Q4 2023 Superior Group of Companies Inc Earnings Call
Participants
Michael Benstock; Chairman, President and Chief Executive Officer; Superior Group of Companies Inc
Michael Koempel; Chief Financial Officer; Superior Group of Companies Inc
David Marsh; Analyst; Singular Research
Kevin Steinke; Analyst; Barrington Research Associates, Inc.
Jim Sidoti; Analyst; Sidoti & Company LLC
Presentation
Operator
Good afternoon, everyone, and welcome to the Superior Group of Companies fourth quarter 2023 conference call. With us today are Michael Benstock, Chief Executive Officer; and Mike Koempel, Chief Financial Officer. As a reminder, this conference 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, outlooks, 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 Form 10-Q, shareholders, potential investors and others read 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 any sorry, 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.
Michael Benstock
Thank you, operator. We appreciate everyone being on today's call. I'll start with our fourth quarter highlights and some broader perspective on 2023. And then I'll discuss our go-forward strategies to sustain and accelerate our momentum in the new year and beyond.
Before I turn the call over to Mike for additional detail on fourth quarter results and our outlook for 2024. We'll then be happy to take questions.
Throughout 2023, we talked about the back-end weighted nature of our financial performance and that played out with our consolidated fourth quarter results being the strongest of the year. We generated $147 million of revenues during the fourth quarter, up sequentially and down just 1% versus the prior year quarter, which was our strongest year over year comparison of 2023.
Fourth quarter adjusted EBITDA came in at $9.9 million, again, our strongest quarter of the year and up significantly from $3.5 million last year. We also produced $0.22 of diluted EPS in the fourth quarter, much improved from the adjusted $0.06 net loss per share last year and again, our best result of the year.
In addition to improved earnings as you can see in our results release today, we continue to drive strong operating cash flow while reducing working capital. As a result, we have strengthened our balance sheet reduced our net leverage ratio by almost 50% during the year.
Similar to what we described in our November call, business conditions have continued to slowly improve as many clients are gradually expanding activities. And while demand certainly hasn't returned to full strength, we're cautiously optimistic that underlying trends will continue to move in the right direction and that we'll continue to see a gradual pickup in RFPs and other leading indicators in this still uncertain environment.
We have our teams focused on what we as a company can control. Most importantly, on quality service that leads to strong customer retention. In addition, we are strategically investing to fully capitalize on the very favorable long-term outlook for all three of our very attractive businesses for those of you who need a quick primer on as you see in our three segments, we released a brand-new investor slide deck today that's available on our website. And I would encourage you to take a look.
Shifting gears, I will provide a high-level overview for each business segment and then turn it over to Mike for a deeper dive health care apparel which primarily consists of the week and Fashion Seal Healthcare brands grew both revenues and EBITDA year over year.
Market conditions for healthcare apparel have been improving with more positive signs emerging. Our addressable market for this segment is large and expanding, and our aim is to grow our market share well beyond the more than 2 million caregivers who already were our brands every day to work.
We began this process last year with our rebranding efforts under the wings trademark and the launch of our direct-to-consumer website, which continues to produce favorable results to build on this momentum will continue our digital advertising efforts to further enhance customer awareness and engagement with wins as with any DTC start-up.
This required investment is a gating factor on profitability in the shorter term, but one that we firmly believe will establish a foundation for profitable sales growth over time, combined with the favorable contribution from our B2B website, which we also launched last year and is adding efficiency to the wholesale process and the strengthening of our relationships with the other digital channels that we service. We see a compelling longer-term outlook for health care apparel.
Moving to branded products. During the fourth quarter, we drove our strongest revenue and EBITDA results of the year. The gradual expansion of demand that began in mid-2023 that I referenced on our November call continued through year end, and we ended the year with a stronger pipeline than a year earlier.
Our booking trends have remained favorable so far in the first quarter, albeit with the normal seasonality. Our focus within branded products is strong customer retention and increasing share of wallet as well as driving RFP activity and sales rep recruiting while maintaining strong margins, we're confident in our ability to capture share currently less than 2% of this large, attractive and growing market.
