Superior Uniform Group Incorporated (NASDAQ:SGC)
Q1 2016 Earnings Conference Call
April 28, 2016 02:00 PM ET
Hala Elsherbini - SVP, Halliburton Investor Relations
Michael Benstock - CEO
Andy Demott - COO, CFO & Treasurer
Kevin Steinke - Barrington Research
Good afternoon, everyone. Welcome to the Superior Uniform Group’s 2016 First Quarter Earnings Conference Call. With us today are Michael Benstock, the Company’s Chief Executive Officer and Andy Demott, its Chief Operating Officer, CFO and Treasurer. After the speakers’ opening remarks, there will be a Q&A session. [Operator Instructions] This call is being recorded and your participation implies that you agree to this. If you don’t, then simply drop off the line.
Now I will 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, excuse me, and good afternoon. 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 2015 in this morning’s news release 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 periods in 2015 unless otherwise noted.
With that, I will turn the call over to Michael.
Thank you, Hala and rest assured it is afternoon, and good afternoon to everyone. Welcome to our Q1 2016 earnings call. We had a fabulous start to 2016 as we continued to build on the strategic framework for long-term growth. The first quarter was certainly action packed not only did net sales significantly increase by 25.1%. We opened our factory in Haiti and acquired BAMKO effective March 1st. BAMKO is not just another promotional products company. It is a dominant player in the branded merchandise market. The business has an outstanding sales, marketing, product and customer centric team, which delivered fiscal 2015 net sales of $31.5 million. Coupled with our existing promotional products offering through Blue Fusion this makes us one of their largest promotional products company distributors in the country.
Before reviewing segment highlights, I’d like to summarize our rationale for the acquisition. BAMKO adds an important element to enhance our position in all the markets that we serve it’s a combination that makes sense from both growth and synergy standpoint. Specifically, it provides a more diversified revenue and earnings range for Superior, it also provides a platform for our promotional products and branded merchandise business, this is very similar, if you recall to what the acquisition of HPI Direct did for us in helping to create a new platform across all non-healthcare uniform business development. BAMKO also has deep sourcing capabilities, we are now in the enviable position of having one of the largest staffs in China of any promotional products distributor or Uniform company in the United States.
Our staff of more than 60 people there manages projects and performs due-diligence, quality control and social of its directly more than 150 factories in any given time. In most cases, this means no brokers, no agents direct from the factory as they say. Even most of the biggest competitors in our space can’t match this. BAMKO as a highly scalable ERP project management software, web development platform, CRM and customer care support in India. This also will drive efficiencies as we pursue additional branded merchandise acquisitions in this very fragmented industry.
BAMKO has a robust sales footprint that will allow us to leverage cross-selling opportunities. In addition to further penetrating BAMKO’s elite customer based, which includes many Fortune 500 and 1000 companies that have strong brands and active promotional programs and many even have uniform programs that can be opportunities for our division HPI Direct. And I want to emphasize most importantly, we’ve bought a company with a strong and dynamic leadership team, we spend a lot of time with the principals before and during our sensitive due-diligence process. We gained tremendous confidence in their ability to further enhance both Superior and BAMKO’s prospects for growth. BAMKO has an impressive track record and a reputation for high energy, creativity, innovation and excellence. From 2010 to 2015 sales expanded at a 14% CAGR. We believe BAMKO can continue its pattern of double-digit sales increases.
Now let’s move on to reviewing our segment performance. Our uniform related products net sales increased 24.4% to $54.5 million when compared to last year’s first quarter. Organic sales excluding BAMKO increased by 15.7%, this came as we continue to penetrate new and existing customers and benefited from higher turnover rates and a somewhat improving economy. The Office Gurus, our Remote Staffing Solutions and BPO operations those had another strong quarter, sales grew 25.7% to $4.4 million. Sales to outside customers expanded by 36.2%, reflecting solid new customer gains as well as increased sales penetration with existing caps.
