Good afternoon, everyone. Welcome to the Superior Group of Companies’ 2019 Second Quarter Earnings Conference Call. With us today are Michael Benstock, the Company's Chief Executive Officer; Andy Demott, its Chief Operating Officer; and Michael Attinella, Chief Financial Officer and Treasurer. After the speakers’ opening remarks there will be a question-and-answer session. This call is being recorded, and your participation implies that you agree to this. If you don't, 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 and 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' Quarterly Report on 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 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 in 2018, unless otherwise noted.With that, I'll turn the call over to Michael.

Thank you, Hala, and good afternoon, everyone. Thank you for joining us to review our Q2 2019 results. My remarks will focus on performance highlights, progress against our strategic direction and brief remarks on our market environment. Andy will give an update on our operational improvement initiatives and our integration progress's financial review.We are pleased with our second quarter operational performance and encouraged to see early signs of positive gains from our ongoing integration efforts, realigned sales strategies and business process investments. For the second quarter, net sales increased by 12% led by a 24.9% gain in our BAMKO Promotional Products segment and steady growth from The Office Gurus, our remote staffing solutions segment.Results for our total Uniform segment were mixed and came in slightly lower. As expected, earnings were impacted by pressure coming from several sources, largely from higher operating expenses as we invest for future growth and respond to increased RFP activity, for new customer acquisitions as well as for those we are already servicing.Let's look at segment performance at a higher level. Our sales strategy shift is starting to take hold in our Uniform Group with HPI, our employee ID business, securing a few new business wins in our sweet spot. Overall, our pipeline is growing with potential opportunities, and we are hard at work to turn these opportunities into new business wins. Additional strategies are forthcoming to accelerate and grow our pipeline even further.Shifting to healthcare. Note that we benefited from a full quarter of our CID acquisition versus only two months of last year's second quarter. The division is now being fortified with a stronger operational structure and is on track to recapture sales and marketing momentum.To that end, and as part of our healthcare division integration strategy, Fashion Seal Healthcare has taken a stronger…

Thank you, Michael, and good afternoon, everyone. My comments today will focus on our key operational and integration highlights for the quarter. Let's take a look at our segment performance. Our Uniform segment, Superior Uniform Group, comprised of HPI, Fashion Seal Healthcare and CID, delivered a net sales gain.As Michael mentioned, second quarter results included the benefit of a full quarter of the CID acquisition, which we acquired May 2, 2018. Our integration efforts at CID are beginning to materialize with Fashion Seal Healthcare taking operational oversight.Capitalizing on their fashion innovation and design expertise, we introduced our first laundry-friendly fashion scrub [indiscernible] in June with overwhelmingly positive response. This has caused us to reevaluate the timing and scope of our planned launch as we expect this to be even larger than our initial expectations. This functional and fashion-oriented laundry scrub will fill a market void with the right product to withstand the harsh requirements of a health care laundry system.We're developing collaborative sales strategies among our health care uniform divisions and anticipate market delivery for this product later this year. As such, we anticipate a slow sale ramp beginning this year with significantly more sales opportunities in future years.CID went live July 1 on its new warehouse management system to provide better visibility and inventory controls, and we are tracking well on our SAP integration with expected completion by the end of Q1 2020.Our second near-shore factory in Haiti is also progressing on schedule and we expect the building to be complete in September. In anticipation of ramping up production quickly to improve profitability, we have already hired skilled managers and are progressing with their onboardingWe will experience increases in our operating costs beginning in the third quarter associated with the ramp-up of this new facility. We do expect to…

Thank you, Andy. This morning, we filed our Form 10-Q for the second quarter ended June 30, 2019, so I'll limit my review to key income statement and balance sheet highlights. Net sales for the second quarter increased 12% to $92.3 million with the acquisition of CID contributing 6.4%; a decrease in our Uniform and Related Products segment, exclusive of CID, contributing 1.2%; an increase in our Promotional Products segment adding 5.7%; and our Remote Staffing Solutions segment contributing 1%.Uniforms and Related Products net sales increased 7.7% compared to Q2 of 2018 largely due to one-month benefit in 2019 from the acquisition of CID. Overall, our Uniform segment performed well with strategic imperatives in place to drive sustainable, long-term growth.BAMKO's net sales were up 24.9%. BAMKO contributed 25.7% to our sales mix in the second quarter of 2019 compared to 23.1% in the same quarter of 2018. Sales at The Office Gurus were up 11.6%, and The Office Gurus contributed approximately 8.5% to our sales in both second quarters of 2019 and 2018.Consolidated gross margin for the second quarter was 35.1% compared to 35.5% a year ago. This 40 basis point change primarily came from the higher volume of lower-margin business in our Promotional Products segment. And while margin rates in our Uniform segment remained constant between periods, pricing was very competitive for new and existing business.As a percentage of net sales, consolidated selling and administrative expenses increased to 29.1% from 28.3% a year ago. These increases were the result of several items, including changes in sales mix, investments to support growth within all business segments, integration costs, shutdown costs at p3web, severance expense associated with reduction in force at HPI and SCG, amortization of intangibles relating to the CID acquisition and higher selling and administrative expenses in CID's business…