Next up is our contact centers business segment, which also grew revenue year over year. Increased costs related to labor and talent at first, a cold in early 2023 weighed on quarterly profitability, but we will begin to anniversary these higher costs this first quarter.
Our focus for contact centers is on increasing seats with existing customers and building the pipeline of new customers will continue to utilize the latest technology to enhance efficiency and take advantage of our ability to increase prices when possible to improve margins.
During 2024, our pipeline of new business remains strong for the Office Gurus, and we're bullish on the outlook for this high margin business.
I'll now turn the call over to Mike, who will walk us through our fourth quarter financial performance in greater detail and provide our outlook for 2024. We'll then take your questions. Mike, over to you.
Michael Koempel
Thank you, Michael. Rounding out a back-end loaded year as we first referenced a year ago, our fourth quarter results were the strongest of 2023. Our quarterly revenue reached $147 million, which was up 8% sequentially from the third quarter and down 1% from last year.
As compared to last year, fourth quarter sales increased in the health care apparel segment by 6% to $28 million and in the contact center segment by 5% to $23 million. These increases were more than offset by a 4% fourth quarter sales decline in our Branded Products segment to $98 million.
While branded product sales were down, the fourth quarter result sequentially improved from the prior quarter and represents the strongest quarter of the year. Our gross margin rate climbed significantly over the past year, up 760 basis points.
The margin increase was primarily due to last year's inventory write-downs of $7.8 million primarily within our health care apparel segment and a favorable shift in the mix of pricing and customers and lower supply chain costs within our Branded Products segment.
Our SG&A for the fourth quarter came in at $49 million relative to $44 million a year earlier, while the SG&A rate improved on a sequential basis by 130 basis points. Year over year rate increased by 360 basis points, primarily due to expense deleveraging from the sales decrease in our Branded Products segment, employee related costs and depreciation in our contact center segment and lapping unrealized gains of $1.6 million recognized in 2022 on written put options.
Our interest expense for the fourth quarter was $2.1 million, a slight improvement over the past year despite higher interest rates due to our successful efforts to reduce debt outstanding by $62 million during the year.
Net income for the fourth quarter was $3.6 million, or $0.22 per diluted share, up from net income of $2 million or $0.14 per diluted share in the year ago quarter, which included a one-time pretax nonoperating gain of $3 million or $0.2 per share.
Therefore, excluding last year's gain, our fourth quarter result of $0.22 per diluted share was up significantly from last year's adjusted result of a $0.06 loss per share. The improved result was driven by the aforementioned increase in gross margin for the quarter.
Consolidated EBITDA for the fourth quarter was $9.9 million compared to $3.5 million in the year ago quarter. Excluding last year's gains that I previously mentioned, the EBITDA increase was primarily driven by the health care apparel segment, whose EBITDA improved significantly to $1.4 million in the fourth quarter from negative $6.5 million a year ago, mainly driven by last year's inventory write-down.
Also despite a sales decrease in the fourth quarter, the branded product segment's EBITDA improved to $11.7 million in the fourth quarter from $10.8 million a year ago due to higher gross margin. These improvements were partially offset by an EBITDA decline in our contact center segment to $2.3 million in the fourth quarter from $3.8 million a year ago, primarily driven by labor increases earlier in the year.
Turning to our balance sheet, we've continued to successfully reduce leverage ending the year just under 2.0 times trailing 12 month covenant EBITDA, a significant improvement relative to 2.9 times just three months earlier in September and 3.9 times at the end of 2022.
In other words, we've cut our leverage ratio effectively at half over the past year. We also ended 2023 with cash and cash equivalents of $20 million, benefiting from our continued strong free cash flow and our focus on reducing working capital. Our operating cash flow for the year was $79 million.
I'll wrap up with our full year 2024 outlook, which similar to 2023 will have a back-end loaded cadence due to the underlying nature of the markets we serve. Our outlook calls for full year revenues in the range of $558 million to $568 million, up from 2023 revenues of $543 million.
