Superior Group of Companies - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 results slightly down year-over-year on revenue and profitability: net sales $145.4M (-1% YoY), EBITDA $7.3M (5.0% margin), diluted EPS $0.13 (vs $0.22) as mix and higher Healthcare sourcing costs weighed on margins.
• 2025 guidance introduced: revenue $585–$595M and diluted EPS $0.75–$0.82, with a back-end weighted cadence similar to recent years; management expects improving interest expense and continued cash generation.
• Capital allocation catalysts: Board approved an additional $17.5M share repurchase authorization and amended credit agreement increases annual restricted payments capacity to $30M from $20M, enhancing flexibility for dividends and buybacks.
• Segment dynamics: Healthcare Apparel grew 8% on digital strength; Contact Centers grew 4% with 54.7% gross margin; Branded Products declined 5% due to timing of uniform program rollouts; management reiterated focus on cost control, operational efficiency, and technology enablement.

What Went Well and What Went Wrong

• What Went Well

  • Healthcare Apparel revenue +8% YoY, driven by digital channels and favorable non-digital timing; management highlighted continued investment in sales, branding and marketing to grow brand awareness.
  • Contact Centers: revenue +4% with gross margin at 54.7% (consistent with Q3 and higher than 1H), supported by pricing actions and technology adoption; “we’re implementing some of the very latest technology to not only enhance the customer experience, but to optimize our own cost and long-term profitability”.
  • Balance sheet and cash generation: 2024 operating cash flow $33.4M; year-end outstanding debt reduced to ~$86M; net leverage ratio improved to 1.7x TTM covenant EBITDA.

• What Went Wrong

  • Branded Products revenue -5% YoY on lower volume in Branded Uniform programs due to timing of customer rollouts; EBITDA in segment down to $8.9M from $11.7M.
  • Healthcare Apparel gross margin pressure from higher sourcing costs tied to Haiti manufacturing and year-end inventory adjustments; segment EBITDA $1.1M vs $1.4M.
  • Consolidated profitability compressed: EBITDA fell to $7.3M (5.0% margin) from $9.9M (6.7%); diluted EPS $0.13 vs $0.22 amid mix and cost headwinds.

Transcript

Michael Benstock (CEO)

Thank you, Operator. Today I'll review our consolidated full-year and fourth quarter financial highlights, along with a discussion of our three business segments. I'll then turn the call over to Mike, who will take us through a more detailed financial discussion and provide our outlook for 2025. After that, we'll open the lines to take your questions. Fourth quarter results came in largely as expected, placing us within our full-year 2024 outlook ranges, which, as a reminder, we had raised after the first quarter. Our full-year consolidated revenue and diluted EPS were up 4% and 35%, respectively, over the prior year, and we are pleased to have achieved this result under the current macroeconomic conditions, which have presented numerous challenges. Market conditions continue to reflect customer hesitancy, given the uncertainty around inflation, interest rates, geopolitical conflicts, the new administration, and the general economic direction.

While we cannot control these external factors, we are committed to tackling the aspects of our business that are within our control. Our team has shown resilience and adaptability, focusing on cost management, maximizing our operational efficiencies, enhancing customer experience, and driving innovation within our product lines. This presents us with tremendous opportunities for growth, even in a more prudent spending climate. During the fourth quarter, consolidated revenue was down 1% versus the prior year, which, if you recall, had been a strong quarter for us. Positive growth in healthcare apparel and contact centers was offset by a decrease in our branded product segment. We generated fourth quarter diluted EPS of $0.13 relative to $0.22 last year. Again, this put us within our full-year outlook range, and, as expected, was a tough year-over-year comp given the outsized strength in the fourth quarter of 2023.

We also generated positive operating cash flow, enabling us to maintain a strong leverage ratio. Our solid financial foundation provides us the opportunity to make strategic investments in our three very attractive end markets while also opportunistically repurchasing our shares, which Mike will speak to. Starting with branded products, we did achieve modest growth in the promotional products channel, driven by a combination of both new and existing customers. We are investing in sales leadership to expand our share of wallet with existing customers, as well as to add new customers at a faster pace. Overall, our expanding market share should result in strong growth over time, especially once economic uncertainty lifts. Turning to healthcare apparel, while overall market conditions remain soft, especially for the brick-and-mortar wholesale-related channels, we look to grow our digital channels over time, both wholesale and direct-to-consumer.

