Superior Group of Companies Inc (SGC) 2014 Q3 法說會逐字稿

Good morning everyone, and welcome to the Superior Uniform Group's conference call to discuss the Company's fiscal third-quarter 2014 financial results. With us today are Mr. Michael Benstock, Chief Executive Officer of Superior Uniform Group, and Mr. Andrew D. Demott, Chief Financial Officer. After the speakers' opening remarks, there will be a question-and-answer period and instructions to ask a question will be given at that time. This call is being recorded and your participation implies consent to our recording this call. If you do not agree to these terms, simply drop off the line.

I would now like to turn the call over to Hala Elsherbini, Senior Vice President of Halliburton Investor Relations, who will read the Safe Harbor statement. Please go ahead.

Thank you and good morning everyone. This conference call will contain forward-looking statements about Superior Uniform Group's business opportunities, and its anticipated results of operations. Please bear in mind that forward-looking information is subject to risks and uncertainties, and actual results may differ from what you hear today. Many of these risks and uncertainties are described in Superior Uniform Group's annual report on Form 10-K for the year ended December 31, 2013, in the news release that was published this morning, and in the Company's other filings with the SEC. Forward-looking statements in this conference call are based on our current expectations and beliefs. Management does not undertake any duty to update the forward-looking statements made during this conference call or elsewhere. Please note that all growth comparisons that management makes today will relate to the corresponding period of last year unless otherwise noted.

With that, I'll turn the call over to Michael.

Thank you Hala, and good morning everyone. We are pleased you could join us to learn more about Superior Uniform Group's third-quarter and nine-month performance.

Here's what we will cover today. I'll start with some financial highlights for the quarter which ended September 30. Then I will provide some perspective on our progress in executing our growth strategies in both our operating segments, followed by the industry trends we see affecting our performance. Next, Andy will give you some color on the story behind our financial results for the three months and for the nine months. Finally, I'll return with our general outlook on the fourth quarter, after which we will be ready to answer your questions.

Let's begin with some quarterly highlights. This was a record third quarter from a revenue and earnings standpoint. It also was the second-highest quarterly performance in our 94-year history, exceeded only by this year's second quarter. Both our uniform and related products and the remote staffing solutions segments posted better-than-expected increases. As a result, revenues rose by 18.3% to $52.3 million compared with $44.2 million for last year's third quarter.

HPI Direct has proven to be a pivotal acquisition for us. We completed this acquisition on July 1, 2013, and as such, its results are included in the current and prior-year quarters. Therefore, all of our net sales growth in the current quarter is organic.

Here's a closer look at the two segments. Our uniform business, which includes the Fashion Seal Healthcare, HPI Direct and Superior ID brands, saw 17.5% higher revenues with HPI recording an impressive 59.3% increase. We continued to expand our relationships with current customers, seeing higher sales from 24 of our top 30 customers. Remote staffing solutions, our call center and BPO operation, while still a small part of our overall sales, continued to post phenomenal topline growth, up by 42.6% from last year's third quarter. This reflected the inroads we are making in penetrating new markets as well as increasing sales to existing customers.

For the total Company, the combination of leveraging our fixed costs across higher sales volumes and continued cost efficiencies enabled us to more than double our bottom line. Net earnings rose by 123% and earnings per diluted share grew by 100% despite a 9% increase in average shares outstanding. Andy of course will give you more details on the numbers and other key performance metrics in a few minutes.

We executed very well on many fronts, and I would characterize this as another epic quarter. This is due to the long-term growth strategies we have in place for both operating segments.

We are executing on four major growth strategies in our uniform and related product segment. First, we are very focused on deepening our market penetration in healthcare and non-healthcare industries.

The best way to describe our approach to the healthcare market is to look at it as though it's a tree with a number of branches. We are doing a great job today of reaching markets with low-hanging fruit in all sales channels. We are penetrating our existing customer base through our dealer network where we have geographic support, as well as via healthcare laundries, because these are areas that have traditionally served us well.

We are also moving toward the higher branches and widening our channel pipelines to include integrated delivery networks which represent large healthcare systems, group purchasing organizations, or as they are known, GPOs, home healthcare, long-term healthcare chains, and medical colleges, and even some large single standing hospitals. We expect considerable lift from all of these markets over the coming years as we have quickly become more relevant as a direct supplier to these markets. We continue to elevate our Fashion Seal Healthcare brand through various marketing initiatives, in addition to positioning ourselves as experts in global sourcing.

We truly offer a unique value proposition, scalable and customizable. Current and potential customers appreciate that we offer the broadest uniform product line in the industry, have an excellent garment sourcing network, and a growing promotional products business, which helps to make us a one-stop source for all their branding needs.