We also expect earnings per diluted share in a range of $0.61 to $0.68, up from 2023 $0.54, and I'll reiterate that similar to last year, we expect a back-end weighted pattern.
This concludes our prepared remarks. And operator, if you could please open the line, Michael and I would be happy to take questions.
Question and Answer Session
Operator
Certainly. (Operator Instructions)
David Marsh, Singular Research.
David Marsh
Hey, guys. Congratulations on the quarter. Looks really, really good. Just a quick start on wanted to talk about the style the contact center segment a little bit on it was it was looks like it was down a little sequentially and I know you guys had mentioned is kind of there were there were some seats that have lost some contracts that hadn't been new, but it looks like you've had some pretty good backfill.
Can you just talk about kind of the general cadence of that business and kind of what your expectations are for the year in that in that particular business?
Michael Benstock
Sure. Thanks for joining us. We are we're feeling good about the business. I mean, last year was a little bit strange in that we had a lot of long-term customers cut back on the number of new agents that they had. And it was tough to make that up as the year went on, but we did make it up.
And in the end, we ended up with a net gain of agents that we were able to bill out. In addition, last year, you know, we were a little late putting price increases and which certainly impacted the first half more than the second half of the year. We're feeling strong about the business. It's growing.
The infrastructure is all in place for it to grow. The sales efforts are yielding on our expectations for the business and there's really nothing holding us back. There's still strong demand pipeline's strong first quarter should be should be pretty good.
And we expect that that momentum will continue to build throughout the year. Fourth quarter is usually the softest quarter in terms of growth of that business. People don't tend to put on new seats as they're Yes, ending the year and looking at their budgets.
Usually that's when they're cutting back the most for the holiday season. And so fourth quarter is always kind of a little bit tenuous what's going to happen, but we're feeling strongly going into this year that that we should see some pretty good growth.
Michael Koempel
And Dave, just to build on that, if you look at the build, if you will from Q3 to Q4. You'll see it's fairly consistent last year versus this year to Michael's point, just around of the holidays that we experienced and the fewer hours worked in the month of December in the fourth quarter.
David Marsh
That's really helpful. Appreciate that. And then just turning to the Turning to the health care apparel business, no stop to be consistently about inventory and getting it rightsized. I saw that inventory did tick down a little bit again sequentially in fourth quarter.
Was wondering if you could give us an update there on kind of overall feel for are your inventory levels like the demand? And if you feel like you're pretty close to equilibrium and at a point where you could start to build again?
Michael Koempel
Sure. Dave. This is Mike. I'll take your question. Yes, we talked at the beginning of the year about it would take us about a full year to get to what you refer to as equilibrium. And we feel like we've reached that point here at the end of the year.
So I think with the obviously the significant charges that we took in 2022 that that proved to be is that the right decision in terms of helping us to clear through inventory on through various channels. And so we work the inventory down significantly by the end of this year. And we are shifting our focus really toward new product launches and new introductions as we get deeper into 2024.
So from a working capital perspective and inventory. We've really driven a lot of value there. I think that will certainly normalize as we go forward and we'll look to invest in inventory where we see the opportunities and growth in certain categories.
David Marsh
Got it. And then just lastly from me on the SG&A side, a little uptick in the quarter. I'm guessing that's just typical year end kind of accruals for incentive comp and things of that nature. And I certainly expect a reversion back to, but a level kind of more similar to the prior couple of quarters going forward.
Michael Koempel
Dave, I didn't quite catch your full question.
Michael Benstock
Very last point in particular.
Michael Koempel
Can you repeat that? I'm sorry.
David Marsh
Sure, sure. Sure. SG&A just upticked a bit in the fourth quarter. Just wondering if that was just a typical kind of fourth quarter seasonal, you know, kind of incentive comp accrual type action and if we would it be right to expect a reversion back to kind of I mean, you have 1Q, 2Q, you guys really had things in check on. Just wondered if you're aware or should we expect the level of trend?
