Superior Group of Companies Inc (SGC) 2015 Q3 法說會逐字稿

Welcome to the Superior Uniform Group's third-quarter 2015 conference call. With us today are Michael Benstock, the Company's Chief Executive Officer, and Andy Demott, its Chief Operating Officer, CFO, and Treasurer. (Operator Instructions). This call is being recorded and your participation implies a consent to this. If you do not agree, 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, ma'am.

Thank you. This conference call may 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 fiscal 2014, in this morning's news release, and 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 will turn the call over to Michael.

Thank you, Hala, and good afternoon, everyone. It's a pleasure to have you here to talk about our performance for the third quarter and nine months, which ended on September 30, 2015.

I will start with some highlights of our financial and operational performance, plus some comments on industry trends. After this, Andy will give you additional background on our financial progress. Then I will return with a general outlook for the rest of the year. After this, we will both be happy to answer any of your questions.

We are pleased with the results for the third quarter. It was a good quarter which met our expectations, but what isn't readily apparent is all the progress we made on continuing to execute our growth plans to improve our future performance.

We experienced our 12th consecutive quarterly increase in net sales, which were up 8.4%. Uniforms and related products saw sales rise 6.2%. This reflected a stronger economy than a year ago, which our customers tell us also led to slightly higher rates of employee turnover. In addition, we increased our market penetration during the quarter and continued to gain market share. However, pricing remains competitive, but generally it is still rational.

Our employee ID business through Superior I.D. and HPI Direct is strong. Our retail partners are currently at peak hiring levels as they prepare for the holiday selling season. And we're filling many uniform orders early in the fourth quarter that will be followed by the typical slowdown in orders as our customers shift their focus to selling their own products before year-end.

The Office Gurus net sales jumped 60.8% through solid market penetration with new and existing customers. Because this is a fast-growing, but small, portion of total revenues, I would like to reiterate our rationale behind this strategic extension of our business. We started the segment to provide back-office support for our uniform business when unemployment levels in our area were below 3% and we found ourselves unable to hire entry-level employees.

The initial goal was to give our customers a better experience. In fact, not only were we able to service our customers more effectively, we were able to also significantly reduce our operating expenses. By the end of 2009, we began offering this solution to other companies.

The Office Gurus target customer base is broad. We don't compete with larger call center providers, which are constantly being pressured for lower rates from their large customers. Instead, our niche focus is on the smaller customers, which typically need to start with fewer seats, generally less than 25, and engagement even can start with as few as three or four seats and then increase over time as we broaden our service scope and handle multiple functions, such as inbound product support calls, outbound product sales, and lead generation for those customers.

Ultimately, though, our goal is to become an extension of our customers' operations, rather than just providing commoditized work. We handle so many aspects of their business over the long term that we develop a very deep relationship.

We essentially help our customers grow their businesses long term. So it's not surprising that the increase in net sales we saw last quarter came from both new and existing customers.

From a bottom-line perspective, a powerful combination in the factors led us to increase net income by 19.7% for the quarter. This included our successful efforts to control SG&A, which continues to expand at a far lower rate than sales. We also reduced our interest expense and saw a lower effective tax rate. Andy will detail this further in his financial review.

While this is good news, what really makes the quarter stand out in my mind are the three actions we took to improve our growth prospects. Firstly, as we stated on earlier calls, we have a keen focus on the direct healthcare market, and during the quarter, our uniform and related products division, Fashion Seal Healthcare, signed its second contract this year with another healthcare group purchasing organization, or, as you know now, known as a GPO for short.

The second GPO goes into effect on November 1, and coupled with the Premier GPO, which was awarded earlier in the year, we now have access to nearly 5,000 facilities.

Let me provide some additional background on our GPO strategy. The largest GPOs control the most number of hospital beds in the country, and we are speaking to all of them, not only the ones we have under contract. We are engaging in direct conversations with GPO member executives, raising their awareness and understanding of our value proposition.

For some, this is a relatively new value proposition as GPO contracts had not offered a uniform category in the past. Purchasing has been inconsistent and fragmented within these healthcare groups. By creating a uniform category, GPOs can now offer members optimized pricing and a more efficient purchasing process.

This includes more than giving these companies a better price. They now have the ability to create a consistent, branded quality look for themselves. That not only raises employee satisfaction, which is important as turnover increases, it also can make a better impression on the patients that they serve.

And patient satisfaction standards are getting -- are gaining greater attention through the Hospital Consumer Assessment of Healthcare Providers and Systems Initiative. I know that's a mouthful. We can refer to them in the future as HCAHPS. These national standardized patient satisfaction surveys are being administered to collect information and publicly report patient perspectives on care and quality related activities. This enables hospital comparisons to support consumer choices. Hospitals will now receive a 1- to 5-star rating visible to the public. This rating, along with survey scores, incentivizes hospitals to improve their overall patient experience.

Being able to appropriately identify hospital staff members through uniforms is one distinct way to add to patient satisfaction and thereby improve HCAHPS ratings.

Also, it is important to note that the concept of uniform categories, as I said, is new to many healthcare groups, and we are aggressively marketing this more streamlined approach to uniform purchasing. While it is a slow process, we are gaining traction. We are implementing test programs and our efforts are yielding solid opportunities, and as we stated in the past, we expect this to become a significant part of our business in the next three to five years.

Secondly, we're opening our first Company-managed manufacturing facility in almost 15 years. We have entered into a long-term agreement to lease a factory being built to our specifications in Ouanaminthe, Haiti, in the CODEVI industrial park. We recognize that making certain products in the duty-free Haiti environment gives us the best long-term value proposition in our hemisphere. It offers a combination of an inexpensive workforce and duty-free shipments into the US, using imported fabrics.

The factory will open in January and ramp up to about 150 employees within nine months. Further growth beyond that will happen as we achieve our initial efficiency goals. We believe that once the factory is up to full speed, no one will be able to offer customers a better cost and service value proposition on the uniforms that we make there. This will give us a major competitive advantage and it is the lowest-cost option for us to operate our own factory. We are very, very excited about this opportunity and its future prospects.

