Good afternoon, everyone. Welcome to the Superior Group of Companies Second 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 except as required by law.

I'll now hand the call over to Michael Benstock..

Thank you, Operator, and welcome to our call. Today, I'll start with the financial highlights from our second quarter. Next, I'll cover how each of the three business segments performed, including a high-level discussion of some of our go-forward strategies.

I'll then turn the call over to Mike to take us through a detailed financial discussion and our outlook for 2024, after which both Mike and I would be happy to take your questions. Let's get started. We delivered profitable results in the second quarter.

However, our results were not as strong as we had originally forecasted due to softening market conditions as well as supply chain delays. We expect to recover the revenue associated with the supply chain delays in the branded products and healthcare apparel segments in the third quarter. On that basis, we are maintaining our full-year outlook.

On a consolidated basis, we generated revenues of $132 million, up 2% over the prior year period. Our EBITDA of $5.6 million was down from $7.4 million a year earlier, with a margin of 4.2% compared to 5.8%. Our continued growth in gross margin dollars and gross margin percentage were more than offset by higher SG&A as compared to last year.

While our second quarter SG&A costs were down slightly from the first quarter, our costs deleveraged on the lower-than-expected revenues. As a result, our second quarter diluted EPS was $0.04, as compared to $0.08 in the prior year quarter.

We continue to drive solid operating cash flow during the second quarter, which, with the balance sheet improvements we made over the past year, enabled us to maintain a strong net leverage ratio.

Therefore, we remain in a strong financial position to make strategic investments that will help us capture additional market share over the long-term across our three very attractive end markets while standing ready for any highly compelling M&A opportunities.

I mentioned last quarter that we were cautiously optimistic on the demand trends across our three business segments.

While first quarter demand was strong, we began to see a shift to slower customer decisions to purchase during the back half of the second quarter, as the uncertainty around inflation, interest rates, the upcoming election, and global geopolitics weigh on our customer sentiment.

With that said, we remain focused on what we can control, which is positioning the company for long-term growth. I'll reiterate what I mentioned last quarter. Superior Group of Companies, still has a very small but growing share of three large, attractive, and growing end markets.

We are driven to win more than our fair share of new customers while maintaining impressive customer retention statistics through providing a superior customer experience.

We're optimistic on the future given the enormous size of our target markets and our own ability to capitalize through wise investment in our people, in our products, and technology. Turning to our business segments, I'll start with healthcare apparel.

During the second quarter, our revenue was down 5%, due largely to continued softness in our store-based uniform wholesale business and a timing of revenues as compared to last year, due in part to temporary supply chain issues.

These headwinds were partially offset by continued strong growth in our digital business, both in our wholesale and direct consumer channels.

While the gross margin rate was up versus last year, the SG&A percentage increased at a higher rate, primarily driven by investments in marketing to drive further awareness of the Wink brand and support for the early stages of our direct-to-consumer channel. As a result, EBITDA was $1.3 million as compared to $1.9 million in the prior year quarter.

Despite the second quarter sales decline in healthcare apparel, we believe our selling strategies in healthcare apparel, including last year's successful rebranding under the Wink trademark and expanding our direct-to-consumer efforts will drive long-term growth.

Over time, we see ourselves capturing significant additional share of this large growing and resilient addressable market, expanding well beyond the more than 2 million caregivers who already wear our brands to work every day.

Turning to Branded Products, our revenue was up 2% compared to the year-ago quarter, despite an inventory shift related to certain contract uniform customers whose inventory was contemplated to be on the shelf in June, but instead arrived in the third quarter. As a result, the revenues from these contract assets will be realized in the third quarter.

Interestingly, the overall demand trajectory for Banco [ph] in particular, which is the largest portion of the segment, is being driven by a significant increase in the number of customer orders, partially offset by smaller order sizes and lower value products reflecting a cautious buying pattern by our customers.

However, the increased number of orders, including from new customers, results in capturing additional market share and, therefore, greater opportunity for growth when the headwinds normalize for expanded revenue. The good news is that customers haven't stopped buying. They are, however, being more prudent with their spend.

The increase in gross margin dollars and rate was offset by higher SG&A, which was primarily driven by employee-related costs, including commissions on the higher gross margins. As a result, the branded product EBITDA of $6.7 million was down slightly from $7 million a year earlier.

From a strategic standpoint, our game plan for branded products revolves around strong customer retention, growing our wallet share, driving greater RFP activity, increasing our sales rep recruiting. Our market share of less than 2% has ample room to expand in this $24 billion market.