From a bottom line perspective, we continued to leverage our fixed cost across higher sales volumes. However net income increased at a slower rate due to acquisition related expenses. Andy will discuss these related expenses and transactions in detail in his financial review after I am done stating. We continue to make good progress with Fashion Seal Healthcare Direct this is our direct channel investment to penetrate group purchasing organizations, large healthcare systems, medical collages, home healthcare chains and long-term care chains we've invested in the right staffing and leadership to move this business forward so it can deliver incremental opportunities to drive sales and profitability.
Our Fashion Seal Healthcare Indirect operation sells to healthcare dealers and laundries while we have been in this business almost of our 96-year history our teams still find ways to add value to our existing Fashion Seal Healthcare customers by offering new products and services. In fact last month we released a new catalog of scrub apparel that really takes comfort and fashion to a whole new level for our industry. During the quarter we had no significant shift in our global sourcing, we're still having our uniform products manufactured in any given time in 11 or 12 countries and nearly 30 factories. As I said earlier though our new facility in Haiti did open in January and is producing a single line of apparel for Fashion Seal Healthcare customers.
By cutting out the middlemen where it makes sense, we’d be more cost effective. It also gives an opportunity to bundle this product line with others which makes us more competitive on larger accounts. The factory with its 87 employees is hitting its quality and production targets. We plan to ramp up staffing to about 150 employees by the end of the year and up to 300 people by the end of 2017. In addition the acquisition of BAMKO provides us with a significant presence of personnel in China and India that should help us drive lower uniform cost once we realize the synergist benefits of this new arm of the Company.
Now we will move onto our remote staffing solution segment. As you know we focused on a niche of serving a targeted but broad customer base typically starting with the requirement of fewer than 25 seats to fulfill multiple back and front office support functions. Our research and our results to-date indicate this is still a very underserved market in order to stay ahead of the anticipated fast paced growth, last year we began expansion efforts to double our capacity. We've spoken about this in previous calls. Our new call center building in El Salvador should be completed in the next few weeks. And then we'll start the final permitting process for the move that puts us on schedule to be operational midsummer. This will more than double our existing capacity in that country and gives us the ability to increase the number of agents in El Salvador to 1,200. We are looking forward to continue growth in our Belize and Florida call centers as well. Our current employment in this space across all centers is currently 670 associates. At our projected growth rates we are more than double this over the next five years.
Let's take a look at some market trends affecting our company. While there continues to be volatility in the macroeconomic and geopolitical environment, our uniform customers remain cautiously optimistic. They too are seeing higher employee turnover which is consistent with the current departmental labor reports. The rate of hires is encouraging, up 6.5% between February 2016 and 2015 and turnover in general is rising with increased hiring rates in retail during this period up 18.6% and in the category of accommodation and food services department lay the tracks hiring increased by 14.40%. Of course with this comes increased wages to stay competitive which also drives higher turnover as you know this is all good news for us. More people hired it means we sell more uniforms.
Now I will turn the call over Andy to give you more detail on our first quarter performance.
Thank you, Michael, and good afternoon everyone. We are very excited to have completed the acquisition of substantially all of the assets of BAMKO which flows effective as of March 1st. BAMKO's operating results are included in our financial statements for the last month of the first quarter where possible I will breakout its results separately to illustrate its impact as well as the progress we're making in the rest of the uniforms and related product segments. I'd also like to point out the BAMKO sales tend to be more lumpy because of their shorter sales cycle as well as the impact from large contracts which can fluctuate quarter-to-quarter.
This may have a slight impact on our overall sales trends going forward additionally Chinese New Year tends to negatively impact BAMKO's second quarter where first quarter production levels effect their second quarter sales results. As we've pointed out in the past, we have an inventory based process with our uniform business and the sales cycle is in the 2 to 3 year range whereas BAMKO is making shift model and can’t close on certain deals in less than three months and shift within weeks or months depending on the level of customization required.
Now let's start with the closer look at the quarterly income statement, net sales jumped 25.1% to nearly $58 million. This represents our 14 consecutive quarter of sales growth. Uniforms and related products contributed 14.9% of this gain on an organic basis. The BAMKO acquisition added 8.2% and Remote Staffing Solutions contributed the additional 2%.
Uniform related product sales increased 24.4% from a year ago, BAMKO had a great start to their year contributed 8.7% of the increase with the balance coming from a solid new business pipeline as we continue to take market share. And as Michael mentioned, we benefit from an improving economy and higher levels of employ turnover.