Thirdly, we are progressing with our call center capacity expansions. In addition to smaller renovations in Belize and the US, we're opening our new facility in El Salvador in mid-2016, which is a few months later than originally planned, though that should be in time for our needs.

This will, when completed, double our existing capacity. We are taking these actions to stay ahead of what we know is significant demand. While this is a sizable capital investment to increase our capacity, this segment does not require us to spend heavily on an ongoing basis to generate sales. We have a small sales force and attend limited trade shows.

Additionally, the sales cycle for this business is typically less than six months, compared to the two to three years it could take to acquire a major uniform customer. And as you can see, our net sales continue their steep growth curve each quarter. In addition, once the facility is in place our ongoing costs are relatively low and yield a great return on the investment.

Since our growth is affected by what's happening in the economy in all of our business segments, let's look at current trends. New jobs, new hires, and employee turnover are all positive indicators for our business. The significant inflection point that we saw in job growth during 2014 was moderated, but stabilized at a good pace, in 2015.

Recent reports, though, indicate some deceleration in jobs and economic growth in the last couple of months. Additionally, there is a general level of uncertainty and distraction around presidential election cycles that normally begins during the fourth quarter before an election year. However, we have yet to see any significant impact from these factors, but we are watchful.

Stats from the US Department of Labor show most employment indicators in August continued near historic levels. However, total job openings decreased to 5.4 million in August, after reaching a series high of 5.7 million in July.

The greatest number of job openings occurred in two of the markets that support our growth, healthcare and retail trade. At the end of August, healthcare job openings increased 12.5% from what we saw a year ago. In addition, hiring was 16.8% higher and separations rose 10.8% over the last year. Retail trade job openings increased by 6.1% for the same period. Hiring grew 10.2% and separations were 8.3% higher than a year ago.

My point in recapping these numbers to you is to emphasize that we do see our customers increasing employment overall and they're also telling us that their turnover percentages are continuing to rise.

And while employment in the markets we serve has improved over the last year, we balance this with a cautionary note that the recovery remains sluggish. We will continue to manage our business tightly and expect a solid finish to this year.

More people will need uniforms as total employment in the markets we serve grows and as turnover increases, of course. Our customers also are spending more on branding initiatives. This extends beyond uniforms and into promotional products, which we offer through our value-added branded merchandise division Blue Fusion. Customers also appreciate the one-stop shopping experience we offer, which helps them round out their corporate identity programs. We continue to strengthen our promotional products' market position as we pursue accretive acquisitions to broaden our footprint.

With this as background, I will turn the call over to Andy to give you more detail on our three and nine months performance.

Thank you, Michael, and good afternoon, everyone.

Let's start with the third-quarter income statement. Net sales increased 8.4% to $56.7 million. Our uniforms and related products contributed 6% of this gain, with remote staffing solutions adding the remaining 2.4%. As Michael mentioned, uniforms and related product sales rose 6.2% from last year's third quarter. This reflects increased market penetration, higher employee turnover, and a solid new business pipeline.

The remote staffing solutions segment saw quarterly sales to outside customers rise 60.8% from a year ago. The increase came from a good mix of business from new and current customers. In addition, we are attracting more business in our US call center.

Cost of goods sold rose 10.6% to $37.4 million. As a percent of sales, cost of goods sold was 66.1%, compared with 64.8% in 2014. The difference came from higher direct product costs as a percentage of net sales, primarily due to new business that carried a lower gross margin than our average accounts. This new business, however, also requires a lower level of customer service, distribution, and other related costs, reflected in lower selling and administrative costs.

As I mentioned earlier, we also attracted a higher volume of domestic business in our remote staffing solutions segment that generates higher hourly billing rates than offshore services, but the gross margin percentage earned is lower.

Gross margins as a percentage of sales was down to 33.9% or $19.2 million. For the 2014 third quarter, it was 35.2% or $18.4 million. As you know, our gross margin fluctuates mainly based on customer mix and the level of service required.

As discussed earlier, some of our uniform contracts carry a higher gross margin, but also require a higher service component. Other contracts are low touch and have lower gross margins. However, these accounts can be just as profitable, if not more so, than contracts with higher gross margins.

As I mentioned before, a portion of our growth came from new business with one of our large customers, who initiated a made in the USA uniform program. This program is at a higher average dollar selling price, but carries a lower margin percentage than our average customer. Due to the size of the contracts and the higher domestic volume, overall operating margin percentage did not accelerate at the same level and came in essentially flat compared to the 2014 third quarter. This business certainly makes a significant contribution and we are proud to take on this type of program.

As we indicated, we manage to the net margin and we follow a rigorous activity-based costing model that we have built over the years. That's why we believe looking at operating margins offers a better measure of our overall profitability as opposed to gross margin.

Our selling, general, and administrative expenses increased 3% in the latest quarter to $13.5 million. As a percentage of net sales, SG&A dropped to 23.8% for the third quarter, compared to 25.1% last year. This trend shows how we are leveraging our fixed-cost structure across the higher level of sales, as well as the impact of the lower touch programs I covered in the discussion of gross margins.

Interest expense decreased 9.7% from this quarter last year to $130,000, primarily because of our average borrowings outstanding being lower. Income from operations expanded by 7.5% to $5.7 million. That led to an operating margin of 10.1% versus 10.2% for the three months in 2014.

Our effective tax rate declined to 27.8% from 34.8% for last year's three-month period. The decrease came primarily from an increase in the tax benefit on income from foreign operations, a lower state rate because the statute of limitations expired on some of our uncertain tax positions, and the reversal of deferred tax on income from foreign operations that is now considered to be permanently reinvested.

