Hala Elsherbini - SVP of Halliburton IR Michael Benstock - CEO Andy Demott - COO and CFO

Kevin Steinke - Barrington Research

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 2016, 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 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 2016 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 2017 earnings call.

As usual, I’ll review highlights of our Q2 results and provide thoughts on the market trends underlying our operating environment. Andy will then provide more detail on our financial performance, then I’ll wrap up with some closing remarks and we’ll be happy to take your questions.

While our second quarter results were mixed, overall the company achieved solid performance, particularly from a bottom line standpoint. Consolidated net sales grew slightly with an increase of 1.5% compared to the second quarter last year.

The increase continued our string of quarterly year-over-year sales increases. However, customer purchasing continued to be somewhat stalled with decisions being pushed back awaiting more clarity in the political arena, The good news is that we are seeing an increased level of activity and more opportunities moving to our pipeline albeit at a slower pace.

Even though our sales were only slightly ahead of the prior year, we generated much stronger earnings for the quarter. Net income increased 31.2% over the same quarter a year ago.

The notable earnings growth relative to the sales increase can be attributed to several factors that lead to improvements in gross margin, which in turn led to a very strong operating margin. Andy will provide additional detail in the financial review, but I will point out that our efforts to streamline and integrate our operations and capitalize on our expanded scale continues to enhance our bottom line, more about that in a minute.

From a segment perspective, performance varied, so let’s take a look at some of the dynamics that took place. In our uniform segment, sales increased 1.7% for the second quarter.

This came in spite of the continuing general slowdown of the decision making process by our customers. Of note, net sales were not significantly impacted by the loss of the large legacy employee ID customer that we spoke about last quarter.

They did in fact take the last of their inventory withdrawal in the second quarter as we anticipated. We believe that our ongoing relationship with this customer will be at a much lower scale, but we're happy that we're still working with them on a portion of their business.

The fact that our uniform segment produced sales growth despite the ongoing political uncertainty and within a highly competitive environment demonstrates our ability to continue to track new customers by delivering a high level of quality products and services. Our health care channel continuous to perform well, Fashion Seal Healthcare carried solid brand equity and continues to innovate.

We unveiled a new patient apparel catalog at the 2017 biannual Clean Show in Las Vegas last month highlighted by the introduction of a new pediatric line called Mobies. Additionally, we're concentrating efforts on expanding our healthcare market share, analyzing the most profitable opportunities.

And of note, we are seeing particularly good penetration in the medical college market. As I mentioned, we're seeing the benefits of our accelerated integration of our employee ID business through Superior I.D.

an HPI Direct as one customer facing entity. We're taking advantage of our operational administrative shared services group to achieve this integration and we're realizing efficiencies and capitalizing on the scale of our combined businesses.

There is still a great deal of opportunity to achieve added efficiencies in our employee ID channel. We're also seeing momentum from cross-selling opportunities between HPI Direct and BAMKO, with efforts on both sides generating solid introductions and business being written.

Speaking of BAMKO, let’s take a look at their segment performance. Promotional product net sales decreased 10%.

As we have noted in the past, BAMKO’s sales model is different than our uniform business. As you may recall, BAMKO completed two exceptionally large orders last year, one thing for the Olympics in Brazil and another for the Pope's World Youth Day.

These events only happen every few years. Overall, orders of this magnitude maybe sporadic and will impact the smaller base of revenues to a greater degree.

Once our sales run rate grows, we should see less fluctuation from quarter to quarter. We are very confident in the BAMKO team and we expect sales performance to return to strong double-digit growth in the third quarter.

Our strategy of acquiring a company of BAMKO’s market recognition and expertise provides tremendous future opportunities. Their ability to support most of their back-office functions from their China and India offices is very scalable and supports our very aggressive efforts to close one or two acquisitions per year to further grow our promotional products business.

Moving to The Office Gurus, our remote stepping segment delivered an excellent quarter. Net sales returned to double-digit growth and increased 28.8% year-over-year through solid market penetration.

We're working very strategically to expand our footprint in our very under-served market niche. Of note, the Office Gurus took home the runner up award for best outsourcer of the year at Call Center Week in Las Vegas last month.