In Remote Staffing Solutions quarterly sales outside customers grew 36.2% from a year ago. This stems from solid execution as we increased business with existing customers while attracting new ones. Cost of goods sold was 24.2% to $37.9 million. As a percent of sales cost of goods sold was down slightly at 65.5% compared with 65.9% or $30.6 million in last year’s first quarter. Breaking this down further, we saw cost of goods sold as a percentage of net sales for Uniform of 66.5%, compared to 67.1% a year ago. This is primarily due to a reduction in direct credit cost as a percentage of sales as well as lower overhead costs on higher Uniform volumes. These factors more than offset slightly higher cost of goods sold on BAMKO sales.
For Remote Staffing cost of goods sold as a percent of net sales increased to 46.9% from 42.4%, as U.S. based sales more than doubled compared to last year’s first quarter. These carry lower gross margin percentages than our offshore services, because of the higher hourly rates charged. Gross margin was slightly higher at 34.5%, compared to 34.1% in the year ago period. As you know our gross margins can fluctuate based upon customer mix. So we believe looking at the operating margins offers a better measure of our overall profitability.
SG&A expenses increased 32.4% in the latest quarter to $16.5 million as a percentage of net sales SG&A rose 28.4% compared to 26.8% in the 2015 quarter. They were three major columns for the increase. First is supporting 25.1% higher sales including hiring more people to handle our continued growth. Second in the closing of $255,000 pension settlement loss and third the nearly $900,000 in expenses associated with the acquisition of BAMKO will reflected here. Net of these acquisition expenses SG&A expenses reflected historical trends as we leverage a higher level of sales across our fixed cost structure.
Interest expense rose 8.8% from the year ago quarter to $148,000, because of higher average borrowings offset by lower interest rates. Income from operations increased 6% to $3.6 million, which led to an operating margin of 6.1% versus 7.2% the last year’s months. Excluding acquisition related expenses operating margin would have been 7.7% in the first quarter of 2016. BAMKO generated operating income of $0.2 million excluding the acquisition related expenses of approximately 0.9 million.
Our effective tax rate for the quarter drops to 33.7% from 36.6% last year. The difference came from an increase in the tax benefit on income from foreign operations and a decrease in non-deductable share based compensation as a percentage of taxable earnings. As you may recall, last year we were a bit conservative in estimating a higher rate as the year began and worked our way down throughout the year. Net income for the latest period was $2.3 million, up 10.6%. On a diluted per share basis earnings were $0.15 compared with $0.14 a year ago. Excluding the acquisition related expenses earnings per share would have been $0.19 in the first quarter of 2016. We also paid our regular quarterly dividend of more than $0.08 per share.
Let’s move onto the balance sheet. Our financial condition remains very strong. Cash and cash equivalents increased 120.9% this quarter to $2.3 million. We invested $15.3 million for the acquisition substantially all of the assets of BAMKO net of the foreign cash acquired and approximately $2.7 million for capital expenditures. Accounts receivable grew 28.9% to $38.6 million, this reflected higher sales and the BAMKO acquisition.
Inventory decreased 1.2% to $62.8 million, as a result of continuing efforts to reduce overall inventory levels. Note that BAMKO does not carry any significant investment in inventory as I said earlier, most of their business is making shift. Prepaid expenses and other current assets increased by 54.9% to $9.6 million primarily as a result of the BAMKO acquisition. While they did not carry much inventory they do have more significant amounts tied up in vendor deposits.
Accounts payable declined by 3.8% to $11.3 million, primarily due to the lower inventory purchases. Other current liabilities decreased by 18.2% to $6.8 million, primarily due to the payment of year-end incentive compensation in the first quarter partially offset by $0.7 million of assumed liabilities from the acquisition of BAMKO. During March as part of the acquisition, we amended our five year credit agreement with Fifth Third Bank this gave us access to $20 million revolving line of credit, up from the prior $15 million line. We also have a about $45 million term loan which we used to fund the acquisition.