Net income for the quarter was $4 million, up 19.7% from this time last year. On a diluted per-share basis, third-quarter earnings per share were $0.28 versus $0.24 last year, a 16.7% increase. This occurred despite a 4.2% increase in diluted shares outstanding.

Now for a recap of our income statement for the year-to-date period. Net sales grew 7.2% to $157.1 million. Uniforms and related product sales expanded by 5.4%. Organic growth in the current year more than offset a $5 million in new uniform rollout and $2.5 million special promotional program that we saw in the second quarter of last year. Remote staffing solutions revenues to outside customers experienced a 50.5% growth.

Cost of goods sold increased 9% to $103.6 million. This represented 65.9% of sales, compared with 64.9% for the nine months last year. The increase is largely due to higher direct product costs tied to the absence of the large $5 million rollout noted above, which carried a higher gross margin than our average account, in addition to the substantial new business I mentioned earlier in the review of the results of the third quarter, which also carries a lower gross margin percentage.

SG&A expenses continue to increase at a lower rate than sales, rising only 1.9% from a year ago, to $39 million. As a percentage of sales, SG&A dropped to 24.8%, compared with 26.1% for the year-ago period.

Interest expense rose 12.2% to $395,000. This indicates the higher interest rate that was paid on some of our long-term debt as part of an interest rate swap agreement that went into effect at the beginning of the third quarter of 2014.

Operating income grew 10% to $14.6 million. That gave us an operating margin of 9.3%, compared with 9.1% for last year's nine months. Our effective tax rate dropped to 31.7% from 34.2% a year ago.

Net income for the year to date expanded 14.2% to $9.7 million. And diluted earnings per share increased 8% to $0.67 versus $0.62 a year ago on 6.1% more diluted shares outstanding.

We continue to return value to our shareholders in the form of a quarterly dividend. In August, we increased the quarterly dividend by 10% to more than $0.08 per share. For the year to date, we have paid cash dividends of $3.1 million versus $2.7 million in the first nine months of last year.

Let's move onto the balance sheet. Our financial condition remains very strong. Our cash and cash equivalents decreased 30% so far this year to $3.1 million. Much of this was used to fund our new facilities in El Salvador and Haiti. Accounts receivable grew 25.4% to $35.1 million, reflecting higher sales in the third quarter of 2015 in comparison to the fourth quarter of 2014.

Inventories increased 6.9% to $62.3 million to support those sales volumes. This also led to a 59.7% increase in accounts payable to $15.5 million.

Long-term debt was 6.8% lower at $21.1 million as we continue to pay down debt. Shareholders' equity expanded 13.3% to $91.1 million.

Cash flows from operating activities were $5.6 million so far this year versus $4.1 million at this time in 2014. As you would expect, this year's spending is focusing on property, plant, and equipment as we continue to build the new facilities in El Salvador and Haiti.

Overall, we are pleased with our three- and nine-month performance. Now I will turn the call back to Michael so he can share a general outlook for the Company.

Thanks, Andy.

Operationally, we are meeting our growth milestones and managing our business tightly to respond to changing market and economic conditions. We expect to finish the year as anticipated and remain confident in our long-term revenue goals.

As a reminder, over the next three to five years, we expect to increase uniform revenues an average of 6% annually and the entire Company by an average of 8% per year or greater.

Here are two numbers that help put this in perspective. According to last year's census data reports, the uniform industry has grown 4% annually since 1986 versus a 2.6% annual US GDP growth rate during the same time period. While the data lags one year, historically the uniform industry has outpaced GDP growth and we are on track to grow faster than the uniform industry in general.

We expect to make progress in organic growth in all areas of our business during the fourth quarter. In addition, we are actively pursuing acquisitions and are in discussions with a number of candidates. We stepped up our strategic approach to identifying attractive target companies that meet our specific criteria. Our benchmarks are companies that give us critical mass in an existing or new market, create new relationships for us, or add products and services that are a logical extension of our business.

With that, I think this would be a good time to begin taking questions.

(Operator Instructions). Kevin Steinke, Barrington Research.

I wanted to ask about the second GPO win that you announced and congratulations on that. Just wondering as you get your message out there of your value proposition to healthcare organizations if there is a network effect in winning these GPO awards. That is, once you win one, is the second one easier and so on and so forth? Or I am just wondering if that's the case, and if you think your message is really starting to take hold in that particular market.

Great question. The first one took us a couple of years to get, so certainly the second one has been easier, although we have been working on all of them during that period of time.

They have certain time frames that they actually open these categories up or that they create new categories, so we have been talking to the five largest GPOs, and even more than that, but let's talk about the top five that control most of the hospital beds in this country. We have been talking to them for a couple of years.

And you are absolutely right. After getting the first one, there tends to be a lot more opportunity to open the other ones up sooner.

We have created the value proposition for the GPOs. They see a revenue stream that they haven't really enjoyed from this category before and they also see the opportunity to be involved with the mission of the hospital to help improve their HCAHPS scores and help improve their branding and imaging and so on.

So, we are having no trouble discussing the message wherever we are in this country. We have teams of people out today, for instance, in the Midwest talking with a major hospital system, as we have every single week. And people are shaking their head. It is a revelation to them. Why didn't they consider that spend before?

But when they realize how fragmented it has been within their healthcare system, the spending, and they pull the numbers together and they see how substantial it is, they also understand that there is an opportunity for savings. So, it has been resonating very, very well.

Okay, great. You mentioned in your opening comments continuing to take market share, but that the pricing environment is still competitive. Could you just review how you are going about taking market share in a still competitive pricing environment, the value proposition that enables you to take market share in that type of environment?

The value proposition that allows us to take market share is we offer something that most of our competition doesn't and that's a really stellar design team.

We work very closely to make sure that we align the uniform program with the customers' marketing and imaging and all of their advertising that they are doing, that we are in line with their decor of their different locations, and that we give their customers a really great experience, and that could be their employees and their customers a great experience by providing great uniforms.