Wrapping up our business segment discussion, contact centers grew revenues 9% year-over-year, accelerating slightly from last quarter's 7% revenue increase.

Due to the attractive long-term growth opportunities, TOG continues to invest in advance in talent and satellite offices to support new and existing customer growth, which puts pressure on both gross margin and SG&A, but only in the short term.

As a result, our EBITDA performance was almost flat with the prior year period at $3.2 million, despite the stronger top-line results.

We're seeing solid demand for TOG's offering from both existing and new customers, and our strategy is to continue growing our pipeline and ultimately earning more business, while ensuring that our offering is competitive and reflects the value we bring to our clients.

We're also investigating and already using some of the latest technology to provide the highest quality customer experience, while at the same time, employing additional technologies to enhance our efficiency and grow margins over time.

I'll now turn the call over to Mike to walk us through our second quarter financial results in greater detail and to provide an update on our outlook for the full year.

Mike?.

Thank you, Michael. During the second quarter, we grew our top line 2% over the prior year period. This was our second consecutive quarter of year-over-year growth.

And while our second quarter revenue was somewhat light versus our forecast, we're able to reiterate our full-year revenue expectations, given our favorable outlook for the rest of the year.

Our consolidated sales growth was driven by our branded product segment, which grew 2% to $81 million, and our contact center segment, which grew 9% to $25 million. These increases were partially offset by a 5% sales decline in our healthcare apparel segment to $27 million for the quarter.

In terms of our profitability, our consolidated growth margin expanded 170 basis points over the prior year, coming in at 38.5%. Both branded products and healthcare apparel continue to drive year-over-year margin expansion, with increases of 240 and 120 basis points respectively, driven by a combination of improved supply chain costs and pricing.

These gross margin rate increases were partially offset by a 140 basis point decline at our contact center segment, driven by increases in employee-related costs of our agents, training in anticipation of new clients in the back half of the year.

Our SG&A expenses were $48 million for the quarter, up from $43 million a year earlier, primarily driven by higher sales-related compensation from growth in the branded product's gross margin, higher marketing and advertising expenses, increased third-party professional fees, and increases in employee-related costs.

Our EBITDA of $5.6 million was down from $7.4 million in the prior year period. Looking at this by segment, branded product EBITDA was down just slightly to $6.7 million, as stronger sales and a stronger growth margin were offset by higher SG&A expenses.

Healthcare apparel EBITDA came in at $1.3 million, down from $1.9 million in the prior year period, primarily due to the lower revenues and higher marketing expenses this quarter.

Contact center's EBITDA was almost flat year-over-year at $3.2 million, as sales growth was offset by the combination of a lower growth margin rate and a higher SG&A rate, largely reflecting investments in talent to support future sales growth. Shifting gears, our interest expense for the second quarter was $1.5 million.

That sequentially improved from $1.8 million in the first quarter this year, and much improved from $2.6 million in the year-earlier quarter. The interest expense decrease from last year was primarily driven by a $53 million reduction in our weighted average debt outstanding, which I'll touch on in a moment.

In terms of net income, we reported $600,000 for the second quarter, or $0.04 per diluted share, relative to $1.2 million, or $0.08 per diluted share, in a year-ago period.

Turning to our balance sheet, which continued to improve, we ended the second quarter with cash and cash equivalents of $13 million, and we reduced our debt outstanding by another $12 million during the quarter.

We've also generated $16 million in operating cash flow year-to-date, and our net leverage ratio at the end of the second quarter was 1.7 times trailing 12-month covenant EBITDA, much improved relative to 3.7 times a year earlier. I'll wrap up with our full-year 2024 outlook, which is unchanged from what we provided on our last quarterly call.

Specifically, we look for full-year revenues to be in the range of $563 million to $570 million, and a full-year earnings per diluted share to be in the range of $0.73 to $0.79.

These ranges call for acceleration over our first-half results, including the later timing of quarterly sales that were originally expected during the second quarter, as previously discussed. That concludes our prepared remarks, and, Operator, if you could please open the line, Michael and I would be happy to take questions..

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

Thank you, and good afternoon. I wanted to start out by asking about the supply chain delays. You mentioned healthcare apparel and branded products. You mentioned that delayed revenue being pushed to the third quarter.

Just trying to get a sense as to if you could size the revenue that was delayed and, therefore, how much the third quarter will benefit..