Thanks, Mike. This quarter, we again demonstrated the agility of our exceptional team. We capitalized on the diversity of our business while preparing our business model and the infrastructure to capture significant synergies to deliver long-term operating performance and shareholder value.Our work to rightsize the company, streamline operations and elevate through enhanced automation will pay dividends in the future. And we're strengthening our growth prospects every day as we manage the transformative impact on our enterprise, elevate our customer experience and deliver our brand-building solutions to help our customers unlock the value of their brands.We remain optimistic about the second half of the year as we work to achieve our long-term growth objectives. As always, we appreciate all the contributions of our SGC team members and thank them for their hard work and continued commitment.With that, we'd 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 of Barrington Research. Please go ahead.

Good afternoon, everyone.

Good afternoon.

So as I kind of look at this bigger picture, you enumerated quite a few investments going on in 2019 and in the second quarter specifically that are expected to yield benefits in the future, both in terms of growth and operational efficiencies. Just trying to get a sense, as you look at your business, how much those various investments you also called out some severance expense in the quarter – are, how much all that is weighing on your margins in 2019 versus what you see for longer potential margin. So yes, maybe I will just start out with that.

Yes, Kevin, this is Mike. So from a gross margin standpoint, we don't see a lot of impact with respect to the investments that we're talking about. From a net margin standpoint, from an operating margin standpoint, there has been impact particularly in the areas of the growth initiatives that we're investing in.Now we have invested in – as was mentioned during the remarks, we have invested in the expansion of TOG, both in personnel and in our real estate and rentals and costs associated with expansion of our capabilities and footprint. We have vacancies with respect to seats from a call center standpoint, and that certainly gives rise to additional costs that we have within our operating margins – our reductions of our operating margins associated with that business.On the BAMKO side, as we continue to invest in additional expansion in that area, we also have costs with respect to the growth of our personnel and process there. That said, though, a lot of our costs with respect to sales and growth that Michael talked about, most of that cost is variabilized as salespersons are typically on highly commissionable base pay.So from an operating margin standpoint on the BAMKO side, we do see some increase in costs associated with that business, but not as much because most of the people we're adding are on variable pay programs. In the other areas, we have continued to invest in personnel during the course of this past year that don't – that haven't been anniversaried last year.For instance, as we look at some of our executive team, I wasn't here last year, we added some people within our human resources programs that were here last year. All of these areas we're investing in to improve our ability to grow on a go-forward basis.Now as far as the overall costs associated with that and as far as what the impact is on margins, we haven't really quantified that in a way that we looked at – look at it in aggregate, but there has been an impact associated with those costs, and we have those costs included in our – in the operating margin impact.Now on a go-forward basis, though, the costs that we talked about with respect to the reduction in-force that we did both at p3web and here in the U.S. with respect to what we did in HPI and Superior Uniform Group. We do anticipate benefits associated with those costs of – in excess of $2 million. So the investments that we're making today and the benefits that we plan to get out of them on a go-forward basis are significant and substantial

And I'll jump in a second, just Kevin, this is Michael. A lot of the investments we're making are for things that we've already created efficiencies on, and we are able to do a small reduction to right size ourselves accordingly. But there's still plenty of efficiencies yet to be gained from the integrations of technology, from the bringing together of divisions together and having the best work together and create even more efficiencies. So I think this is – it's always been ongoing with us, so – not as long enough to see.Every couple of years, we kind of right size ourselves. Sometimes, it's up. Sometimes, it's down. And sometimes, it's for our different levels of growth. Right now, I think Mike just explained to you about TOG and BAMKO kind of ramping ahead of their growth.They've been doing that for some time, and they're doing quite well with it. I mean they are growing at greatly increased rates than they were before. They have to say ahead of that. That is likely to happen also with CID and Fashion Seal Healthcare working together, and it's likely to happen with HPI and SID working together. But there are still efficiencies that we will gain from a distribution standpoint.The investment we're making in the new factory in Haiti is going to produce some significant gross margin improvement for CID as well as lower inventories and lower interest costs associated with having lower inventories on it. So there's a lot ahead of us. And I think I said in the last quarter that we've never had so many transformational projects going on at one-time.But if we're going to accused of anything, it's – I guess maybe we should have spread these out over a lot of years. And some of us…