One of the things we do is we -- maybe because of our manufacturing background and our original roots as a really strong manufacturing company back in the day when we had 14 factories in the United States and we had a strong sourcing department who understood the products very well, we still actually have that.

So we have feet on the ground in many of the countries, most of the countries, where we operate. We have a fabric sourcing group that is second to none. We have laboratories that we manage to make sure that every -- a lot of good that we order is what was originally specced and, eventually when put into use, will behave like it is supposed to.

And I think the other things, social compliance certainly is extremely important to our customers and they know how forward thinking we are with respect to social compliance.

I think part of what it comes down to is we have been around a long time. They know we are financially strong. Certainly for the larger programs, they look at us, we are transparent. We are public. They can see our financials. They know that they are dealing with a company that has the financial wherewithal to support them.

We stand behind our products 100%. We have a process that we go through of problem resolution and mitigation that I think is second to none, and we reduce the errors and credits that we have to give in our Company down to an infinitesimal amount for an apparel company, which was what we are in that instance when it comes to supplying garments to people. It is quite extraordinary.

So I think there's a lot of different -- we can support our customers by helping them with their marketing and on the creative side with our own marketing efforts. And we have done that with some customers.

So I believe the one thing that distinguishes us most, though, putting everything aside, is our service. We have been doing this a long time. We have run our own factories. We don't rely -- I am a highly skeptical person, so I guess everybody who works for me now is, so when we are dealing with suppliers, we trust, but validate, and we make sure that everything that we tell our customers that we can back up with with actually happening in the field.

So, I think that pretty well sums it up.

Okay, thanks for that color. And just, you mentioned looking to make acquisitions. How would you characterize the environment as you are out there looking? Is it pretty competitive or do you feel like you are well -- more well positioned that others to get deals done or is it -- it is just something where you are going to have to be real patient and wait for the right price and the right opportunity?

It is probably all that, Kevin. I wouldn't say it is competitive. We don't see other -- a lot of other companies like us trying to roll up other companies, trying to roll up smaller competitors or identify other competitors.

And I have to tell you that it is not that we haven't looked at companies that we thought on the face of it we would like to buy, but after looking at the companies, we have decided that we don't want to buy them.

We are looking for great talent when we buy a company. We are looking for people who can add value to our overall organization. Not that we wouldn't buy a company, shut it down, roll it all in if that was the right movement. We have done that in the past. But I would much rather find a company of entrepreneurs and people who still have fire in the belly and want to grow the heck out of their businesses, like the HPI Direct people did.

So, identifying and finding those types of companies is a little harder than just finding a smaller company, any smaller company. You are dealing with people who generally grew -- built the business, started the business themselves, built it, grew it, have strong attachment to their business, and some of them are just not ready to sell.

They will be. There will come a point in time where they will want a liquidity event. And they might want to be part of a larger organization or will need to capitalize in some way, and we may be able to offer them that.

But we are being patient, but we are working on it, I can tell you, very, very diligently to move things forward. But we are not going to step into an acquisition that is not exactly right for us.

Okay, yes, that makes sense. Thanks for taking my questions and for updating us on your progress today. Appreciate it.

(Operator Instructions). [Gary Steins], Private Investor.

I was curious if you could speak a little bit more about the effective tax rate and what is something of a normalized rate that we should expect? Because if you normalize the current quarter and year-to-date results around a 35% rate, the EPS growth rate has been muted quite a, bit especially now that we have more shares outstanding. Can you talk to that, please?

Yes, I think if you look at the rate -- obviously, the third-quarter rate is the time of year where we -- with the timing of when we file tax returns, that's when the statute of limitations kick in, so that did have an impact of a couple points in the quarter. I think the more normalized rate is back around that 34% or so on an ongoing -- 34%, 35% on an ongoing basis.

Okay, okay. And I guess we are in the roughly second year in a row where our free cash flow is not covering the dividend. Do you see that working capital efforts will be able to bring this into a higher free cash flow level, so we have comfort that the cash dividend is covered?

Yes, I think -- in the first stage, we're in a higher capital expenditure period right now with building the call center in El Salvador, as well as the Haiti factory. That's a short-term thing that will be completed mid next year.

Okay.

On the other side, our working capital generation, we have been in a very low interest environment. We maintain a little bit higher inventories than we really absolutely have to have right now. The cost of carrying it isn't that much and it provides us the ability to service our customers at a much better level.

If we had need to, we could put the screws to that and squeeze out a fair amount of that to cover it. We are not in any kind of crunch.

Okay, good. And I'm just curious as to how much from a high level do you believe that your facilities are underutilized? So let's say next week you hit the lottery and all your sales people are bringing in more orders that you have ever had before. How much can you reasonably assume, if you were to get a huge jump in orders, without adding more capacity? (multiple speakers) you guys are underutilized right now?

I would say that to a degree, if so, it really depends on where that lottery comes from.

Right, right.

If it is high-touch items or it is not high-touch items. I mean clearly if it is high-touch items, they will be at higher prices.

As an investor, I would not worry about Superior having capacity. Our capacity is somewhat flexible and expandable. Most of what you are referring to is capacity to house inventory and ship inventory, and certainly that's somewhat elastic. We have the ability to expand well beyond where we are right now.

And in our call center business, clearly by mid next year we will have the ability to expand as far as we like for a few years. There won't be any concerns. But if there are concerns, we can accelerate that as well. We have never let our capacity ever get in our way of our growth and we won't in the future either.

Okay, good. Thanks, gentlemen.

At this time, there appears to be no further questions. I would like to turn the conference back over to management for any closing remarks.

Thank you very much. As you can see, there was good news in the third quarter. We did more than meet our expectations for this period. We've laid the groundwork for continued organic growth opportunities and we continue to pursue accretive acquisitions. We are steadfastly focused on maintaining a strong capital structure and delivering sustainable shareholder returns.

Andy and I really appreciate your time today. We look forward to sharing our fourth-quarter and year-end results with you next February. Until then, we wish you a good end to your year and a strong start in 2016.