Hi, Kevin. This is Mike. I'll take the question. What we started to see during the second quarter was really a combination of certain suppliers reducing capacity and then just an increase in demand in getting product, particularly out of China. We started to see some delays in product that we were receiving.

It impacted us on the finished goods side, which, again, did directly impact the recognition of revenue. We also saw it in terms of delaying some of our fabric to our production facility in Haiti, which also did impact sales in the healthcare side as well.

Again, we experienced those delays, which did create a shortfall in our expectations to the tune of, I would say, approximately a few million dollars for the quarter. Again, that's timing, some of which we began to recognize in the month of July and will recognize throughout the third quarter primarily..

Yes, Kevin, some of those delays were precipitated by the fact that with the anticipation that there could be tariffs placed on a lot of products coming out of China, in particular next year, if Trump were to be elected, a lot of people are trying to accelerate their shipments out of Asia.

That has placed a lot of demand on the backbone of the logistics companies to try to meet that demand. That's certainly one of the reasons for the delay..

Okay, great. That's helpful commentary.

With regard to the softer marketing conditions you mentioned and the slower customer decision-making, does that apply primarily to branded products? Is that kind of across the segments? Is that slower decision-making continued thus far as you progressed into the third quarter?.

Good question. We had a leadership summit about a week and a half ago and brought all of our presidents together. They all concurred that they had never seen slower decision-making on all of our customers' parts. RFPs are going out. The responses to the RFPs are taking forever.

Sometimes we're being told that we've been awarded business and it takes forever to get things through people's legal departments. Even after that happens, it is taking our customers the longest period of time to actually pull the trigger and give us purchase orders. That is true in all of our businesses.

I don't know what's causing that exactly except an uneasiness on their part or mandates from their own companies to slope their spending down or defer certain spending items. The spending will be there. It's just taking longer than ever. We're even seeing in our pipelines that our pipelines of business are larger than they've been in some time.

But part of the reason why they're larger than they've been for some time is it's taking people longer to make a decision. That's just a fact of life. We're happy that our pipelines are dramatically larger than they've been in the past. When things do start to pop, we believe that that will result in us taking additional market share..

Okay. Thank you. You talked about increased marketing and advertising expenses, I think, in a relation to direct-to-consumer and healthcare or maybe some other areas. Could you just expand upon that and, again, what the magnitude of that was? That will continue into the back half of the year..

Hey, Kevin. This is Mike again. The predominant increase in marketing and advertising continues to be in the healthcare apparel segment.

As Michael mentioned in the prepared remarks, that's still attributable to us rebranding and continuing to build the awareness of the Wink brand, which we, I'd say, officially rebranded last year, as well as continuing to invest in the growth of direct-to-consumer.

Obviously, these are heavier investments in the early stages of that channel specifically, which, again, over time we would expect to gain leverage as we build that customer base. That certainly is putting pressure on healthcare in particular, especially in a quarter, as you can see, where sales are down.

We expect to gain more leverage on that as we move forward with our sales expectation in the back half of the year. Again, we'll continue to have a meaningful investment, but, again, we would expect to begin to gain some leverage in return on that as we move into the back half of this year..

Okay. That's helpful commentary. Lastly, I wanted to ask about the second half of the year as you think about the outlook. Obviously, you talked about some of the revenue being delayed due to supply chain issues, but you expect that to come back.

But I guess does your outlook also assume kind of a typical seasonal ramp in revenue? Is that something you're seeing or expecting in the business? Is that kind of factored into the outlook?.

That is what we're expecting, Kevin. I would say just to add a little bit more to what Michael was saying in terms of RFPs in our contact center business where the decision making has been longer, the good news is that our pipeline is very strong, particularly with new customers.

With that timing of the decision making, that would translate for them in a larger magnitude of sales in the back half of the year Q4 in particular than we might otherwise see just because of the timing. Again, that is factoring into the back half of the year..

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

Our next question comes from Keegan Cox with D.A. Davidson. Please go ahead..

How's it going?.

Hi, Keegan..

I just wanted to ask and dig a little bit more on the higher SG&A. I got that it was from kind of early investment in your contact center business, but I was just wondering if you could talk about it a little more and why you're growing that out..

Sure. The SG&A increase is driven by a handful of factors, one being we did have an increase in gross margin with our branded products business. As we said before, we pay commissions based on gross margin dollars. As gross margin dollars rise, so will our commission expense within branded products.