On the non-healthcare side, the combined strength of HPI Direct and Superior ID, or what we also refer to as our employee ID brands, provides uniforms to a number of growing customer-facing areas -- food service, transportation, private security and chain store businesses. With HPI's leadership for growth in these marketplaces, we are gaining more customer wins and servicing more recurring business with long-standing customers. We have anchored a really solid competitive position with these customers and in these markets, and we are more of a force than ever to be reckoned with.

Our second growth strategy in uniforms, global sourcing, is really paying off. We have deepened our sourcing strategies and are building relationships with manufacturing sources in parts of the world that offer the best value and delivery while meeting the high standard of quality and social responsibility that we require. We've also hired additional talent to better manage costs and validate our multi-supplier strategy.

Third, our promotional products business pipeline remains strong. This is a seamless and natural extension of our branding activities with customers, offering them a single-source provider for their full image programs. We will continue to scale this business through acquisitions as well as through organic growth initiatives.

And fourth, we continue to seek acquisitions with high growth potential. HPI is a prime example of our ability to identify, execute and integrate companies that provide a significant contribution to our top and bottom lines. Our Chairman Emeritus, Jerry Benstock, is spearheading the process of identifying strategic acquisition opportunities that strengthen areas we already serve and diversify our portfolio where it makes sense.

For example, we consider companies that give us critical mass to move to the next level in a geographic market or create new relationships for us, or add products that are a logical extension of our business as targets. The goal is to become a one-stop source for our customers' uniform and branded materials' which increases with barriers to exit.

Now let's move on to remote staffing solutions. As you know, that serves as our own back-office operation in addition to servicing outside customers, netting solid economies of scale. We are finding a niche in servicing customers requiring support for more -- for less than 100 seats in addition to customizing the needs for larger opportunities.

As we mentioned last quarter, we are investing in capacity expansion to our El Salvador location. We have purchased the land with security permits and expect to complete the new facility later next year. It will ultimately house an additional 500 employees. We will essentially double our current staffing levels for our remote staffing solutions over the next three to five years across all of our locations, which include our call centers in Belize and here in Seminole, Florida at our headquarters. The growth of that business has been exceedingly positive with sales increasing at rates greater than 40% for each of the last eight quarters.

All these growth strategies are supported by three positive market trends. The macroeconomic environment is improving. More customers are telling us that lower levels of unemployment and greater confidence in the job market are beginning to trigger an increase in employee turnover. People who work in hospitals, food service, private security, and other chain businesses are starting to leave one job for the next. Employers are looking for ways to improve employee satisfaction so that they can hold onto good people. We expect this will result in more money being allocated to branding with uniforms being a key component to that effort.

A stronger economy also is creating more optimism in our customer base. Many of them are opening new stores, expanding their businesses, and going through refreshes and rebranding. These factors also should translate into continued demand for our products.

Additionally, as a result of the Affordable Care Act, more individuals are complying with mandates to buy health insurance, and we expect to see more Americans obtaining healthcare by year-end in order to avoid paying the well-known tax penalties. This should continue to drive demand for employment in the healthcare industry.

Finally, the healthcare industry is consolidating, in part of attracting patients and employees through branding initiatives that serve to heighten patient satisfaction and portray security and safety throughout the continuum of care.

With that as background, now I'll turn the call over to Andy for the financial review.

Thank you Michael and good morning everyone. As you can see, all of the growth strategies that Michael discussed led to another phenomenal quarter from a financial performance perspective. Since our press release is available on our website and our 10-Q was issued this morning, I'll provide some commentary around some of our key financial factors in the quarter.

Let's take a closer look, starting with the income statement for the third quarter. Net sales increased 18.3% for the latest three months. That sent revenues to $52.3 million from $44.2 million a year ago.

Third-quarter results include HPI's results for both the current quarter and the prior-year period, and thus our topline increase this quarter is attributable to organic growth. The uniforms and related products segment contributed 17% of the overall sales increase with remote staffing solutions adding the remaining 1.3%. Our uniforms and related product sales were up 17.5% over last year's third quarter.

As Michael indicated, HPI delivered a remarkable quarter of 59.3% higher net sales. This reflects the success of our continued market penetration.

Our remote staffing solutions saw quarterly sales rise 42.6% from a year ago as we continue to sign significant new accounts. Our cost of goods sold actually decreased as a percentage of sales to 64.7%, or $33.9 million, from 66% or $29.1 million at this time last year. Two major reasons for this were higher sales volume to cover overheads and lower direct purchasing cost due to better product sourcing efforts. This led to an improvement in gross margins to 35.3% for the latest quarter compared to 34% a year ago.

Selling and administrative expenses continued to increase at a fraction of the sales rate. They rose 2.4% from a year ago to $13.1 million. As a percent of net sales, SG&A dropped to 25.1% compared with 29% in the 2013 quarter. This reflects the gains we are seeing from leveraging our fixed costs and benefiting from economies of scale.

Interest expense increased 51.6% to $144,000 by reflecting higher average borrowings for the quarter. Note that we have paid down our outstanding balance on our revolver as of the end of the quarter from a balance of $11.4 million at the end of the second quarter to zero.