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

139683509119

Welcome to the Superior Uniform Group's third-quarter 2015 conference call. With us today are Michael Benstock, the Company's Chief Executive Officer, and Andy Demott, its Chief Operating Officer, CFO, and Treasurer. (Operator Instructions). This call is being recorded and your participation implies a consent to this. If you do not agree, 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, ma'am.

Thank you. This conference call may 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 fiscal 2014, in this morning's news release, and 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 will turn the call over to Michael.

Thank you, Hala, and good afternoon, everyone. It's a pleasure to have you here to talk about our performance for the third quarter and nine months, which ended on September 30, 2015.

I will start with some highlights of our financial and operational performance, plus some comments on industry trends. After this, Andy will give you additional background on our financial progress. Then I will return with a general outlook for the rest of the year. After this, we will both be happy to answer any of your questions.

We are pleased with the results for the third quarter. It was a good quarter which met our expectations, but what isn't readily apparent is all the progress we made on continuing to execute our growth plans to improve our future performance.

We experienced our 12th consecutive quarterly increase in net sales, which were up 8.4%. Uniforms and related products saw sales rise 6.2%. This reflected a stronger economy than a year ago, which our customers tell us also led to slightly higher rates of employee turnover. In addition, we increased our market penetration during the quarter and continued to gain market share. However, pricing remains competitive, but generally it is still rational.

Our employee ID business through Superior I.D. and HPI Direct is strong. Our retail partners are currently at peak hiring levels as they prepare for the holiday selling season. And we're filling many uniform orders early in the fourth quarter that will be followed by the typical slowdown in orders as our customers shift their focus to selling their own products before year-end.

The Office Gurus net sales jumped 60.8% through solid market penetration with new and existing customers. Because this is a fast-growing, but small, portion of total revenues, I would like to reiterate our rationale behind this strategic extension of our business. We started the segment to provide back-office support for our uniform business when unemployment levels in our area were below 3% and we found ourselves unable to hire entry-level employees.

The initial goal was to give our customers a better experience. In fact, not only were we able to service our customers more effectively, we were able to also significantly reduce our operating expenses. By the end of 2009, we began offering this solution to other companies.

The Office Gurus target customer base is broad. We don't compete with larger call center providers, which are constantly being pressured for lower rates from their large customers. Instead, our niche focus is on the smaller customers, which typically need to start with fewer seats, generally less than 25, and engagement even can start with as few as three or four seats and then increase over time as we broaden our service scope and handle multiple functions, such as inbound product support calls, outbound product sales, and lead generation for those customers.

Ultimately, though, our goal is to become an extension of our customers' operations, rather than just providing commoditized work. We handle so many aspects of their business over the long term that we develop a very deep relationship.

We essentially help our customers grow their businesses long term. So it's not surprising that the increase in net sales we saw last quarter came from both new and existing customers.

From a bottom-line perspective, a powerful combination in the factors led us to increase net income by 19.7% for the quarter. This included our successful efforts to control SG&A, which continues to expand at a far lower rate than sales. We also reduced our interest expense and saw a lower effective tax rate. Andy will detail this further in his financial review.

While this is good news, what really makes the quarter stand out in my mind are the three actions we took to improve our growth prospects. Firstly, as we stated on earlier calls, we have a keen focus on the direct healthcare market, and during the quarter, our uniform and related products division, Fashion Seal Healthcare, signed its second contract this year with another healthcare group purchasing organization, or, as you know now, known as a GPO for short.

The second GPO goes into effect on November 1, and coupled with the Premier GPO, which was awarded earlier in the year, we now have access to nearly 5,000 facilities.

Let me provide some additional background on our GPO strategy. The largest GPOs control the most number of hospital beds in the country, and we are speaking to all of them, not only the ones we have under contract. We are engaging in direct conversations with GPO member executives, raising their awareness and understanding of our value proposition.

For some, this is a relatively new value proposition as GPO contracts had not offered a uniform category in the past. Purchasing has been inconsistent and fragmented within these healthcare groups. By creating a uniform category, GPOs can now offer members optimized pricing and a more efficient purchasing process.

This includes more than giving these companies a better price. They now have the ability to create a consistent, branded quality look for themselves. That not only raises employee satisfaction, which is important as turnover increases, it also can make a better impression on the patients that they serve.

And patient satisfaction standards are getting -- are gaining greater attention through the Hospital Consumer Assessment of Healthcare Providers and Systems Initiative. I know that's a mouthful. We can refer to them in the future as HCAHPS. These national standardized patient satisfaction surveys are being administered to collect information and publicly report patient perspectives on care and quality related activities. This enables hospital comparisons to support consumer choices. Hospitals will now receive a 1- to 5-star rating visible to the public. This rating, along with survey scores, incentivizes hospitals to improve their overall patient experience.

Being able to appropriately identify hospital staff members through uniforms is one distinct way to add to patient satisfaction and thereby improve HCAHPS ratings.

Also, it is important to note that the concept of uniform categories, as I said, is new to many healthcare groups, and we are aggressively marketing this more streamlined approach to uniform purchasing. While it is a slow process, we are gaining traction. We are implementing test programs and our efforts are yielding solid opportunities, and as we stated in the past, we expect this to become a significant part of our business in the next three to five years.

Secondly, we're opening our first Company-managed manufacturing facility in almost 15 years. We have entered into a long-term agreement to lease a factory being built to our specifications in Ouanaminthe, Haiti, in the CODEVI industrial park. We recognize that making certain products in the duty-free Haiti environment gives us the best long-term value proposition in our hemisphere. It offers a combination of an inexpensive workforce and duty-free shipments into the US, using imported fabrics.

The factory will open in January and ramp up to about 150 employees within nine months. Further growth beyond that will happen as we achieve our initial efficiency goals. We believe that once the factory is up to full speed, no one will be able to offer customers a better cost and service value proposition on the uniforms that we make there. This will give us a major competitive advantage and it is the lowest-cost option for us to operate our own factory. We are very, very excited about this opportunity and its future prospects.