Yes. That’s helpful. And the way I'm thinking about this, and I think your comments mirror this in terms of light at the end of the tunnel, et cetera, is that you're going to start to see more of the benefits of all these various projects and operational efficiency projects as well as the sales pipeline really starting to benefit 2020, it seems, just from the way the timing of ramping up the SAP integrations and the Haiti facility, et cetera. It seems like you – plus you talked about the Fashion Seal Healthcare project going on with CID and the positive momentum there. It seems like you'd be set up for a pretty good 2020 based on all these things coming together, if that's the right way to think about it.

I'd be very disappointed if you are wrong, Kevin. But yes, that is the right way to think about it. But I think some of these things we talked about very, very carefully doing one customer at a time so we're not impacting people at HPI. That carries us – we wanted to be done with this project by October, November. It may carry into January, February. So how's that going to impact HPI? It shouldn't really. I mean we're still building our pipeline.Selling really has nothing to do with what's happening in SAP. And you know how long the process is from the time you sell to the time you actually close business, having been around this quite a lot. So it's a long cycle. So it's not impacting us in that respect. I don't disagree with you at all. In 2020, our expectation should be a good year. All this will be behind us. I can tell you we have breath of fresh air we'll all take having not been involved with all these transformational projects. And I guess the organization will be able to bring itself back together from the stress of doing so many different things at one time, but necessary.

Okay. That’s sounds great. Yes. And you specifically called out RFP expenses as having a margin impact in the quarter, which I don't know if you’ve ever called those out in the past. You may have, but it just kind of jumped out at me that perhaps that's an indication of a good sales pipeline going on. And so maybe if you can expand on that, the RFP activity that you are seeing.

Sure. RFP activity is as high as it's ever been – higher than it's ever been. As you do more RFPs, there's more travel expenses associated with that. There's more sales expenses, sample expenses. It's just a fact of life. And so it's not to a point yet where we'd be willing to disclose it as a separate item in our financials, but I can tell you it is more than it has been in the past. And it will continue to be. So what you're seeing now isn't going to change. I hope isn't going to change for quite some time. We seem to be headed in the right direction in that respect. And as opposed we only have the one huge, big opportunity, we are going after five smaller ones. Well, that's 5x the amount of travel, 5x the amount of resources you'll need to do it.

Right. And you said you're starting to see signs or you've closed some of those kinds of mid-tier deals. So you're starting to see some fruits from that effort, it sounds like.

That's true. And I think one of the things you'll see that's different, if you go back four or five years ago, we would speak more about the very large deal we won or the very large deal we lost, whatever. Yes, on this case, plus there's smaller deals that's going to have less of an impact. Even a rollout, an initial rollout, will have less of an impact. So we'll be talking much about it. I mean you'll know it's happening when we see our numbers rising. And we'll certainly speak more about – in the future about how we're doing with respect to that holistically but not specifically to an account.

Okay. Good. I guess on the Promotional Products side, you talked about continued investments there. Just to make sure I understand it correctly, your – are you just continuing to hire new sales people in line with your organic growth strategy to add people to drive the new business pipeline? And maybe they're also already bringing some business on that they already have, but just getting – trying to get a sense of how much sales hiring is going on there and how much more you want to do in Promotional Products?

Yes. Kevin, yes, so a lot of our investment in the BAMKO side of the business you can identify based on three factors. One is additional salespeople. So we mentioned during the comments that we doubled our sales staff in their – in the BAMKO business. And the sales force that we hired is largely commissioned.There was a lot of – it's not a fixed-cost business. It's highly commissionable. The people we brought in from a sales force standpoint are very seasoned professionals in the area of Promotional Products. They brought books of business with them, and that's why we've been able to capitalize and why you're – you see such high growth numbers with respect to BAMKO's performance. That organic business model expansion plan that we have in place is really paying nice benefits for us.The other area that we've invested in BAMKO, however, is in some of the integration activities that we've undertaken. BAMKO has – I think as you know, there's three separate businesses associated with BAMKO. We've integrated the back office operations within those three.And that’s also an investment that we've made during the course of the – actually the first six months of this year. And some – there was a tail in the end of last year as well. So there have been investments in BAMKO associated with that as well that primarily is related to the expansion of the sales force we have in that market.

