Good afternoon everyone. Welcome to Superior Group of Companies 2018 Second Quarter Earnings Conference Call. With us today are Michael Benstock, the company's Chief Executive Officer; and Andy Demott, its Chief Operating Officer and CFO. After the speaker's opening remarks, there will be a question-and-answer session. You will receive instructions on how to ask a question at that time. This call is being recorded and your participation implies that you agree to this. If you do not, then simply drop off the line at this time. 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. This conference call may contain forward-looking statements about Superior Group of Companies' 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 Group of Companies' Form 10-Q, 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 management's current expectations and beliefs. Management does not undertake any duty to update these 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 in 2017, unless otherwise noted. With that, I'll turn the call over to Michael.

Thank you, Hala, and good afternoon everyone. Welcome to our second quarter 2018 earnings call. I'll start out as usual by giving some color to our Q2 results and then provide the same on our recent acquisition of CID Resources. CID is the largest acquisition undertaken in SGC's history. It is very much a transformative, strategic alliance that accelerates our growth to consumers through the retail health care channel and is expected to be accretive to our earnings per share beginning in the third quarter of 2018. Andy will provide additional financial metrics on CID along with his financial review. I'll then come back to wrap up with some closing remarks, and we'll be happy to take your questions. Superior Group of Companies second quarter results were again mixed, and organic top line growth moderated in both our Uniform and Promotional Products segments. The Office Gurus consistently delivered outstanding growth. During the quarter, we managed through several factors that slowed our growth trajectory in the short-term. However, we are executing against our long-term plan and making strategic investments to deliver sustainable business performance. We are diligently working to integrate our three recent acquisitions, realize the operational efficiencies and capitalize on opportunities across our brand-building business. For the quarter, consolidated net sales increased 25.6%, with the preponderance of the improvement coming from our acquisitions of Public Identity and Tangerine Promotions in 2017 and of CID Resources in 2018. This marks our 23rd consecutive quarter of year-over-year net sales increase. As our scale expands, we expect to see the lumpiness in quarterly performance from the varying sales cycles even out. Additionally, cross-selling opportunities between divisions remain a high priority, and we are successfully executing cross-selling wins across our Uniform and Promotional segments. The sales gain in our Uniform segment, Superior Uniform Group,…

Thanks, Michael, and good afternoon, everyone. We filed our Form 10-Q for the second quarter ended June 30, 2018, this morning. So I'll limit my review to key income statement highlights for the quarter and 6-month period. As noted on our first quarter call, our results reflect the adoption of the new revenue recognition accounting standard, ASC 606. Consolidated net sales were $82.4 million, an increase of 25.6% over last year, with acquisitions in our Promotional Products segment and our May 2 acquisition of CID contributing 34% of the gain. For segment contribution, increases in Remote Staffing Solutions contributed 3.6%; partially offset by lower organic sales in Uniforms and Related Products, which accounted for 9.6%; and decreases in Promotional Products contributed 2.4%. On a year-over-year basis, net sales increased 8.2% in Uniforms and Related Products, largely due to the CID acquisition, which contributed 20.3% of the increase. This was partially offset by the adoption of ASC 606 and the subsequent reduction in net sales of $3.5 million, which represented 6.7%. Additionally, the impact of a legacy customer lost in 2016 contributed 5.4% related to the remaining inventory sales in the second quarter of 2017. While we continue to service this customer at a reduced rate, the net reduction impact was approximately $2.7 million in the second quarter. This is the last quarterly comparison that will be impacted by the loss of this customer. As Michael mentioned, organic sales growth softened during the quarter, but our pipeline of opportunities continue to build, and we are seeing purchasing deferrals from a year ago beginning to move forward. In Remote Staffing Solutions, quarterly sales to outside customers, once again, experienced significant growth and increased by 50.6% from a year ago as we continue to meet strong demand and growing new customer engagements and…

Thanks, Andy. We've got a lot of numbers there. In summary, second quarter was an intensely busy quarter for Superior Group of Companies. Just to name some of the things we worked on, we certainly worked on a large pipeline of opportunities: getting new warehouses up and running; realigning our sourcing strategies with the addition of CID; CID being itself a formidable acquisition in the second quarter; added a whole host of technology improvements within our business. We still have the integration of the acquisitions that were done last year, the two acquisitions done in 2017 of Tangerine and Public Identity. Identifying Jamaica as our next country for call center expansion and, of course, recruiting higher level talent in our HR area to be able to keep up with our expanding needs as we seek higher levels of revenue; very interesting quarter for us. The first-half activities strongly aligned with our core strategy of laying the groundwork for long-term success. We're focused on investments where we can capture significant return on investment. We strengthen our market position every single day, and we're working very hard to elevate our existing and new customers' brand experience. This of course enhanced by our diversified business model and our ability to capture market share in a now broader addressable market. And the addition of CID puts SGC in an exciting position to expanding it to new, higher margin channels. We're stepping at a great time, and less than 90 days have gone by. Since closing, we're finding we're optimistic that this acquisition is even more advantageous than anticipated, presenting opportunities even beyond our earlier expectations. As to SGC, we have a clear plan and vision, and we are prudently executing to achieve our long-term objectives across our entire platform of companies to ultimately create…