Thirdly, we are progressing with our call center capacity expansions. In addition to smaller renovations in Belize and the US, we're opening our new facility in El Salvador in mid-2016, which is a few months later than originally planned, though that should be in time for our needs.

This will, when completed, double our existing capacity. We are taking these actions to stay ahead of what we know is significant demand. While this is a sizable capital investment to increase our capacity, this segment does not require us to spend heavily on an ongoing basis to generate sales. We have a small sales force and attend limited trade shows.

Additionally, the sales cycle for this business is typically less than six months, compared to the two to three years it could take to acquire a major uniform customer. And as you can see, our net sales continue their steep growth curve each quarter. In addition, once the facility is in place our ongoing costs are relatively low and yield a great return on the investment.

Since our growth is affected by what's happening in the economy in all of our business segments, let's look at current trends. New jobs, new hires, and employee turnover are all positive indicators for our business. The significant inflection point that we saw in job growth during 2014 was moderated, but stabilized at a good pace, in 2015.

Recent reports, though, indicate some deceleration in jobs and economic growth in the last couple of months. Additionally, there is a general level of uncertainty and distraction around presidential election cycles that normally begins during the fourth quarter before an election year. However, we have yet to see any significant impact from these factors, but we are watchful.

Stats from the US Department of Labor show most employment indicators in August continued near historic levels. However, total job openings decreased to 5.4 million in August, after reaching a series high of 5.7 million in July.

The greatest number of job openings occurred in two of the markets that support our growth, healthcare and retail trade. At the end of August, healthcare job openings increased 12.5% from what we saw a year ago. In addition, hiring was 16.8% higher and separations rose 10.8% over the last year. Retail trade job openings increased by 6.1% for the same period. Hiring grew 10.2% and separations were 8.3% higher than a year ago.

My point in recapping these numbers to you is to emphasize that we do see our customers increasing employment overall and they're also telling us that their turnover percentages are continuing to rise.

And while employment in the markets we serve has improved over the last year, we balance this with a cautionary note that the recovery remains sluggish. We will continue to manage our business tightly and expect a solid finish to this year.

More people will need uniforms as total employment in the markets we serve grows and as turnover increases, of course. Our customers also are spending more on branding initiatives. This extends beyond uniforms and into promotional products, which we offer through our value-added branded merchandise division Blue Fusion. Customers also appreciate the one-stop shopping experience we offer, which helps them round out their corporate identity programs. We continue to strengthen our promotional products' market position as we pursue accretive acquisitions to broaden our footprint.

With this as background, I will turn the call over to Andy to give you more detail on our three and nine months performance.

Thank you, Michael, and good afternoon, everyone.

Let's start with the third-quarter income statement. Net sales increased 8.4% to $56.7 million. Our uniforms and related products contributed 6% of this gain, with remote staffing solutions adding the remaining 2.4%. As Michael mentioned, uniforms and related product sales rose 6.2% from last year's third quarter. This reflects increased market penetration, higher employee turnover, and a solid new business pipeline.

The remote staffing solutions segment saw quarterly sales to outside customers rise 60.8% from a year ago. The increase came from a good mix of business from new and current customers. In addition, we are attracting more business in our US call center.

Cost of goods sold rose 10.6% to $37.4 million. As a percent of sales, cost of goods sold was 66.1%, compared with 64.8% in 2014. The difference came from higher direct product costs as a percentage of net sales, primarily due to new business that carried a lower gross margin than our average accounts. This new business, however, also requires a lower level of customer service, distribution, and other related costs, reflected in lower selling and administrative costs.

As I mentioned earlier, we also attracted a higher volume of domestic business in our remote staffing solutions segment that generates higher hourly billing rates than offshore services, but the gross margin percentage earned is lower.

Gross margins as a percentage of sales was down to 33.9% or $19.2 million. For the 2014 third quarter, it was 35.2% or $18.4 million. As you know, our gross margin fluctuates mainly based on customer mix and the level of service required.

As discussed earlier, some of our uniform contracts carry a higher gross margin, but also require a higher service component. Other contracts are low touch and have lower gross margins. However, these accounts can be just as profitable, if not more so, than contracts with higher gross margins.

As I mentioned before, a portion of our growth came from new business with one of our large customers, who initiated a made in the USA uniform program. This program is at a higher average dollar selling price, but carries a lower margin percentage than our average customer. Due to the size of the contracts and the higher domestic volume, overall operating margin percentage did not accelerate at the same level and came in essentially flat compared to the 2014 third quarter. This business certainly makes a significant contribution and we are proud to take on this type of program.

As we indicated, we manage to the net margin and we follow a rigorous activity-based costing model that we have built over the years. That's why we believe looking at operating margins offers a better measure of our overall profitability as opposed to gross margin.

Our selling, general, and administrative expenses increased 3% in the latest quarter to $13.5 million. As a percentage of net sales, SG&A dropped to 23.8% for the third quarter, compared to 25.1% last year. This trend shows how we are leveraging our fixed-cost structure across the higher level of sales, as well as the impact of the lower touch programs I covered in the discussion of gross margins.

Interest expense decreased 9.7% from this quarter last year to $130,000, primarily because of our average borrowings outstanding being lower. Income from operations expanded by 7.5% to $5.7 million. That led to an operating margin of 10.1% versus 10.2% for the three months in 2014.

Our effective tax rate declined to 27.8% from 34.8% for last year's three-month period. The decrease came primarily from an increase in the tax benefit on income from foreign operations, a lower state rate because the statute of limitations expired on some of our uncertain tax positions, and the reversal of deferred tax on income from foreign operations that is now considered to be permanently reinvested.

Net income for the quarter was $4 million, up 19.7% from this time last year. On a diluted per-share basis, third-quarter earnings per share were $0.28 versus $0.24 last year, a 16.7% increase. This occurred despite a 4.2% increase in diluted shares outstanding.