We're also investing in sales, branding, and marketing to further drive Wink brand awareness. As for contact centers, which remains our highest-margin segment, we are encouraged by the revenue growth potential, especially now that we have a sales team in place for the first time since launching this business in 2008. We did see a positive contribution from brand-new customers during the quarter, which more than offset a decline with existing customers, due in part to end-of-year seasonal adjustments. Our contact center strategy is to continue growing our customer count with our new internal sales capability by targeting small and medium-sized enterprises with greater marketing support. Most importantly, we're implementing some of the very latest technology to not only enhance the customer experience but to optimize our own costs and long-term profitability.

I'll now hand it over to Mike for a detailed walkthrough of fourth quarter results, as well as our initial outlook for 2025, before we take your questions. Mike.

Mike Koempel (CFO)

Thank you, Michael, and thanks, everyone, for joining us today. On a consolidated basis, our fourth quarter revenues were down 1% relative to the prior year period, completing what was, again, as anticipated, a back-half-weighted year for SGC and placing us within our outlook range. I want to again emphasize that we expect a similar pattern for 2025. Looking closer at top-line performance, starting with branded products, revenue was off 5% year-over-year. Sales of promotional products grew, while branded uniform sales with existing customers were down year-over-year, primarily due to stronger uniform program rollouts in the year-ago quarter. We grew healthcare revenue 8% over the prior year, primarily driven by growth in our digital channels, as well as some favorable sales timing in our non-digital channels. For contact centers, we drove 4% top-line growth.

We now have a sales force in place, as Michael just mentioned, and while we saw a decline from existing customers, this was offset by an even stronger contribution from new customers that also provide the opportunity for future seat expansion. Turning to margins and profitability, our consolidated gross margin for the fourth quarter of 37.1% was down just 70 basis points relative to the year-earlier quarter, despite the tough comparison. SG&A as a percent of revenues at 34.4% was about a percentage point higher. This resulted in consolidated EBITDA of $7.3 million versus $9.9 million in the fourth quarter of 2023. On a segment-by-segment basis, branded products' fourth quarter gross margin was down a percentage point to 33.9%, driven by sourcing mix and lower volume related to our branded uniform programs.

As we have said in the past, the sales and margin mix of uniform programs can vary on a quarterly basis, depending upon the timing of program rollouts and sourcing considerations. SG&A as a percent of revenues for the fourth quarter increased about a percentage point to 25.9%, mainly driven by deleveraging. As a result, branded products' EBITDA was $8.9 million for the quarter, down from $11.7 million the prior year. Turning to healthcare apparel, while our fourth quarter gross margin of 33.7% was off 3 percentage points due to higher sourcing costs related to manufacturing in Haiti, we did achieve better leverage on SG&A as a percent of revenues by more than a full percentage point on the 8% sales increase. As a result, our healthcare apparel EBITDA came in at $1.1 million relative to $1.4 million in the year-earlier period.

As for contact centers, which is our highest-margin segment, we drove a stronger fourth quarter gross margin of 54.7%, up more than two and a half percentage points from last year. SG&A as a percentage of revenues at 44.9% improved slightly from 45.1% in the year-ago quarter. This resulted in EBITDA of just over $3 million, up from $2.3 million in the year-ago period. Our fourth quarter interest expense was $1.5 million, which improved sequentially and also marks a significant improvement from $2.1 million in the prior year period. This improvement was driven by lower weighted average debt outstanding, as I'll discuss in a moment, and a more favorable weighted average interest rate, down 130 basis points over the past year.