[Operator Instructions] And our first question comes from Kevin Steinke of Barrington Research. Please go ahead.

Good afternoon everyone.

Hey, good afternoon Kevin.

I wanted to start off by talking about the pipeline in the Uniform segment. You talked about decision-making continuing to move forward there after a pause last year. Based on the typical pace at which things move through the pipeline, should we still expect it to be more of a benefit to organic growth in 2019 rather than the second-half of '18?

That's correct, Kevin. If you look in our pipeline, typically, we divide it into stages. We're in a state now where we're waiting to hear back from customers. We're going to get a lot of decisions made in the next 60 to 90 days. Those decisions are made, contracts are negotiated then. But generally, it takes some time before we start issuing purchase orders, even offshore, to bring merchandise back. And the cycle back can be anywhere from six to nine months. So, yes, 2019 for sure will be impacted by our sales success in the second-half of this year, and likely in the second-half of 2019, more so than in the first-half.

Okay. And on CID, you mentioned after the first three months here that it's looking even more advantageous than you even originally expected. So can you just talk a little bit about what you are finding there, what you like and the opportunities as you move forward?

Besides being a really great group of people and great management, great middle management, great staff at all levels, what we're finding is with our -- with -- I'll take it in pieces. Our laundry customers, Fashion Seal Healthcare laundry customers, are very excited about the possibility of being able to put CID products through their laundries once we have laundry-friendly products available. CID did not have laundry-friendly products. Really, neither has their competition had laundry-friendly products that are fashionable as CID's products are. So that's one certain opportunity that we're feeling great about. The laundries also, besides acting as launderers and renters of uniforms, also, many of them have direct sales forces. They go out into the marketplace and call on doctor's clinics and so on. And they're looking forward to the offerings that CID has in order to offer even the non-laundry-friendly products to their customer base. That's one side of it. The other side of it is that even Fashion Seal Healthcare customers, some of them are already tapping into CID's design capabilities, which are very fashion-forward in presenting products to Fashion Seal Healthcare customers outside the laundries. And that's an exciting opportunity. I believe that over time, more integration and more collaboration between their design teams and our design teams will make us a much fresher organization from a design standpoint. Now look to the other side, on CID. CID was a very successful company when we bought them. I mean, they built in seven years a brand from $0 to $65 million, fastest-growing brands, brand builder in your business, highly recognizable, well thought out, low price points, not only their own brands but the ones they licensed, Vera Bradley and Carhartt. And what we're finding is that you couple their skill on the design product development sales of marketing acumen, account management, customer service, all the customer-facing things that they've done so well with our capabilities on the operational side, where they need help. And one thing people say about us is we know how to create operational efficiencies. And so we're supporting them with IT going forward. We will support them with distribution going forward. And it all isn't going to happen in a day, but it will happen over the next year to 18 months as we speed up integration efforts. They will be integrated onto our SAP and our Uniform platform over the next, let's call it, 18 months. We're hoping that's the schedule. It's not finalized yet, but that will bring them many advantages that they don't currently have. So you look at what we can do for them in distribution, in IT, from an accounting standpoint, from a collections standpoint, from all the things that we do, from a backlog standpoint, a shared services standpoint so well, should help them become a more operationally efficient organization and ultimately, give even better service to their customers than they are currently giving.

Okay, great. Just a couple of follow-ups there, you mentioned integrating on SAP. So is 18 months kind of a reasonable time frame to think about how long the integration of CID lasts? Or how much heavy lifting is really there to do with integration?