I would say within our branded product space as well as our contact centers, we are making some investments in talent to support what we believe to be obviously the future growth trend of those businesses. So building out what I would call a little bit more infrastructure.

Thirdly, also within the contact center business, we have made some incremental investments in a couple of what I would call satellite offices, obviously off of our current office format, which really helps us enable to access additional pools of talent, train on board faster.

So again, we're making some of those investments in the early stages here to support the growth of new customers coming on board. And then lastly, another meaningful part would be the marketing and advertising expense that I just referenced with Kevin, which again is predominantly within our healthcare business..

Awesome. And then to kind of just follow up on that, you talked a little bit about supply chain delays, and I know you guys have facilities in the Caribbean, like in Haiti and such.

Have they been impacted at all by the storms heading through there?.

They have not been impacted by the storms, thankfully. In the civil unrest in Haiti, which is the other side of what happens in Haiti that could impact, has not impacted us much at all either. We've really had no downtime in the past quarter as a result, so we're in good shape there..

Awesome. And then I think I just had one more kind of, you were talking, Michael, about the pipeline of business kind of picking up in the back half of the year. And I just wanted to dig down into what segment that's in. Is it in the contact center? Just trying to make sure I got it right..

Yes, that's in the contact center business where the pipeline of prospects is much higher. And when I say prospects, I'm talking about people who we're having serious conversations with about taking over their business. They only make it to that list if that's the case.

And then, of course, the second side of that is even when we're told that we've won, it's taking longer to close business. But business is closing at a rate that we're very satisfied with..

Awesome. Thank you..

Next question comes from Jim Sidoti with Sidoti & Co. Please go ahead..

Hi, good afternoon. Thanks for taking the questions. So I'm looking at the results of the first half of the year and the results of the guidance. And it seems that you expect Q3 and Q4 to be even better than Q1 was.

So what's giving you that confidence?.

I would say a couple of things, Jim. One is there is what I call some seasonality in terms of we know historically that branded products in particular typically has a very strong third quarter leading into the fourth quarter.

Two, I would say that from a timing perspective, we talked a little bit about the supply chain delays, which will obviously benefit the back half of the year.

Thirdly, I would say from a timing perspective, there are a couple of customers in the healthcare business where those sales took place in the first half of last year are now coming in the back half of this year. Kind of gets a little bit to what Michael was referring to in terms of the timing of decision making. And those sales are purchase orders.

Those are sales ready to go. And then lastly, I would just again comment on what Michael and I touched on before just from a contact center standpoint, just in terms of the timing and onboarding of new customers, which is coming.

Again, that put a little bit of pressure on SG&A expense for contact centers in the second quarter as we were training in advance of the back half of the year. But because of the timing of new customers, we expect that to drive improved sales trend in the back half for that segment as well..

And historically, Q4 is even better than Q3.

The fact that you're going to, I guess, do some catch up in Q3 this year, do you think that those two quarters will be a little more leveled off?.

They'd be a little bit more balanced, Jim, to your point. Yes..

And then in terms of hiring sales people for branded products, are you finding that to be any easier or is that still a challenge for you?.

It's never easy to wedge somebody away who's comfortable in their current environment.

We've had more success in the last quarter than we've had in prior quarters, but we're satisfied that we're getting return for our efforts and looking at a lot of other ways as well to grow sales other than hiring additional sales people, we can create some operational efficiency that will make the sales force we have even more efficient.

We're in the process of rolling some things out internally, somewhat using some AI technology as well to do so that will help our current sales force achieve what we believe are better results for us as well..

All right. And then last one for me. The one area where you have made a lot of progress is your gross margin, up significantly from 2022 and 2023.

Do you think that these levels are sustainable?.

We would expect Jim to maintain a margins where we’ve been. If you look back historically just the last year, you really started to see our margin rate go up in the third quarter of last year and we’ve continued that trend.

I’d say we’ve have margins in the back half more consistent with last year only because we start lapping the stronger margins that we started to accrue in the third quarter..

Okay.

But it sounds like you are thinking the high 30s? That’s a pretty sustainable number?.

Yes..

Alright. Thank you..

Thanks, Jim..

This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Benstock for any closing remark..

Yes, thank you operator. I want to thank everyone for joining the call, for the great questions as well. We are excited about our company growth prospect and everyone here at SGC is focused on strong execution. We look forward to updating you again on our next call. And please don’t hesitate to reach out if you have any further questions before then.

Enjoy the rest of your summer. Thanks again for being with us today, and as always thank you for your interest in SGC..

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