The purchase price was approximately $15.3 million net of cash acquired and 324,000 restricted shares as the previous common stock that will vest over five-year period. We also recognized a liability for future contingent consideration of approximately $5.4 million for future payments based upon the operating results of the acquired business through 2021. As you can see we executed on several key initiatives and are off to a very good start to the year.
I will turn the call back to Michael for his closing thoughts and a general outlook for the year.
Thanks Andy. We closed a solid first quarter and had a good momentum as we head toward the midpoint of 2016. We expect to benefit from the significant investments we've made to increase our capacity, strengthen our market position and broaden our value proposition to existing and new customers. We also made deep organizational changes last year, creating better accountability among our channel managers through a more efficient corporate structure and the metrics by which we judge our leadership. While we don't expect to see sales rise as dramatically during the rest of the year as they did in the first quarter, our outlook remains very positive. We expect to be very much in line with our long-term guidance.
Over the next 3 to 5 years, we expect consolidated average organic sales growth in excess of 8% per year for our business excluding BAMKO. This includes increases in our Uniform business of approximately 6% per year and $2.5 million to $3 million increases for our remote staffing solutions. As mentioned earlier, BAMKO generated net sales of approximately $31.5 million in 2015 and we expect BAMKO to generate organic growth in excess of 15% per year. In addition through BAMKO’s scalable platform, we have increased our ability to add on acquisitions. Our criteria includes companies with $5 million to $15 million in annual sales, good geographic penetration, strong customer base or product lines that we can leverage.
On a longer term basis, we're working through out pipeline of Uniform acquisition opportunities. We continue to cultivate, nurture those relationships in an effort to secure a strategic fit. These include companies generally with $10 million to 35 million in sales. They must have strong customer relationships and good management teams that we can keep in place or if necessary we can augment with our experienced people. We are very excited to welcome BAMKO to Superior family and believe our combined strengths will differentiate us within the marketplace at the preferred one-stop shop for all local merchandise.
We have the capacity and capability to grow our sales and profits. Our formidable balance sheet enables us to continue to drive shareholder value and long-term growth. We have incredibly dedicated teams across all divisions that work tirelessly to create value for our brands and for our customers' brands and you our shareholders as well. I want to give a shot out to our entire team many of whom are also shareholders and tell them thank you for your contribution, without you this kind of results cannot happen.
With that, we would like to open the call for your questions.
We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Kevin Steinke with Barrington Research. Please go ahead.
I wondered if you could talk a little bit more about the cross-selling opportunities to your existing customer base that BAMKO creates and if the motivation for an acquisition like this and others is actually being driven somewhat by demand from your existing customer base for these products that is they like you're providing them already in terms of Uniforms, but they're coming to you and saying, okay it would be great if you could provide us with a broader product line in terms of promotional products et cetera?
Okay, two pieces to that. Kevin thanks for the question, it's a good question. Over the years we have seen the demand from our customers for promotional products and what has happened in the last 10 years is, promotional products companies of which are there many, there are 22,000 in the United States. Some of them is small as garage-type mom-and-pop operations all the way up to very-very large companies in this space. And what we find is that, these people have been going into our clients over the years and telling them that they could be there one-stop shop for rollover apparel. So that is the reason why we started the Blue Fusion a number of years ago to compete against that really as a defensive mechanism. But we didn't really have a way with Blue Fusion to differentiate ourselves as a supplier. We were the same people going to the same catalogs as everybody else, ordering merchandise.
There is something very lacking in our ability to understand that business completely, but also to scale it up to the size that it needed to be where we could be taken seriously by some of the larger purchases of promotional products. I mean it's not a big secret that many of our customers buy promotional products, they buy them from the same people, or the same people buying them, are same people that we deal with at those organizations and often times, the promotional products purchased is as larger or even larger than the Uniform purchase. So it is not to be subordinated to other suppliers, we build this defensive strategy over the years, we have wanted to have a stronger platform to do it we have looked for companies to help us jumpstart that, because we believe to get where BAMKO it would have taken us many years and quite frankly, I don’t know that we had that kind of time. We searched for companies, we found one that does differentiate themselves from most of the other promotional product companies out there and I wouldn’t call them just a promotional product company.