There's a fair amount. Some of it comes down to priorities. We're in the process of integrating HPI onto SAP. That will take us the better part of the next 10 to 12 months. It's already begun, but we're not doing a big bang turn off, shut off and turn on. We did that back in the late '90s. That didn't work out so well for us. So we're growing nice and slow, making sure we don't impact any of their customers. We do it one customer at a time or one product group or customer group at a time to make sure the impact is very small. From a resource standpoint, in order to do -- and we'll learn a lot in doing HPI that way in order to help speed up CID's integration as well. So I think 18 months is reasonable. It could be a little bit shorter. It could be a little bit longer. Most importantly, we do it right, and there's a lot of benefits to them being on SAP, inventory management tools that they have, internal planning tools, customer analysis and all the analytics that they can do on their business in SAP that they currently can't do on their system, so -- or that they have to struggle to do on their system.

Should we think -- be thinking about any meaningful integration costs as you go through this process that you might call out separately? Or will that just kind of be folded into your numbers as you move forward?

It'll be folded into our numbers. We haven't examined -- we're kind of at a step, and I think we've spoken about this in the past, where every few years we have a large investment. Andy has spoken about it. Typically, we run 2% on CapEx, but every few years, we wind up with another $5 million or $10 million of expenses associated with IT or distribution. As we become a larger organization needing more IT and distribution capabilities, certainly, organization will not just for CID but for HPI and all of our divisions, Fashion Seal Healthcare, we're going to have to keep up with the technology to make sure that we're still a low cost fulfillment to our customers of their products. So that has not been fully analyzed yet. But that would be normally in the second-half of the year; we'd be looking at all of our CapEx needs on a go-forward basis over the next few years and making determinations. Probably more urgency doing that now than there might have been a year or two ago, a little bit larger, and we'll also do the distribution for a lot of BAMKO's customers now as part of our shared services. So we want to make sure we're doing it efficiently and as cost effectively as possible.

Okay, great. Moving on to Promotional Products, can you just maybe give us the post quarter analysis on the results there in terms of -- you mentioned maybe a little bit lower sales than you expected. But you expect it to get better in the second-half. So is that related to the ongoing integration or maybe just talk a bit more about the trends intra-quarter and moving forward.

Yes. I think whenever you look at the quarter, and their sales effort I think has been trying to get across is that they spent a significant amount of time in the last, really the last year working on their acquisition pipeline. We're really focused on acquisitions and bringing that in. I think, to an extent on their organic business, for lack of a better word, took our eye off the ball on the sales side a little bit and got behind -- kind of behind the process and that affected the results. At this point, given where they're at with Tangerine, we really want them focused to make sure we're getting the integration process right and it does as well as Public Identity, so that we can move forward and with a good model. That's why we paused the acquisitions really until the beginning of next year as part of it being a priority. We're starting to see some positive momentum for them as well with opportunities where they're at, and their business is always going to be a little bit lumpy with opportunities on the core business. The other part of it is, as we now have three separate units there, the time where you will see the BAMKO piece being down, that may well be that there was a shared customer or an opportunity at a customer that BAMKO normally would have put into their operations that fit, whether that be relationships or just the nature of the customer, made more sense for Tangerine to handle it or Public Identity to handle it. That kind of weighs on what shows as the core BAMKO's organic number. And as Michael has said in the past, with that business it's getting harder and harder to see what part of it's really the organic piece and what part of it's the acquisition piece.

I was actually there last week, and I have to tell you, as a group, they have probably the best self-awareness, what they've done right and what they've done wrong over time. Their take on it, to me, is we're focused outwardly, looking at what all our competition is doing, working slowly on the integration of these other units as well, and we should have been focused more on building out our sales team. And they're back on it and they have been for a couple of months now, and we expect to see good results. And there is a direct relationship in that business between how much you focus on sales and how much sales you do. There is lot of sales out there to be had. Remember, you know they've got 22,000 competitors out there. So, you can imagine, you have 22,000 competitors. There are hundreds, if not millions, of customers out there for their products, and that's what they're focused on right now. And looking at their history even before we bought them, when they focused on something, they never failed to succeed. So we're very optimistic.

Okay. And what's left to do on integration in the Promotional Products segment? And how tightly are those three businesses going to be integrated versus still kind of operating as their own brands per se?

They'll be integrated from an IT standpoint. That remains to be done. That will happen over the next six to 12 months. They will be -- they already are integrating from a distribution standpoint into the Superior Group of Companies distribution centers, so our shared service distribution centers. So that's already happening. Their accounting still needs to be integrated and create efficiencies from that, as does some of the other back office and administrative functions. Certainly, the newer acquisitions, Tangerine and Public Identity, will be over the next year using more of the resources of China. They're using that to some extent, but more so, and the resources available to them in India as well as El Salvador. You're going to see a big difference over the next year in their -- how they operate. And hopefully, that will filter down to the results.