Our fourth quarter net income, reflecting the EBITDA trends already discussed, was $2.1 million relative to $3.6 million in the very strong fourth quarter of 2023, and we generated earnings per diluted share of $0.13 relative to $0.22. Our balance sheet has continued to strengthen, with year-end cash and cash equivalents of $19 million at year-end, compared to $20 million at the end of 2023, despite completing more than $7 million of share repurchases during the year, as well as a small acquisition completed during the fourth quarter. We also reduced our outstanding debt to $86 million at year-end, improved from $93 million a year earlier. For the year, we produced strong operating cash flow of $33 million, supporting our net leverage ratio, which ended 2024 at just 1.7 times trailing 12-month covenant EBITDA, improving from 2 times at the start of the year.

Providing an update on our share repurchase plan introduced last August, during the fourth quarter, we repurchased approximately 72,000 shares for $1.1 million at an average price of $14.96 per share. We ended the year with approximately $2.6 million remaining under our initial authorization. Today, we are announcing that our board has authorized an additional $17.5 million share repurchase plan with no program expiration, and we intend to continue buying back shares depending upon a number of market factors. In support of the new repurchase program and reflecting our improved financial profile, our bank syndicate agreed to amend our credit agreement to increase the annual amount of permitted payments for shareholder distributions, share repurchases, and the like. I'll wrap up with our initial outlook for 2025.

As Michael mentioned in prior calls and spoke of in his opening remarks, there are lingering factors resulting in customer hesitancy and overall economic uncertainty. Taking these factors into consideration, we look for full-year revenues to be in the range of $585 million-$595 million, suggesting year-over-year growth at the high end of 5%. We look for full-year earnings per diluted share to be in the range of $0.75-$0.82, suggesting 12% year-over-year growth at the high end. As mentioned earlier, we expect a back-end weighted cadence to 2025, similar to what we have achieved in each of the past two years. Operator, if you could please open the lines, Michael and I will be happy to take questions.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Jim Sidoti with Sidoti & Company. Please go ahead.

Jim Sidoti (Analyst)

Hi. Good afternoon. Thanks for taking the questions. I'm just looking through the cash flow statement. It looks like you did an acquisition, $4 million acquisition in the quarter. Can you let us know what that was?

Mike Koempel (CFO)

Hi, Jim. This is Mike. Thanks for the question. Yes, we did a small acquisition in December of this past year. I would consider it really a small opportunistic acquisition. It enabled us to add a few new, what I would call, blue-chip customers that we really feel could really provide us with some growth with those new customers. It also enabled us to add some experienced talent as well. We identified an opportunistic transaction and really took advantage of it and will, again, provide us with some growth here in 2025.

Jim Sidoti (Analyst)

It sounds like it's a branded products business?

Mike Koempel (CFO)

It is. It is a branded products business.

Jim Sidoti (Analyst)

Okay. The overall guidance seemed pretty much in line with where I was, where the street was. EPS a little bit lower. Are you seeing higher material costs or labor costs? Can you just give a little color on what's going on on the cost side?

Mike Koempel (CFO)

Sure. As I mentioned in my prepared remarks, what we saw for the quarter was a slightly lower margin rate in the healthcare business, again, due to some higher costs, especially with our manufacturing in Haiti. Some of that has to do with the fact that with holidays, we've got some less production, so absorbing less of the cost, which put a little bit of pressure on margin in the fourth quarter. We took physical inventory, had some inventory that we had written off, not what I would call significant, but it kind of adds up along with some of the incremental production costs. I'd say the cost in Haiti, again, incrementally drove a little bit more pressure on the margin, which, to your point, then impacted some of the flow-through on the sales that we had for the quarter.

Jim Sidoti (Analyst)

All right. It sounds like you think costing is going to remain at that level in 2025?

Mike Koempel (CFO)

For the most part. I think, again, part of our charge in Haiti was, again, associated with some year-end inventories that we had taken. Would not expect that to repeat itself. In terms of just the larger production costs, we would expect that to continue into 2025.

Jim Sidoti (Analyst)

All right. The last one for me. I know you did raise prices on the contact centers business, and I think you might have raised prices on your other businesses as well over the past 12 to 18 months. Are those price increases sticking, and do you think you have additional pricing power in the future? What does the pricing environment look like?