We're told that is unheard of for call center business our size to achieve this level of accolades from its peers. We have caught our team's accomplishments in this growing and young business.

A quick update on our Haiti facility, the factory continues to ramp up and is headed right toward our goal of nearly 300 operators by the end of the year. Besides scrub apparel, we're producing other healthcare garments further optimizing our competitive position on bids for larger opportunities.

We’re pleased with our progress, which continues to meet or exceed all of our quality production targets. With respect to uniform oriented acquisition opportunities, our efforts are diligent and thoughtful as we work to find the right fit at the right time as we've discussed previously.

On a macro level, current employee turnover rates, well they have not reached the intense levels we saw pre-recession are still increasing at a steady rate. Competitive pricing is still mostly rational, but the market is impacted by the lack of progress in Washington.

Putting all that aside, our go to market strategies continue to distinguish us from our competition and will further optimize our value proposition as markets strengthen. Now I’ll turn the call over to Andy to give you more detail on the second quarter financial performance.

Thank you Michael, and good afternoon everyone. We filed our Form 10-Q for the second quarter ended June 30, 2017 this morning, so I’ll limit my review to key income statement highlights.

As Michael noted second quarter 2017 net sales increased 1.5% to $65.6 million. Sales growth softened during the quarter but as Michael motioned we're seeing a significantly larger opportunity pipeline than last year.

For segment contribution, uniforms related products contributed 1.4% of the sales increase and remote staffing solutions added 1.6% with overall gains partially offset by a decline of 1.5% contributed by our promotional products. On a year-over-year basis, net sales increased 1.7% in uniforms and related products.

We achieved sales growth through continued market penetration and positive employee turnover. In remote staffing solutions quarterly sales to outside customers grew 28.8% from a year ago, as growth accelerated through a combination of adding new customers and further penetrating our existing customer base.

Our promotional product segment experienced a net sales decline of 10%. As Michael mentioned, the nature of this business line and the variation and the size of client projects can cause variability in it sales from quarter to quarter.

However, the BAMKO business model is extremely scalable and we expect solid double-digit growth in the third quarter. Our consolidated gross margins increased to 35.6% compared to 33.7% in the year-ago period.

As we've indicated in the past, our gross margins can fluctuate based upon customer mix. And while we believe looking at operating margins offers a better measure of our overall profitability, we saw greatly improved gross margins due to the benefit of increasing scale and spreading cost over a larger production base.

SG&A expenses increased 3.1% in the latest quarter to $17.5 million. As a percentage of net sales, SG&A was relatively flat at 26.6% compared to 26.2% in the 2016 quarter.

Income from operations increased to $5.9 million with an operating margin of 9%$ versus 7.4% in Q2 of 2016. Our effective tax rate for the quarter was 23.9% versus 28.3% last year.

The 4.4% decrease came from an increase in the excess benefit related to share-based compensation, a decrease in the state tax rate and an increase in the benefit related to federal tax credits. We are very pleased with our bottom line results as second quarter net income rose 31.2% to $4.3 million or $0.29 per diluted share compared to net income of $3.3 million or $0.22 per diluted share last year.

Let’s shift for a quick review of our six month results, net sales increased 3.2% to $126.6 million with our March 1 2016 acquisition of BAMKO driving higher sales for the first half of this year. This included two additional months of sales from BAMKO.

Promotional product’s net sales increased 30.4%, uniforms and related products declined by 1.4% over the prior year, due primarily to the lost employee ID legacy customer we discussed earlier. The net reduction in sales for the first half of 2017 from this customer including the sale of their remaining inventory commitment was approximately $1.4 million.

Remote staffing solutions revenues to outside customers expanded by 8%. As a percentage of sales, SG&A expenses for the first half increased to 27.7% compared to 27.3% in the first half of 2016.

Of note, included promotional product segment SG&A expenses for the first half of 2016 was approximately $1.1 million of acquisition-related expenses. As we previously noted, we completed the sale of our previous call center location in San Salvador in the first quarter.

This sale has generated net proceeds of approximately $2.8 million and resulted in a pretax gain of approximately of $1 million. Operating income increased 37.3% to $11.5 million and operating margin for our first six months was very strong at 8.3% compared to 6.8% in 2016 period.