There's another factor here that you can't ignore, and that's BAMKO is hiring people from the traditional Promotional Products business, the ad specialty business, who are more in line with our 22,000 competitors who are selling from catalogs, off-the-shelf product that's being logo-ed, which is generally lower-margin merchandise. And that's – as you bring them on, they're bringing their book of business. That's what they're bringing with them.Our goal is to transition them to more customized product, more of their book of business being the customized product that we can do for them in China and other countries now. And with that will come higher gross margins and higher operating profits. And that is – as we put these people on, sure we want them to bring their book of business, good business, profitable. It's not as profitable as what we can do on a customized basis. But that will come, too, as they become more fluid in selling and using the support that BAMKO gives them, some of which they've never had before in their previous positions.

Okay. That’s very interesting. I mean is – was that a factor at all in the gross margin in Promotional Products in the quarter? Or was that just mix? I may have missed the comments.

That wasn't – we probably didn't – I haven't done a good job explaining it. I hope we – I just explained it well now. But yes. Yes, sure

Okay. That’s helpful. Okay. What about the overall backlog in Promotional Products, what you're seeing there? I mean how were – did bookings trend in the quarter?

Yes. I think – and Kevin, to say anything, as you look at the backlog in Promotional Products, it remains very strong. I mean we're seeing really tied to the increased sales force as well as the efforts that BAMKO has put in place over the last several years. So the backlog in that business remains very strong.

Our bookings have been big. As I've spoken about in previous quarters, nearly every quarter we've had for the last three quarters has been serious upticks from the prior year. But with that many more salespeople, it should be. I would be surprised if it weren't. And we're continuing to put on additional salespeople, so that should be a fact of life and probably something in the future that we should be more transparent about reporting about at least on this call. We didn't say anything about it before this. Thanks for the question.

Sure. Yes, called out also just a lot of customer demand for lower pricing, a lot of price competition in – for new and existing business in Uniform segment. I don't know if it's intensified or if there's anything new we should be thinking about there. I know it's always competitive, but have you seen some sort of meaningful change in that regard in terms of pricing? Or was it just an overall comment on the industry condition?

No. It's meaningful. I think Andy mentioned it, Mike mentioned it and I mentioned it, competitive pressure is amazing. And I think what's – the time I've been spending with customers or with our people who are in front of customers, our customers are seeing higher prices as a result of tariffs, as a result of minimum wage increases.I'm seeing even their own employees having to pay them more to keep them. We're in a dynamic market. They're having to pay more. The health insurance is going up. Everything is going up. And the mandates for a lot of these companies, particularly the larger ones is we want to cut costs by 10% or 5% or – and we have a customer who actually has mentioned a multi, multi-billion dollar account who's cut all costs by 20%.And so what did they do? They go to their vendors and said, "We want you to cut costs by 20%." We don't make 20% on your program. But I've seen more irrational behavior from purchasing people and all power to them. If they can – if their other vendors have that kind of room to give them – to give up, in our case, we said in some cases no, go out to RFP. Good luck. We can't give you the kind of decreases you're asking us.Again, we feel confident that in an RFP situation, we'll prevail. And there's enough RFPs out there right now that if we just prevail on a good share of them, we will be just fine. But it is a unique environment out there. And I'm not complaining about it because on one hand, maybe that's the behavior of our customers.But the fact is that is a matter – that's the behavior of my competitors' customers, too. And so I'm having a – we're having the opportunity actually to be in front of more customers than we've ever been in front of. So I say let's keep it going like this.

Right. I mean you haven't really seen it in your margins, have you? Or what can you do to offset that? Or I guess just like you said, maybe you just don't bid on certain work if it's not going to be profitable enough, but…?

Yes. Well, it's kind of – stuff flows downstream, right?

Yes.

So we're doing the same thing with vendors – among our vendors. So a little pressure we're getting, within a couple percent. And so it's happening everywhere. And I would imagine our vendors who are publicly traded and having to speak on this are probably speaking about the same thing we are because it's what we're hearing everywhere.

Right, okay. And you sound really optimistic about the – with the fashion-friendly laundry product launch that you're doing through CID. I mean just what does that – you're already optimistic about that opportunity. I mean what does it do in terms of the reception for that first launch in terms of what you think the opportunity might be going forward? Is it even larger or more significant than we thought?