Michael Benstock (CEO)

We're in a little bit of a crazy environment now where everybody's expecting prices to go up. Yes, we will continue to raise prices. We have continued to raise prices as was necessary. We've also found some efficiencies along the way where we didn't need to in some of our products and services to not raise prices. We do expect price increases in the future. For the large part, because I'm sure there's a question in here that's going to come about tariffs, we might as well lay it out there. We are very well positioned for whatever's going to happen from a tariff standpoint. We contemplated a lot of what has already happened and has already been announced, and we feel we're in a—but we're still waiting and watching because it's a very fluid situation.

We know what's been announced. We know what's been pulled back. We know what's been announced again and pulled back. We have diversified our supply chain greatly over the last years. During the first Trump administration, we started doing it because of our thoughts that tariffs were going to increase further and not knowing whether he was going to get elected a second time or not. We pulled back, and we went to other countries that have much less risk to us. We certainly have been watching it. We have already proceeded with negotiations with all of our vendors. That has worked out very, very favorably. We will not get into by product, by product what's happened because it does differ by product for each product. Even with our logistics vendors, we have seen some—or our ability to put pressure on them to reduce some costs there.

We are in good shape. I think to the extent that we are going to see cost increases, we are going to be able to pass those on.

Jim Sidoti (Analyst)

The fact you're buying back another, I think it was $17 million in shares, sounds like you're pretty confident that that cash flow is going to continue to remain strong over the next few quarters.

Mike Koempel (CFO)

We would expect to continue to generate good cash flow. As it relates to the share buyback, as we've done in the past, we'll monitor the market going forward. Based on a number of factors, we'll obviously make.

Operator (participant)

This was D.A. Davidson. Please go ahead.

Hi, Michael and Mike.

Mike Koempel (CFO)

Hi. How are you?

Yeah. My question was just on the branded products segment. I know you guys were cycling what you said, more uniforms from or branded uniforms. I was wondering if those customers are still around in your business and you're just waiting for—you are just cycling a big contract or what we are looking for in growth there?

Sure. On the branded uniform program side, there's been no turnover in customers. We've retained all the large customers that we have. What I was really referring to in the prepared remarks is that with our existing customers, they will, from time to time, roll out new uniform programs. Of course, the timing of that can vary from year-to-year or within the quarter. What we saw in comparing the fourth quarter this year to last year, last year was we had a rollout begin to take place in the fourth quarter of last year, which was beneficial to the quarter. The timing of a new program did not occur in the fourth quarter of 2024, but is going to take place in 2025. Again, just a difference in the timing of when our existing customers are rolling out programs.

That makes sense. Thank you. Just a follow-up. It seems like margins are pretty strong in the contact center business. I was wondering if you guys are seeing any labor cost increases there overseas or at home?

Michael Benstock (CEO)

Not to the extent beyond what we reported about a year ago. We have kept a pretty steady state of being able to keep up with the pressure that we had. When we raised our rates a year ago, I think we raised them to a level that made us extremely competitive. We have not had to do much since then. There are spotty places in particular jobs that we have had to do things for, but we have certainly been able to recoup that through price increases.

Mike Koempel (CFO)

We were happy keeping with the gross margin rate in contact centers. It is 54.7%, was consistent with the third quarter and up from the first half of the year. Happy to see that we are maintaining that higher margin in the back half of the year.

Thank you.

Operator (participant)

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

David Marsh (Analyst)

Hey, guys. Thank you very much for taking the questions and congrats on the quarter. Just looking at the leverage, you guys have done a great job bringing leverage down. Would you say that at this level that you're at a pretty comfortable level? As you weigh uses of cash flow, do you think that maybe you want to reduce it some more here? Just give us a little insight there.

Mike Koempel (CFO)

Dave, I'll take that. Obviously, we're very comfortable with where we are at our current leverage ratio. With that said, we've mentioned before that with a very strong leverage ratio that we have, combined with the capacity in our current credit facilities, we certainly have the opportunity for capital investment or capital allocation, such as share repurchases, potential M&A activity, etc. We'll certainly look to utilize that capacity if there's compelling opportunities. As Michael and I have said in the past, we definitely would like to be in the two to two and a half range of leverage, taking into account some of the activities that I mentioned. With free cash flow, having that opportunity over time to get that back down to under two.

