouraged with the positive comp in healthcare in the second quarter. Don't want to get ahead of ourselves.

There's a lot of the year to go, but the business driving an increase over last year, placing an emphasis in digital, not to some extent the D2C, but overall in our digital business, which includes our wholesale business, I think, is helping to create a little bit of momentum in that business.

And then, lastly, when we talked about the contact center business, we are seeing the benefit of the new customers that were added in the first quarter and we're seeing traction there in terms of added seats, which we think will provide an incremental lift to the back half of the year..

So it sounds like you're seeing some evidence in this quarter, but you expect it to continue to build in Q4.

Is that accurate?.

Yes, I think it would be a bill between Q3 and Q4..

Alright. And despite the declining revenue, you have been -- you really haven't seen a huge drop in earnings and you've generated significant cash flow.

What's the plan to that cash right now? Is that all going to debt pay down?.

Our focus is still primarily on bringing our debt levels down. As I mentioned, our target is to get our net leverage ratio down into somewhere between 2 and 2.5. We've been there historically and we would like to get back into that position, which then would enable us to consider other uses of capital.

So, we're happy with the progress we have made in six months but we’ve got unfinished business and we remain focused on bringing those debt level down..

Alright. And then last one for me, in the branded products business, it sounds like that has a lot of potential for you to grow. If you can pick up some share there.

What are the one or two things you need to do to pick up that share, is it adding people or is it into increased promotional activity, what do you think the key is to growing share in that market?.

Yes, that's a great question. Growing share in that market means we have to take business away from 1 of our 22,000 competitors, right? The easiest way to do that is to take their salespeople who come to us with a book of business.

And generally within 18 months have moved 80% of their book of business to us, And with the support, we can give them, we can help them grow, even double their business with us versus their prior employers. So, that's the easiest and least expensive way.

The second most favorable way to do it is to really produce a marketing effort, which we have done very, very little marketing in the past, but we are starting to spend some money on marketing to drive people to us, who perhaps have never heard from us before.

And the third, the third probably the way we've done it in the past so successfully is we bought some of our smaller competitors and rolled them up under [Vanco] (ph). And that's been a very successful strategy. Obviously, with our leverage ratio is where it's at right now, we're not comfortable doing that. We are talking to people.

We continue to speak to them. So that when things ease up from a covenant perspective, we'll be able to go ahead and actually close deals. I can tell you that because of the way the economy is and because of maybe interest rates being what they are and expectations being lower than they might have been a few years ago.

I think the valuations will come in very, very well to our favor when we do go out and do acquisitions again. But in the meantime, we're sitting tight and trying to work through our capital requirements very, very carefully, but I would expect sometime next year, that we will be back in M&A movement.

I can't say we'll close any deals, but we certainly will be a lot more active but there's never a shortage of opportunities out there. So those are really the three ways..

The next question is from David Marsh with Singular Research. Please go ahead..

Hey guys, thanks for taking the questions. I could start kind of at the macro, the revenue guidance is a pretty meaningful reduction from what you guys provided last quarter.

I guess the question is, do you feel like the numbers that you've put out are conservative enough that you'll be able to hit that range here as we sit here kind of part of the way through the third quarter and really with only about five months left in the year..

Yeah, David. I would say we're obviously we're comfortable with the range. We've been approached that closer to the third quarter, a little bit into the third quarter can get some sense of what's in the pipeline, across our segments. We felt that the range that we just guided to is a good range.

We're certainly going to work very hard to not just meet that range, but beat that range, but we feel like it's an appropriate range based on the trends that we've seen in the business more recently..

Okay. And then just turning to the inventory issue that you guys have talked about now for a little while, I mean, can you give us a sense of how close you feel like you are to kind of an equilibrium inventory level.

I mean, is it still a long way to go or are you pretty close? I did appreciate the color provided there about being able to move some clearance through the website.

That's really helpful to understand, but how -- are you pretty close to being at an equilibrium level where you can kind of get back to your normal purchasing?.

We're definitely making progress, Dave. And as Michael alluded to on the digital space within healthcare, I think our emphasis on digital both the DDC as well as our wholesale has helped us to liquidate some of the underperforming inventory and we'll obviously continue to do that.

As we talked about last year, when we were looking forward, we felt it was going to take the better part of the year for us to really reach what we will call our inventory equilibrium or our target. So, I think the next two quarters will be critical.

Obviously, we’re expecting an improvement in the trend of the healthcare business, which will help us facilitate moving the inventory to reach our target. So the next two quarters will be important and our goal is to reach our inventory equilibrium around the year end period.

And we'll remain focused on liquidating those inventories over the next two quarters..

And from a supply perspective, you haven't seen any meaningful disruptions, correct. You can still purchase at whatever level you would like to from your supply base.

Is that a fair statement?.

Yes..

Yes. It is..

And then I just kind of reading -- I'm trying to read the [few notes] (ph) here. There was some kind of dancing around it, but I just wanted to get a definitive answer.

As you sit here today with some performance metrics that you have, do you feel like you'll remain in compliance with the covenants or is it still kind of -- you still kind of feel like it's maybe fifty-fifty that you might need to do another amendment?.

We feel comfortable with, you know, with the amendment that we have in place and our current standing in the business. So at this point, I would not anticipate any additional amendments that would be necessary. Obviously, we looked at this hard at the beginning of the year. And so based on how we were viewing the cyclical nature of the business.

We felt like it was appropriate to put an amendment in place that we felt would cover any potential increase in the ratio. Obviously, we've outperformed that. And so at this point, we feel comfortable as we move forward..

That's really helpful. Appreciate it. Let me yield the floor to another caller..

We’re seeing no further questions in the queue. I would like to go ahead and turn the call back to Michael Benstock for closing remarks..

Great. Thank you, operator. Before we end this call, I would be remiss I did not mention, and we announced last month, the passing of our Chairman of Meredith to the board my father, Jerry Benstock, whose vision and long career with Superior spanned over 60 years, and led to many of the successes we have enjoyed over the last many decades.

That truly loved his Superior family and every community that we operated in and did much to tangibly improve the lives of so many. He will be deeply missed by all who knew him, we mourn his loss. I want to thank all of you again today for joining our call.

As you heard from us today, we continue to aim at profitably capturing share and creating long-term value for our shareholders even as we continue to navigate these uncertain times. We're excited about the opportunities ahead, and we look forward to keeping you updated on our progress.

Please don't hesitate to reach out with any questions, and I hope everyone enjoys the rest of this very hot summer. Thanks again..

The conference has now concluded. Thank you for your participation. You may now disconnect your lines..