Our income from operations climbed 142.9% to $5.2 million. That led our operating margin to more than double at 9.9% compared with 4.8% for last year's third quarter.

Our effective tax rate rose to 34.8% from 29.1% a year ago. The main difference was an increase in our estate tax rate and a decrease in the benefit for income from foreign operations. As a reminder, our earnings in El Salvador and Belize are considered to be permanently reinvested there and we pay minimal tax within those countries, which means there's no US tax provision for those earnings. Because of the significant increase in our domestic income in the latest quarter, or foreign income is now a much smaller percentage of our total earnings.

The bottom-line effect resulted in a 123.3% jump in net income for the quarter to $3.4 million. On the diluted per share basis, we doubled our earnings to $0.48. This included the impact of a 9.3% increase in average shares outstanding. The increase in shares came from additional restricted shares related both to the HPI acquisition and the impact of increased option exercises over the last year.

In recognition of our confidence in Superior Uniforms' continuing growth, the board increased our quarterly dividend by 11% during the third quarter to $0.15 per share from $0.135 per share. Of note, we have paid an annual dividend each year since 1977.

Taking a look at our income statement for the nine months, our net sales grew 38.2% to $146.5 million. The biggest difference came from the inclusion of HPI for the full year. Compared with the first nine months of 2013, revenues from uniforms and related products increased 37.9% and remote staffing solutions expanded 45.9%.

Our gross margin was 35.1% versus 35.4% for the first nine months last year. This change reflects the competitive pressure in the market earlier this year which was slightly offset by lower overhead as a percentage of sales from higher sales volume.

Operating income increased 172.2% to $12.9 million. So, our operating margin for the nine months was 8.8% compared with 5.6% a year ago. Net income year-to-date more than doubled to $8.5 million, and diluted earnings per share rose at a significant rate of 85% to $1.24 a share.

Taking a look at our balance sheet, cash and cash equivalents remain strong at $3 million. Our Accounts Receivable have increased to $29.7 million, growing 30.6% in tandem with our higher sales. This also was true for inventories, which rose 12% to $55.4 million. Our long-term debt decreased 7.1% to $22.8 million and shareholders equity expanded 12.5% to $80.9 million.

Now I'll turn the call back to Michael to share his perspective on the fourth quarter and provide some closing remarks.

Thanks. On our last call, we told you that Superior Uniform Group should had a strong second half. We really are very proud of our third-quarter results and we expect a solid finish to what really has been a transformational and incredible year thus far for the Company.

While we don't provide specific guidance, here's what we are seeing in general for the final quarter. The midterm elections are not proving to be much of a distraction on purchasing decisions today, which we are grateful. The same is true for the current volatility in the Middle East and the rising concern about the Ebola virus. However, these situations may affect the confidence in the economy and some of our customers, so we continue to watch them closely.

Historically, we've done a good job managing market risk. These have ranged from the cotton crisis to earthquakes to multiple recessions. We are able to do this by controlling costs and maintaining operating efficiencies throughout -- by using automated distribution systems, redundant manufacturing strategies and employing lean manufacturing projects as well as having a flat organizational structure. Our new business pipeline is solid in both uniforms and remote staffing services as we continue to develop significant near-term contract opportunities.

With that, I'd like to open the call for Q&A.

(Operator Instructions). There are no questions at this time.

Okay. If there are no questions at this time -- I was hoping I would get one or two or some thoughts from some of you, but I'd like to leave you with some final thoughts. Spirit Uniform Group is a long-term company. We've been around a long time. And surely, when you look at us, you have to consider that we have learned new tricks. We are able to report some of the best quarters in the history of our Company because we evolved and transformed the business model.

And there is a question. Go ahead. Let's take the question and I'll complete my remarks afterwards.

We did have a question, but it looks like he left -- he left the queue.

Okay. In creating some of the best quarters in the history of the Company and transforming our Company as we have, you wonder how do you accomplish that. But really it was accomplished through making some really hard decisions over the years, these past years, of exiting unprofitable operations that prove less accretive to meet our goals. We now operate two businesses that are very diverse yet leverage the fundamental strength of our business model based on an efficient cost structure, and both yield very, very good margins. We operate low overhead and high upside potential. Both businesses are growing organically by taking share from competitors and deepening relationships with our customers.

We are also expanding through acquisitions to leverage synergies, and entering new geographic and product markets. We continue to reinvest in our operations that will drive future growth and deliver meaningful bottom-line results in order to create long-term value for our shareholders. I believe the Company has never been in better financial shape, and we have the right team in place to continue to execute on our growth strategies.

Andy and I thank you for taking the time to be with us today. We look forward to sharing the results of our fourth quarter and full year with you in February. In the meantime, we wish you a profitable end to your year and an enjoyable holiday season.

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