Now for a couple of balance sheet items, our financial condition remains very healthy and we continue to be supported by free cash flow and a solid balance sheet. As a result, our cash position essentially doubled to $7.6 million.

We continue to return value to our shareholders in the form of a quarterly dividend and during the first six months, we paid cash dividends of $2.5 million, an increase of 9.7%. We are well fortified with our capital structure as we continue to execute against our growth plan.

I’ll now turn the call back to Michael for his closing remarks and a general outlook for the year.

Thanks Andy. In summary, during the second quarter, our teams performed well and continued to execute our strategic plan.

Although total revenue was less than stellar, we took every opportunity to move our business profitably forward by focusing on lean practices, cost controls, operating efficiencies and margin improvement to significantly improve earnings and strengthen the company's balancing sheet, so I’m not sure changing our long-term objectives. We’re taking advantage of the scale that we've built through the combination of capabilities of HPI Direct, the Office Gurus, BAMKO and our strong global sourcing team.

That scale is dropping to the bottom line and positions us well for future profitability when we return to more robust sales growth. We're also taking a very aggressive and thoughtful approach to our M&A strategy.

Our pipeline is strong and our outlook remains very positive. As you know, we take a long-term perspective on our business and our long-term guidance remains unchanged.

During the next three to five years, we project organic sales from our uniform business to increase at an average of at least 6% per year. The Office Gurus should add $3 million to $3.5 million per year and BAMKO which leads our promotional products segment should generate annual average growth of more than 15%, this would result in companywide sales growth averaging more than 8% per year without considering acquisitions and their impact.

The foundation of our near-term and long term growth strategies is the dedication and drive of our associates to enhance our customer experience, our operational excellence, our products, our competitive position and our shareholders value. We thank them for their continued commitment and hard work.

With that we'd like to open the call for your questions.

So you talked about obviously the continuation of some slower decision making in the marketplace, although at the same time, you highlighted increasing sales activity with a larger volume of opportunities in the pipeline. So could you touch on what’s driving that larger volume of opportunities?

It is just your own sales efforts or is it something specific to the market you're seeing? Any color on what's driving that pickup in new business opportunities.

It's almost a delayed process here where opportunities that -- typically, our sales cycle might run a year or two years and some of these have been in the hopper for a long time and new ones keep coming in, but they're not coming to closure as quickly as they were. So we’re finding them open.

People are telling us why not. They're waiting to see what kind of decisions, particularly if you look at, if you take an example on healthcare, nobody knows what's going to happen with healthcare, nobody knows what's going to happen with healthcare reimbursements.

Likely, it might stay the same as it is and nothing will happen, but you've seen a big slowdown of the consolidations that were happening with healthcare systems, which had those happened would have resulted in more branding opportunities for everybody in our industry, not just us. And that seems to be what's going on everywhere.

Everybody is saying, we don't know what's going to happen with taxes, we don't know what’s going to happen with cash, we don't know what's going to happen with, I think the border adjustment tax people gotten over this one. I think everybody pretty much has concluded that’s not going to happen.

There may be some adjustments to NAFTA and some little things of the like, but it’s not going to be anything major that's going to impact people like us. But there is a certainty that some of our customers’ business are going to be effective.

We're seeing on the retail side of our business, retail food service and the employee of our business, things are slow. People are -- everybody is competing for the same type dollars that are out there.

This isn't exactly a robust economy. I like what I'm seeing from a hiring standpoint of employees.

I wish turnover were even higher. It will happen.

It always does, but it's going to take a little bit more time, but I think overall, things are pretty healthy out there. I'm not worried when I see the pipeline as large as it is for the long-term, because I know, sooner or later, they have to squeeze out the back end.

It’s just a big bubble moving through, but it is going to take a little bit more time and we're being very watchful of it.

Okay. And you talked about -- you touched on there a little bit, this concept of pent-up demand and you mentioned that last quarter as well.

As you speak to potential customers or your current customers, is there any sense -- obviously they see risk on the legislative front, but at the same time how do they weigh that with the risk of say holding off on a new branding decision or a rebranding because I would think from their perspective, there's also risk in not moving forward with initiatives that could potentially impact their market share, their sales.