Now for a recap of our income statement for the year-to-date period. Net sales grew 7.2% to $157.1 million. Uniforms and related product sales expanded by 5.4%. Organic growth in the current year more than offset a $5 million in new uniform rollout and $2.5 million special promotional program that we saw in the second quarter of last year. Remote staffing solutions revenues to outside customers experienced a 50.5% growth.

Cost of goods sold increased 9% to $103.6 million. This represented 65.9% of sales, compared with 64.9% for the nine months last year. The increase is largely due to higher direct product costs tied to the absence of the large $5 million rollout noted above, which carried a higher gross margin than our average account, in addition to the substantial new business I mentioned earlier in the review of the results of the third quarter, which also carries a lower gross margin percentage.

SG&A expenses continue to increase at a lower rate than sales, rising only 1.9% from a year ago, to $39 million. As a percentage of sales, SG&A dropped to 24.8%, compared with 26.1% for the year-ago period.

Interest expense rose 12.2% to $395,000. This indicates the higher interest rate that was paid on some of our long-term debt as part of an interest rate swap agreement that went into effect at the beginning of the third quarter of 2014.

Operating income grew 10% to $14.6 million. That gave us an operating margin of 9.3%, compared with 9.1% for last year's nine months. Our effective tax rate dropped to 31.7% from 34.2% a year ago.

Net income for the year to date expanded 14.2% to $9.7 million. And diluted earnings per share increased 8% to $0.67 versus $0.62 a year ago on 6.1% more diluted shares outstanding.

We continue to return value to our shareholders in the form of a quarterly dividend. In August, we increased the quarterly dividend by 10% to more than $0.08 per share. For the year to date, we have paid cash dividends of $3.1 million versus $2.7 million in the first nine months of last year.

Let's move onto the balance sheet. Our financial condition remains very strong. Our cash and cash equivalents decreased 30% so far this year to $3.1 million. Much of this was used to fund our new facilities in El Salvador and Haiti. Accounts receivable grew 25.4% to $35.1 million, reflecting higher sales in the third quarter of 2015 in comparison to the fourth quarter of 2014.

Inventories increased 6.9% to $62.3 million to support those sales volumes. This also led to a 59.7% increase in accounts payable to $15.5 million.

Long-term debt was 6.8% lower at $21.1 million as we continue to pay down debt. Shareholders' equity expanded 13.3% to $91.1 million.

Cash flows from operating activities were $5.6 million so far this year versus $4.1 million at this time in 2014. As you would expect, this year's spending is focusing on property, plant, and equipment as we continue to build the new facilities in El Salvador and Haiti.

Overall, we are pleased with our three- and nine-month performance. Now I will turn the call back to Michael so he can share a general outlook for the Company.

Thanks, Andy.

Operationally, we are meeting our growth milestones and managing our business tightly to respond to changing market and economic conditions. We expect to finish the year as anticipated and remain confident in our long-term revenue goals.

As a reminder, over the next three to five years, we expect to increase uniform revenues an average of 6% annually and the entire Company by an average of 8% per year or greater.

Here are two numbers that help put this in perspective. According to last year's census data reports, the uniform industry has grown 4% annually since 1986 versus a 2.6% annual US GDP growth rate during the same time period. While the data lags one year, historically the uniform industry has outpaced GDP growth and we are on track to grow faster than the uniform industry in general.

We expect to make progress in organic growth in all areas of our business during the fourth quarter. In addition, we are actively pursuing acquisitions and are in discussions with a number of candidates. We stepped up our strategic approach to identifying attractive target companies that meet our specific criteria. Our benchmarks are companies that give us critical mass in an existing or new market, create new relationships for us, or add products and services that are a logical extension of our business.

With that, I think this would be a good time to begin taking questions.

(Operator Instructions). Kevin Steinke, Barrington Research.

I wanted to ask about the second GPO win that you announced and congratulations on that. Just wondering as you get your message out there of your value proposition to healthcare organizations if there is a network effect in winning these GPO awards. That is, once you win one, is the second one easier and so on and so forth? Or I am just wondering if that's the case, and if you think your message is really starting to take hold in that particular market.

Great question. The first one took us a couple of years to get, so certainly the second one has been easier, although we have been working on all of them during that period of time.

They have certain time frames that they actually open these categories up or that they create new categories, so we have been talking to the five largest GPOs, and even more than that, but let's talk about the top five that control most of the hospital beds in this country. We have been talking to them for a couple of years.

And you are absolutely right. After getting the first one, there tends to be a lot more opportunity to open the other ones up sooner.

We have created the value proposition for the GPOs. They see a revenue stream that they haven't really enjoyed from this category before and they also see the opportunity to be involved with the mission of the hospital to help improve their HCAHPS scores and help improve their branding and imaging and so on.

So, we are having no trouble discussing the message wherever we are in this country. We have teams of people out today, for instance, in the Midwest talking with a major hospital system, as we have every single week. And people are shaking their head. It is a revelation to them. Why didn't they consider that spend before?

But when they realize how fragmented it has been within their healthcare system, the spending, and they pull the numbers together and they see how substantial it is, they also understand that there is an opportunity for savings. So, it has been resonating very, very well.

Okay, great. You mentioned in your opening comments continuing to take market share, but that the pricing environment is still competitive. Could you just review how you are going about taking market share in a still competitive pricing environment, the value proposition that enables you to take market share in that type of environment?

The value proposition that allows us to take market share is we offer something that most of our competition doesn't and that's a really stellar design team.

We work very closely to make sure that we align the uniform program with the customers' marketing and imaging and all of their advertising that they are doing, that we are in line with their decor of their different locations, and that we give their customers a really great experience, and that could be their employees and their customers a great experience by providing great uniforms.

One of the things we do is we -- maybe because of our manufacturing background and our original roots as a really strong manufacturing company back in the day when we had 14 factories in the United States and we had a strong sourcing department who understood the products very well, we still actually have that.