I think we're very comfortable and we're in a position where, again, we can use the capacity that we have to take advantage of some potential opportunities that might arise.

David Marsh (Analyst)

Speaking of acquisitions, you guys pulled the trigger on a small one in the quarter in branded products. Could you just talk about kind of more broadly the acquisition landscape and kind of maybe help us understand what your priorities would be in terms of the business lines around acquisitions?

Michael Benstock (CEO)

Good question. It's one of the richest environments we've ever seen. There's plenty of opportunity. It's one of those things where you can imagine you kiss a lot of frogs along the way until you find what you're looking for. What we're looking for are almost immediately accretive businesses that don't put any pressure on our leverage ratios. They've got to have great leadership with a great culture and be easily integratable. These are the things we look for. Quite frankly, there's not one of those things that isn't as important as the next. We would not buy a business that was missing one of those components. I think we're seeing some great companies out there. Some are beyond our capacity. We're certainly very engaged, particularly in the branded products business.

We are also more engaged than ever in the call center business and looking for the right company that would get us into a geography that we are not currently in that would make us even more attractive to a customer base.

David Marsh (Analyst)

Okay. I just wanted to kind of dig into your comments, Mike, about the 2025 guidance just a little bit. I caught backend loaded, but what I did not really catch was, and I kind of was trying to derive it from some of Michael's comments early on, just as we are starting the year, I mean, should we expect a meaningful sequential slowdown and then a really heavy backend load or maybe not as much of a kind of more of a flattish to slightly down start and kind of a gradual build? I am just trying to model this here.

Michael Benstock (CEO)

Yeah. Somewhere between there is the right number.

Mike Koempel (CFO)

Yeah. I would characterize it, Dave, more as a, I would say, a more gradual build this year. Shifting a little bit more backend-weighted. Obviously, there's a lot of uncertainty that's taking place right now. Our belief is that things will become clear as we move forward. We're expecting a little bit more of a gradual build this year than we saw last year. Again, ramping up later in the year. Third quarter is always an important quarter for us. It will continue to be an important quarter. That's how I would characterize the calendarization at this point.

David Marsh (Analyst)

Okay. That's really helpful. If I could just sneak in one more. You mentioned in the prepared remarks some comments, just a quick comment really about healthcare apparel and the online channel. This is something you've mentioned in the past periodically on calls. I just wanted to see if that online channel is quite to a place where it's something that you want to talk about more meaningfully, or is it just kind of still a supplement to kind of the traditional brick and mortar and shipping and things of that nature?

Michael Benstock (CEO)

I would say for competitive reasons, we really do not want to speak about it too much. We share numbers and strategies and where we are spending our money and what our return on advertising spend has been. It has been very, very favorable, as favorable as many of the consumer-driven companies, even better than most. We are just going to sit tight with the numbers for a while more, sometime before we will actually start reporting all of those metrics.

David Marsh (Analyst)

No, I get it. Thanks much. Appreciate the color.

Operator (participant)

The next question is from Kevin Steinke with Barrington Research. Please go ahead.

Kevin Steinke (Analyst)

Thank you. I just wanted to ask about the general tone among customers. You mentioned still some uncertainty, obviously, but it felt like maybe there was a little more optimism about budgets opening up or expanding as we enter the year. I do not know if you've seen kind of an increase in uncertainty over the last month or so, or are we just wondering if there have been any kind of fits and starts in terms of the demand environment?

Michael Benstock (CEO)

Yeah. I think that's a good characterization, fits and starts. Let's take it one segment at a time. On the branded product side, we're certainly seeing positive signs of increased spend among our clients in the fourth quarter, resulting in increased booking, strong backlog headed into the new year. More recently, as you can imagine, we've noticed a growing sense of, call it, uncertainty regarding the repercussions, particularly of tariffs on the overall economy and the consequent impact on the cost of our branded merchandise. There are worries that these tariffs could disrupt existing supply chains, leading to potential delays and increased costs for our clients. We're well positioned to weather this. As I said, we've actively diversified our supply chain out of tariffed countries. We're also taking market share from our competitors who are not as well prepared as we are to handle the current environment.