They’re capable of doing many different things, but I think their greatest strength is the team that they have designing in California, is supported by a very large team in China that help them put together these large projects. And that goes differentiated, because they are able to do a lot of customization and if you go out to our investor site, you see some of the webcasts we’ve done there is certainly out there a pretty good roster of their accounts on a few of those different pieces of material. And you look at that and say, okay, so that’s how we sell promotional products, we’ll being BAMKO into our Uniform customers and I have no doubt we will be successful in turning many of them into promotional product and uniform customers.
But the same thing holds true the other way BAMKO has a great list of customers who are in Uniform. They’re not in our Uniform, but BAMKO has great relationships with these people and will be making introductions for us into those accounts. So we can go in there and take a more holistic approach, of we can do all of these for you, not just the Uniforms or not just the promotional products. So we’re very excited. Even putting that aside, even if we’re not able to carry them and they’re not able to carry although right I doubt that to be true and I say it with a certain amount of certainty, because we’ve been able to build with a very small part of our organization, we were really able to build a pretty nice promotional products business on our own over the last few years paying very little attention to it. But if we’re unable to do it, BAMKO’s prospect for growth just having us behind them and our resources behind them is awesome. And our prospects from a sourcing standpoint with their capabilities on the ground, just enhances our capabilities greatly.
Should we expect any significant integration costs or activities associated with BAMKO in the coming quarters or they just kind of hit the ground running and you don’t have to spend a lot on integration?
Yes. Kevin, there is on an expectation of significant integration cost at this point. Similar to what we did with HPI. We bought them to do, what they do. There will be some synergistic values between until we help each other out, but the bulk of your acquisition related expenses are behind us and you have a little bit of valuation work and so if I’ve got a little still ramp up in this coming quarter, but it will be small, there really shouldn’t being anything else.
Kevin, if you don’t mind I want follow-up to your question one more thought. A lot of those will occur to me probably when we get off the phone as well. But one of the constraints that BAMKO had with their customers is they say really didn’t have capital to tie up in inventory. And over the years, they had Uniform opportunities, but they required them to keep inventory in the shelf, and you know what kind of inventory we keep on the shelf as part of the contracts we have with our customers. They weren’t prepared to do that for their customers. Nor did they have the distribution capabilities, they had no warehouse. So they could 3PL it out it was expensive, they wouldn’t be competitive in any event third-partying out. But now they have our distribution capabilities and they have our capabilities from a financial standpoint to support whatever Uniform programs they are able to bring along. So there are a lot of synergies here, there is more to talk about we could probably say and pace doing it of why we bought this company. But I think the best part of it is, you’ve got some of those forward thinkers and strategic thinkers at BAMKO that I’ve ever had a chance to work with and I know we’re going to build that business to be a very, very substantial part of our business.
And it’s just lastly given the growth expectations you talked about for BAMKO. I guess that’s fairly that could accelerate your total organic growth rate a little bit. And just also wondering what it does for you from a profitability or margin perspective going forward?
Yes, Kevin, I mean it definitely will decelerate our organic growth as we go forward. We referenced a bit with the guidance as to whether we should change the organic growth and we finally decided to this year it made more sense to give our existing guidance on the business without BAMKO and tell you what they’re going to be doing. Did you remove that for the year, based on today’s model, we would expect that our overall organic growth rate will probably go from 8 to 8.5 or thereabout maybe a little more we expect that to be in excess of that number I mean that's kind of where we are at from a sales perspective. In regards to the operating margin as I think we had mentioned that whenever we were doing our presentation shortly after the acquisition. BAMKO is an organization that was staffed and built out to be much larger than the $31.5 million businesses they were and our expectation was that they would be marginally accretive to our earnings this year exclusive of the acquisition expenses. That is still our expectation and as they grow and start to leverage, we'll get beyond the acquisition related amortization and that structure that they already have and margins will improve on their business. In the short-term, their operating margin percentage will be lower than ours.
[Operator Instructions] At this time I am showing no further questions. I would like to turn the conference back to Michael Benstock for any closing remarks.
And I'll keep it real short. Andy and I appreciate your time today, appreciate your questions too. We will speak again in July. Have a great Q2.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: firstname.lastname@example.org. Thank you!