So we have feet on the ground in many of the countries, most of the countries, where we operate. We have a fabric sourcing group that is second to none. We have laboratories that we manage to make sure that every -- a lot of good that we order is what was originally specced and, eventually when put into use, will behave like it is supposed to.

And I think the other things, social compliance certainly is extremely important to our customers and they know how forward thinking we are with respect to social compliance.

I think part of what it comes down to is we have been around a long time. They know we are financially strong. Certainly for the larger programs, they look at us, we are transparent. We are public. They can see our financials. They know that they are dealing with a company that has the financial wherewithal to support them.

We stand behind our products 100%. We have a process that we go through of problem resolution and mitigation that I think is second to none, and we reduce the errors and credits that we have to give in our Company down to an infinitesimal amount for an apparel company, which was what we are in that instance when it comes to supplying garments to people. It is quite extraordinary.

So I think there's a lot of different -- we can support our customers by helping them with their marketing and on the creative side with our own marketing efforts. And we have done that with some customers.

So I believe the one thing that distinguishes us most, though, putting everything aside, is our service. We have been doing this a long time. We have run our own factories. We don't rely -- I am a highly skeptical person, so I guess everybody who works for me now is, so when we are dealing with suppliers, we trust, but validate, and we make sure that everything that we tell our customers that we can back up with with actually happening in the field.

So, I think that pretty well sums it up.

Okay, thanks for that color. And just, you mentioned looking to make acquisitions. How would you characterize the environment as you are out there looking? Is it pretty competitive or do you feel like you are well -- more well positioned that others to get deals done or is it -- it is just something where you are going to have to be real patient and wait for the right price and the right opportunity?

It is probably all that, Kevin. I wouldn't say it is competitive. We don't see other -- a lot of other companies like us trying to roll up other companies, trying to roll up smaller competitors or identify other competitors.

And I have to tell you that it is not that we haven't looked at companies that we thought on the face of it we would like to buy, but after looking at the companies, we have decided that we don't want to buy them.

We are looking for great talent when we buy a company. We are looking for people who can add value to our overall organization. Not that we wouldn't buy a company, shut it down, roll it all in if that was the right movement. We have done that in the past. But I would much rather find a company of entrepreneurs and people who still have fire in the belly and want to grow the heck out of their businesses, like the HPI Direct people did.

So, identifying and finding those types of companies is a little harder than just finding a smaller company, any smaller company. You are dealing with people who generally grew -- built the business, started the business themselves, built it, grew it, have strong attachment to their business, and some of them are just not ready to sell.

They will be. There will come a point in time where they will want a liquidity event. And they might want to be part of a larger organization or will need to capitalize in some way, and we may be able to offer them that.

But we are being patient, but we are working on it, I can tell you, very, very diligently to move things forward. But we are not going to step into an acquisition that is not exactly right for us.

Okay, yes, that makes sense. Thanks for taking my questions and for updating us on your progress today. Appreciate it.

(Operator Instructions). [Gary Steins], Private Investor.

I was curious if you could speak a little bit more about the effective tax rate and what is something of a normalized rate that we should expect? Because if you normalize the current quarter and year-to-date results around a 35% rate, the EPS growth rate has been muted quite a, bit especially now that we have more shares outstanding. Can you talk to that, please?

Yes, I think if you look at the rate -- obviously, the third-quarter rate is the time of year where we -- with the timing of when we file tax returns, that's when the statute of limitations kick in, so that did have an impact of a couple points in the quarter. I think the more normalized rate is back around that 34% or so on an ongoing -- 34%, 35% on an ongoing basis.

Okay, okay. And I guess we are in the roughly second year in a row where our free cash flow is not covering the dividend. Do you see that working capital efforts will be able to bring this into a higher free cash flow level, so we have comfort that the cash dividend is covered?

Yes, I think -- in the first stage, we're in a higher capital expenditure period right now with building the call center in El Salvador, as well as the Haiti factory. That's a short-term thing that will be completed mid next year.

Okay.

On the other side, our working capital generation, we have been in a very low interest environment. We maintain a little bit higher inventories than we really absolutely have to have right now. The cost of carrying it isn't that much and it provides us the ability to service our customers at a much better level.

If we had need to, we could put the screws to that and squeeze out a fair amount of that to cover it. We are not in any kind of crunch.

Okay, good. And I'm just curious as to how much from a high level do you believe that your facilities are underutilized? So let's say next week you hit the lottery and all your sales people are bringing in more orders that you have ever had before. How much can you reasonably assume, if you were to get a huge jump in orders, without adding more capacity? (multiple speakers) you guys are underutilized right now?

I would say that to a degree, if so, it really depends on where that lottery comes from.

Right, right.

If it is high-touch items or it is not high-touch items. I mean clearly if it is high-touch items, they will be at higher prices.

As an investor, I would not worry about Superior having capacity. Our capacity is somewhat flexible and expandable. Most of what you are referring to is capacity to house inventory and ship inventory, and certainly that's somewhat elastic. We have the ability to expand well beyond where we are right now.

And in our call center business, clearly by mid next year we will have the ability to expand as far as we like for a few years. There won't be any concerns. But if there are concerns, we can accelerate that as well. We have never let our capacity ever get in our way of our growth and we won't in the future either.

Okay, good. Thanks, gentlemen.

At this time, there appears to be no further questions. I would like to turn the conference back over to management for any closing remarks.

Thank you very much. As you can see, there was good news in the third quarter. We did more than meet our expectations for this period. We've laid the groundwork for continued organic growth opportunities and we continue to pursue accretive acquisitions. We are steadfastly focused on maintaining a strong capital structure and delivering sustainable shareholder returns.

Andy and I really appreciate your time today. We look forward to sharing our fourth-quarter and year-end results with you next February. Until then, we wish you a good end to your year and a strong start in 2016.

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