That describes branded products. On healthcare apparel, we had a very strong Q4 across our omnichannel, mass and distributor channels. Demand for new collections that were introduced in the fall of 2024 continues to grow as consumers have increasingly asked for our retail-facing brands, which are Wink and Carhartt Medical. While we delivered a strong Q4, we're beginning to experience economic marketplace uncertainty, even in this place where these are necessary items for people to buy from both our consumers and customers who are reselling our products, leading to delays in purchasing and installing new groups. We're in a strong inventory position with increased brand awareness to meet demand, take share from our competitors across our portfolio. The good news is we brought in a fair amount of product early in contemplating these tariffs. We should be in pretty good shape.

On the contact center side, it varies greatly across. We're agnostic as far as who we serve, and we have many, many different types of customers. I would say the prevailing theme of cost containment through enhanced efficiencies is absolutely consistent across the board. This is also, I would say, mirrored in our business pipeline, which we believe has a tremendous opportunity to exist for us to capture additional market share. Prospective clients are looking for BPO partners capable of helping them reduce costs. We believe with the innovative technologies that we employ and the other requirements that we can meet, that we're in a very good position to take more market share. With that, we're still seeing slower decision-making, consummate new deals. We've got a great backlog. There's also an uptick in price checking, disguised as RFPs. We're participating in a numbers game.

We're participating in as many as we can to win as much business as possible.

Kevin Steinke (Analyst)

Okay. Thanks. That's helpful color. With regard to branded products and the gross margin in the fourth quarter, I know you called out the mixed impact there. As we kind of think about 2025, do you think gross margin can kind of rebound on an annualized basis to something similar as to what it was in full year 2024? Any other thoughts on the margin trend there in branded products?

Mike Koempel (CFO)

Yeah, Kevin, I would see it really over the course of the year balancing out, as I mentioned in the question or in the prepared remarks, when it comes to some of the branded uniform programs, in any given quarter, the result could be skewed one way or the other, depending upon, again, the timing of a program. When you look at it over the course of the year, it's more balanced. That's just the branded uniform program part. Obviously, you have a large promotional products business as well that's been driving good margins. If you were to look at that segment overall for the balance of the year in 2025, I'd expect it to be fairly consistent year-over-year.

Kevin Steinke (Analyst)

Thank you. And then any significant investments planned for 2025 in terms of just SG&A investments, or do you think you've started to get a bit of leverage there off of the revenue growth?

Mike Koempel (CFO)

There's no significant investments anticipated. As we've talked about before, I think you're alluding to in prior calls, we've certainly made what we call investments in SG&A across each of our segments and selling capabilities. We'd certainly expect to begin leveraging those investments as we move forward and continue to grow the top line. Nothing I would expect as unusual from an expense perspective going into 2025.

Kevin Steinke (Analyst)

Okay. Thank you. Just lastly, just wondering about what's embedded in the EPS guidance for 2025 in terms of more potential debt pay down and potentially lower interest expense. Maybe do you see more going to share repurchases and maybe less to debt reduction? Just trying to balance out those factors when kind of thinking about interest expense.

Mike Koempel (CFO)

Sure. I think I would expect interest expense to be improved from 2024. I think that would be a combination of bringing our weighted average debt outstanding down, combined with, I'd say, a little bit of rate increase. Of course, that's uncertain as well. We factored in a couple of those components as we think about our interest expense going forward.

Kevin Steinke (Analyst)

Okay. Thanks a lot. I'll turn it back over.

Michael Benstock (CEO)

Thanks, Kevin.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Michael Benstock for any closing remarks.

Michael Benstock (CEO)

Thank you, Operator. Thank you, everyone, for joining today's call. In closing, I'd like to thank our employees for their unwavering dedication, our customers for their loyalty, and our investors for their trust in our vision. We are focused on navigating these challenges and seizing opportunities that will allow us to deliver long-term value. I look forward to updating you on our progress as we move through 2025. Please feel free to reach out with any additional questions. Enjoy the evening. Thank you again for your interest in SGC.

Operator (participant)

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