Yes. It is larger. It's more significant than we thought. It made us – it humbled us a little bit because perhaps we were being too cautious in what we thought the initial rollout of this would be. And then once we saw what the interest was, we basically have delayed the rollout just a few months to give us time to gear up so that we have a successful rollout where we don't have disappointed customers.And – but, I mean, that's good news. A few months is not going to kill us. We've actually been working on this project since May of last year. So a few months beyond October, which was the initial rollout of this, isn't really going to make a very big difference. We expect really the impact of this to be very favorable for 2020. Even more so as time goes on every year it should grow. It's the right product. The reception we got out in the marketplace was fabulous.

Okay, great. And then the direct retail CID business, I mean, it sounds like you're – you like the direction of that in terms of product development, CID's ability to focus on product development since you're taking some of the operational load off of them. So how you see growth trending in that side of the business? Is that, again, more of kind of 2020 when we start to see the benefits of all those efforts of product development on the retail side?

I think the product development has been strong. But as they've gotten bigger and now aligned with Fashion Seal Healthcare, it's clear that the product development has to be even stronger, quicker to market, broader, more choices. And the founders of the business, who are wonderful people, had to focus a lot of their time on operational issues, on sales issues.Now the key people from Fashion Seal Healthcare and Superior Uniform Group have taken some of those responsibilities along with key people at CID who've been elevated to positions to be able to manage all of those. And the founders are spending nearly 100% of their time strategically and on product development. We should see fantastic results going forward.This year is pretty well set at this point. There's not a lot we can do to impact this year, and you'll see more of an impact in 2020 and beyond and even more so 2021. But we expect favorable impacts next year. We are making a difference in the marketplace. We are telling a better story today than CID was telling before we bought them in their last years and certainly a better one than we've been able to tell the customers in the last year.We've gained great momentum there. And I think from a culture standpoint and an esprit de corps of the organization itself, it's ready for their next level. And obviously, I think Andy spoke about their warehouse that just put in their WMS system. There are some things behind the curtain there that have to be fixed to make them a better organization, and they're working really hard to do that. And I have no doubt that six months from now, eight months from now, that's going to be a very different-looking organization that's going to be poised for whatever they want to do.

All right. Great. Just a couple of numbers questions here. You didn't call it out, but did ASC 606 have any sort of impact on revenue in the quarter that was meaningful? Or…

Yes. So for the quarter, it had a small impact. For the half of the year, it did have a continued negative impact between – for the six months that it – for the quarter there wasn't a significant impact, though, for the quarter.

Okay. And then the $2 million of cost benefits from the actions you took, that we should start to see that in the second half, I guess, of 2019 or in the fourth quarter?

Yes. Small amount. The $2 million is an annualized number. And as Andy mentioned, we're going to bleed those – the folks that were impacted by the reduction in force. They will be bled out over the course of the next six months. There will be a small impact, but nothing of any kind – not a full one-half-year impact related to that $2 million benefit.

About half of that’s been done already, so you'll see the impact of about half of that except for the severance that was paid out in the third quarter.

But the severance was already in the expenses in the second quarter.

So you'll see half of the benefit of that mostly in third quarter, fourth quarter.

Okay. And then just lastly, you have that $65 million term loan. I know you had the contractual principal payments every year. Is there any restriction for you paying that down faster if you wanted to? Or would you even want to if you could, if you had the excess cash flow? I mean what are your thoughts on reducing the debt balance?

Well, there's no restrictions on us for paying it down early. We have the ability to pay it down early based on the terms of the agreement. And to the extent that we can pay it down early, given other investments that we're planning to make during the course of this year, we can certainly make that a priority. We do, however, continue to – in advance of that, rather than pay that down early, we are continuing to make investments in CapEx and other investments that we're talking about with respect to getting ourselves positioned for growth.So I don't anticipate – although we have the ability to contractually, I don't anticipate us making any advanced payments on that debt to get it reduced during the course of this year simply as a function of the priorities that we're doing with respect to payments. So we do have – as I mentioned in the remarks, we do anticipate paying $10 million of CapEx this year, which will be in advance of what we're doing with respect to what we're doing from a debt pay-down standpoint.

Go back on Kevin's question.

So Kevin, let me make a comment with respect to the 606. So we did have a 606 impact this quarter of $3.5 million in total sales. So we did have uniform sales before 606 that were in excess of the impact with 606 of $3.5 million.

Okay. So that $3.5 million was all or primarily in uniforms?

Primarily.

And it was negative, okay. All right. That’s helpful. Okay. Well, thanks for the update as always. That’s all I had.

Okay.

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

Thank you. We appreciate all your time today. And of course, we look forward to updating you on our third quarter 2019 results in October. Have a great day.

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