Michael Koempel
Yes, no, the perspective, I would probably call it a couple of things. I wouldn't I wouldn't it wouldn't be driven by incentive comp accrual. I would call it a couple of things. One on just as a reminder, in the Branded Products segment on the commissions that we pay, which obviously rolls through SG&A or based on margin and so recognizing that the fourth quarter was the biggest quarter for branded products, we've got a larger commission expense in the fourth quarter, obviously for good reason.
And then of one of the things I called out in the script is last year we had favorability with respect to revaluing a stock put that we have on and actually in the fourth quarter we had and expense driven by the fact that our share price did appreciate.
So that was an incremental expense, if you will, in Q4. So we wouldn't expect that to be normalized going forward per se. But those were a couple of things that what drove the uptick here in the fourth quarter.
David Marsh
Got it. Thanks. I will yield to us and other folks who have questions. Again, congrats on a quarter to job that I say.
Michael Koempel
Thanks Dave.
Operator
Thank you. Kevin Steinke, Barrington Research.
Kevin Steinke
Hello. Good afternoon. So I just wanted to discuss your 2024 outlook. You mentioned expecting the year to be back-end loaded again on what's what leads you to expect that and how much no said business conditions continue are gradually improving, but maybe not back to full strength yet. So maybe any thoughts on that, please.
Michael Koempel
Sir. I'd say a couple of things, Kevin. First of all in terms of the back-end loaded nature on the I think a lot of that's driven by the fact that what we do see in our branded products businesses, they typically do have a strong your Q3 and partially Q4 just as it relates to some degree to the holiday season, whether that's gifting for associates or for our customers and then also with our contact center business.
Typically, what we see is, as we just mentioned before, on the on the top, the results for Q4 for the contact centers. We typically see that business come down a little bit in Q4 as our customers pull back and we have holidays, we start to add new customers in Q1.
And then that then as we add them and onboard them, that drives more volume toward the back half of the year. So those two segments can tend to drive a little bit more performance toward the again the back half of the year, I would say that we wouldn't anticipate to be as back-end weighted as it was this year.
But back end weighted nonetheless, on looking at the businesses and our guidance, implicit in our guidance, our sales is sales growth across all three of our segments, I would say for our branded products and health care apparel segments.
Our guidance assumes low single digit growth. And then we would expect a larger growth in our contact center segment anywhere from high single digit to low teen growth and you put that together and that kind of speaks again to the range that we just provided.
Kevin Steinke
Okay. Yes. Fair enough. That's helpful. As I was going to ask about the segment growth expectations. So I appreciate that. All right.
So again, I mean, I just, you know, so it doesn't sound like you're necessarily assuming some dramatic improvement in the demand environment at all, but it's just kind of your regular cadence of new business ramping up and down, if you mentioned strong pipelines.
So it sounds like on you're just kind of basing that outlook based on what you can see today and that should lead to a stronger second half of the year that does that fair?
Michael Benstock
Yes, I'll jump into. Yes, that is fair, Kevin? Thanks, Michael. I think we're seeing more predictability than you've seen over the last few years. You know, '20 to '23 were pretty crazy for us '20 to '22, certainly because of the and pandemic within '23, with the with the overhang of inventory.
We finally feel like we've gotten to a place where our results are more predictable and we are certainly going to work really hard towards exceeding the expectations. But I think we've set the expectations pretty well where we believe and things will land right now and are they have very high confidence in those expectations.
Kevin Steinke
Okay, great. And you mentioned the direct to consumer effort and health care apparel continue to be pleased with the results there or any more color you can provide there? And I assume it's still too small to really move the needle but on but maybe any comments on just that again, how is this ramping and what you might expect in 2024?
Michael Benstock
Well, I think I think what's really exciting and I don't have any hard data that I can share on this, but the awareness of our brand, wink and car park, which we are a licensee of ours, is much greater than it has been in the past. As a result of a lot of our efforts.