Okay, good. On Remote Staffing, obviously, growth continues to be very strong there. I mean, what are you seeing competitively in that space? Do you feel like you have a niche here that's allowing you to grow at these rates? Or any increased competition? Or just how's the environment overall in that space?

Well, we don't go into any piece of business or almost any piece of business without somebody competing against us. We don't always find that we're the low-cost provider. But we do find that we probably can create more value for our customers than most of our competition can just because of the team we put together and their experience. There's no shortage of customers. The only thing that will get in our way of growth from our guidance is if we don't either lease or build space fast enough to be able to keep up with our customers' needs. And some customers are deepening their relationships with us. That's part of the growth, and a large portion of our customers are new. And we have very, very little turnover of customers in that business. In our earlier years, we had more turnover. In our later years, we're doing a whole lot better in terms of the number of customers we're going to retain every year. Some customers do have some fluctuation from year-to-year in the number of people they need because their business needs change up and down a little bit, but we've created a very loyal, referenceable customer base. And the proof of that is, we put a sales executive in there working with Dominic, who's the President. Dominic White, he was the President of that division about 1.5 years ago or so. And we have decided that we're not hiring any salespeople to work under him. He's working on sales and marketing strategy. So he's working on SEO on the marketing side and our social media strategy, and that's worked out very, very well for us. We're doing some trade shows that are working very well where we take operational people to trade shows, which generally can do better than even a salesperson because they're living the call center world every single day. And we're getting new customers through brokers and word-of-mouth and our own websites, and look at the kind of growth we're having. And quite frankly, I don't think that the value of a sales team is really out there. The value of a sales executive who's doing great with us along with his team, who anytime we get even a customer to El Salvador to come visit us with the notion that they might want to give us work or that we're in consideration, 75% of the time we win those deals. So the key is getting them to El Salvador, Belize, letting them see what it is we do. If they don't want to start in an offshore center, we start them here in our Florida center, which, of course, costs them more money, until there's a level of trust built up where they're willing to try our offshore centers, which are better for us and better for them.

Yes, so that's still the case that some customers like to start in the U.S. and then move overseas. At the same time, though, it seems like you mentioned the margins are coming up as more work is being done internationally. Is that just the fact that you have a number of customers who are growing quickly on the international platform, but you still typically start off customers on the domestic platform?

I would say it's probably half and half. Half of our customers do start on the domestic platform and then move to the nearshore platform, and the other half start nearshore. Very rarely does somebody start nearshore and stay nearshore though. Sorry, very rarely do they start in the U.S. and stay in the U.S. Yes. I stated that wrong.

Yes. Great. Okay. Just on -- you mentioned tariffs just as something that's out there in the environment. I assume -- is your comment is that you're not really -- it's not impacting you right now, but it's just something you're keeping an eye on?

Well, there are unintended consequences to some of these tariffs, to give you some -- and the new environmental regulations in China. Let's start with the environmental regulations. So China is clamping down and has shut factories all over China that were polluters or not up to their standards from an international standpoint with respect to their environmental responsibility. And as a result, there have been some manufacturers of dyes that go into fabrics that have been shut down. They weren't necessarily manufacturers that we were using, but they are manufacturers of dyes nonetheless, creating a smaller group of people selling dyes and somewhat of a shortage, which has raised prices of dyes. When you look at it from an end product standpoint, what's the cost of $0.10 more of dyes in your garment ultimately delivered to the United States? It's a couple tenths of a cent, but it's still there. China has had to import -- China has placed tariffs on cotton that they're buying from the U.S. Now there have been tariffs on cotton, already 10% going into China on U.S. cotton that China bought and mixed in with their cotton. And remember, in the cotton crisis, China build up their whole reserves of cotton, and it took this many years until those reserves were depleted where they needed to buy cotton again from outside China. So they started buying from the U.S. again. Rather than 10% tariffs though, they raised them in retaliation to 25%. What's the mix of cotton that goes into products? Our products in China, hard to tell exactly, but what is the mix of cotton that goes into all cotton products in China? Probably about 25% of the cotton used is U.S., China, is what we have been able to best calculate. So…

Okay, good. I guess, lastly, you increased the 5-year outlook or the 5-year growth outlook for the Uniform business. Obviously, that's related to layering in CID. Correct?

Yes, that is correct.

That is correct.

[Operator Instructions] I'm showing no further questions at this time. I would like to turn the conference back over to Michael Benstock for any closing remarks.

I'll keep it short. Andy and I appreciate your time today. And as always, we look forward to updating you on our progress in the third quarter in October. Have a great day.

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