We're making a huge marketing investment to support that. And so while it's not a huge part of what we do, it's getting bigger and it's not only helping the marketing efforts, not only helping the direct consumer, but helping us really across all the different channels that we're selling.
You have the digital channels where we're selling into Amazon and Walmart.com and so on Target.com and many others. And yes, yes, that's been very helpful as well selling to retailers where I think we're creating a demand for our products that we haven't had in the past.
And I've spoken about our marketing team on the past. I think they're second to none, and I'm hoping that sometime in the not-too-distant future, we'll be able to start reporting more on the results and it will have a bigger impact on our health care apparel business than it has today.
Kevin Steinke
Okay, great. And lastly, I wanted to ask about gross margin was quite strong in 2023. I know you had some of the larger inventory write-down charges in in 2022 that made the comparison a little easier. But even without that those charges, I know there's still some pretty healthy gross margin expansion.
So I'm just wondering if you could talk about what's driving that speak to the levels of sustainability in gross margin or no opportunities for improvement or pullback? Or what how you think that might trend going forward here.
Michael Koempel
Sure, Kevin, this is Mike. Yes, I think consistent with what we've mentioned in prior the least the prior for the prior quarter, if not the previous two, we continued to see strong margins in the Branded Products segment with sales down, we've been able through to pricing and customer mix as well as some favorability in supply chain costs to drive improved margins you certainly see that happening again in the fourth quarter.
Margin rate in the Branded Products business at 35% as compared to about 31% on the year before I think as we look forward, we look to sustain those margins. We think there's still a little bit of upside in the margin rate as we even get into 2024.
But that again, I think I think for the most part, certainly able to sustain that margin, which is which is implicit in our guidance. And as we talked about, we've taken some measures in the contact center business with price changes that we made earlier this year.
And we'll continue to look for opportunities there where we can perhaps drive some rate improvement where we kind of took a step back this year, we'll look to see how we can grow that margin in 2024.
Michael Benstock
Yes. I'll jump on that to a little bit. We are laser focused on gross margins, both at the factories that we manage in Haiti. They are creating better factory efficiency and looking at all kinds of means through process and improvement to gain more gross margin from what we produce ourselves with.
Outside of that, we're also looking at shifting as much as we possibly can to countries that we have free trade agreements where goods can be brought without duty into the United States at all. And that's a very important part of our strategy as well.
Along you know, we have redundant manufacturing strategy, Kevin. So I we still have to keep that in place because there are events in the world that we can't necessarily control all the time but we are laser focused on gross margins and we would be very disappointed not to see some improvement in our gross margin.
Kevin Steinke
Okay, thank you. If I could just sneak one last one in because you mentioned Haiti and I I've read recently about some unsettled political conditions down there. And just wondering if that's having any impact on your you're on your production down there. What's the what's the state of that effort today as Sure.
Michael Benstock
As you know, it's a good question, as you know, are the factories that we manage are on the border with Dominican Republic and there were some earlier noise towards the end of last year with respect to the water rights and water rights are being cut off to the Dominican by the nations and that all gets settled pretty quickly.
So we lost a little bit of time. Typically what happens in those situations where we lose a couple of days and because of Countrywide strikes or even some violence in different areas of Haiti, we'll lose a couple of days where people will stay home and then because they have to eat.
They have to support generally 10 to 12 people and their families by working for us. They do come to work and will work weekends to make up for the days that they lose during the week. So we've been lucky and fortunate that we have lost a lot of time yet.
The situation in Puerto is terrible and even other cities near the port fortunately were far enough away from most of that noise that it doesn't greatly affect us yet, and we're watching it very carefully.
The people who we operate in their industrial park, where there are many people like us and even some of our competitors are watching it very carefully as well to ensure that this is the least amount of disruption as possible. We do have a always a Plan B and a plan C, as you know, with our redundant manufacturing strategy.
So should there be any kind of disruption that actually affects our supply chain beyond our we carry safety stocks. As you know, we have it for all the different eventualities, but we do have other places we can manufacture as well and we're obviously focused on that with the situation, hey, but I would say right now, we've been very fortunate for us not to have impacted us really greatly yet.
Kevin Steinke
Okay. I appreciate the insight. I will turn it over. Thank you.
Operator
Thank you. Jim Sidoti, Sidoti & Company.
Jim Sidoti
Hi, good afternoon and thanks for taking the questions because it seems like you expect the operating margin to expand about 50 basis points next year to just over 4% from just below just under 4% in 2023. Is that are you think that's more on the SG&A line you get the leverage on the gross profit line?
Michael Koempel
I think, Jim, we would expect again a little bit more expansion on the gross margin line. And obviously, as we as we add sales, we'll get a little bit of leverage, get a little bit of leverage in G&A but I would attribute on any operating income improvement largely through some expansion in margin.
Jim Sidoti
And how many sales folks do you think you'll add in 2024?
Michael Koempel
How many sales folks out.
Jim Sidoti
Yes, you said that, you know, one of the reasons you're not going to get the leverage on SG&A is because you're adding sales, salespeople.
Michael Koempel
Where what I've learned to say, Jim, just to clarify is I would expect, as we're adding sales dollars, we'll get a little bit of leverage and G&A. But again, I'd say we're more driven by margin expansion. Just to clarify.
Jim Sidoti
On the gross margin line.
Michael Koempel
Correct.
Jim Sidoti
Got it. Got it. Now you seem to have really turned the corner in terms of new cash generation and your leverage ratio, what do you think the uses for cash will be in 2024? Is the first priority going to be of your bolt-on acquisitions? Or do you think you could increase the dividend or are there other priorities.
Michael Koempel
Sure. I mean, our priorities will be consistent with what they have been sort of pre this focus on the that will, of course, with our Board revisit the dividend on a quarterly basis.
And the other thing that we will do, Jim, this year, we will increase our capital spending this year. I mean, if you look at we just spent over $4 million in 2023, it's a very, very low number. So we'll be investing a little bit more in CapEx, still not quite to what I would call the historical levels, but certainly more than we did in 2023.
And from an M&A perspective, where I think we said before, we clearly have put that to the side. I think that's something that we'll certainly consider as we move forward. As we said before, even though we were actively looking to do any M&A transactions.
We obviously keep the pipeline open, and we'll certainly continue to evaluate whether there's potential accretive opportunities. And we're certainly in a position where if there were we could take advantage of that. And so that will be something that we'll evaluate throughout the year as a potential opportunity.
Jim Sidoti
Thank you.
Operator
This concludes our question and answer session. I'd like to turn the call back over to Michael Benstock for any closing remarks.
Michael Benstock
Thank you, operator. Firstly, I would like to publicly thank Phil Cusack for selling Ramco to us almost eight years ago. And Phil, thank you for your leadership as well as your time in the C-suite as our Chief Strategy Officer, we've accomplished a great deal during your time with SG. and C. and are more diverse and stronger than ever personally.
It's been an incredible experience for all of us who have had the privilege to work side-by-side with you for these eight years, we are in a much better place than ever to succeed in part due to your having a voice in our future. We wish you and your family continued success in all that you choose to pursue.
Secondly, I want to welcome our two new Board members to land and marine. Spencer. We're excited to have you join us. Your combined business and governance experience will be a great asset SDC. as we navigate our continued growth and success.
Thirdly, we want to welcome Dr. Kelly Richmond pulp as our first board observer in our brand new Observer program, this very unique and innovative program was conceived as an effort on our part to provide valuable public company board experience for people who, for reasons outside their control historically have struggled with gaining on trade to seats on public company boards.
We are proud to be trailblazing in this initiative and setting an example for others by working to create a more diverse community of board members for us and others in the future.
With that, I'll close by saying we're excited about 2024. And again, we'd encourage you to have a look at our new investor deck on our website and look forward to participating in upcoming investor conferences and presenting our Q1 results in the spring until them be safe.
Operator
The conference has now concluded. Thank you very much for your participation. You may now disconnect your lines.