It's hard for us to know. We don't sit in the C-Suite of our customers for the most part.

We're dealing with marketing folks and HR and supply chain people who try to relate to us why there seems to be no action happening at their companies. I can't really answer that intelligently.

We try to get a handle on it and I think every situation is still a little bit different. We’re also seeing, as things are moving through the pipeline, we’ve got the attention of decision makers.

They get ready to finally take some action and then we're seeing turnover in some of those key positions where people are leaving and again, it stalls once more. And yeah, that's interesting.

I mean you know some -- the new person coming in is going to pick up the ball, but it does take time for them to get up to speed to do that and we’ve seen a fair amount of that as well and we see that every day. So as turnover starts to increase, it's not like going back four or five years ago when nobody was leaving their jobs.

Everybody was -- there was so much uncertainty, nobody was leaving their job. Now, people are leaving their jobs.

Unemployment numbers are down there and you’re finding middle management in particular, who the people are expected to execute on a new uniform program are leaving their jobs. And so -- but we’re not alone in that.

It's not like we're losing that opportunity of the competition. These things are just going to take a longer amount of time.

I'm very confident after seeing the opportunities in our pipeline. I know what our win ratios are and nothing should change with respect to that.

In fact, I think our strategies will help improve that and when they do, I'm very confident that we’ll be aligned with our long-term guidance.

Okay. And you seem to talk about their healthcare legislation in particular impacting decision making by hospitals and healthcare providers.

But at the same time, you noted good penetration in the Medical College markets. What would you attribute that to just your sales efforts or is your offering particularly well suited towards that type of client?

Well, it's interesting because in that particular market, we saw some weakness in that marketplace from a supplier standpoint and about a year and a half ago, we started working and concentrating on putting together strategies that would win us more business and one of the competitors in that marketplace actually went out of business and we were -- our timing was exceptional. We'd already been in contact with many of their customers and we are considered now a key supplier in that area with opportunities that should be quite strong going forward.

Okay. Great.

And, you obviously talked about the large customer that’s wound down this year also talked about retaining a little bit of business. Can you just give us a sense directionally, I think you said about 10 million in revenue last year.

I don't know if you want to put a number on it, but or a percentage in terms of how much you retained of that on annual basis?

Yeah. I think Kevin, we're still working our way through it, but I’d say, it would be a fraction -- probably less than a third of the volume and that’s quite about as precise as I would want to be.

What I would tell you is that in the second half of 2016, we did $4.1 million with that customer last year and again when you look at the third and fourth quarters, that will impact us, I mean, I guestimate like I said, it probably will continue to do about a third of that business, it may take a little while to ramp up with what the new program is. But that's your exposure in to the second half of the year.

Okay. So you talked a little bit about gross margin.

Obviously that can fluctuate from quarter-to-quarter based on the type of program and the intensity of service levels, but you also mentioned some improvement just to, due to scale and leveraging your production and cost base. So since you called it out, can you give us a sense of how much opportunity there is just to get more leverage at the gross margin line?

Yeah. I think the first thing I'd point out is I mean we have over the last several years, with the -- after the acquisition of HPI and then with BAMKO, we have expanded our sourcing capabilities around the world to make sure that we're getting the best prices from the best places in the world and we are seeing that come through in the margin now, bulk of this quarter, I mean usually whenever we refer to it, you’ll say the gross margin is going up, but SG&A went up a comparable amount, we're doing it because of what’s happened due to mix.

We really didn't see even much of that this quarter. We're just really starting to see the full impact of what we've done in the past.

So I think my expectation would be you’d continue to see the improvement that we saw this quarter as we go forward. I'm not sure beyond that, I mean I think that’s about as much guidance I can give you on it.

We are reaping the benefits of a lot of hard work.

Just, you mentioned good cross selling between HPI and BAMKO, maybe expand on that a little bit more in terms of being able to cross selling to your uniform customers would maybe seem to be the larger opportunity, but I don't know if I'm thinking about that the right way, but it may be any more additional color on the cross selling efforts?

I think that’s accurate. All of our uniform customers use promotional products, but not all BAMKO’s promotional product customers use Uniform’s.

So they have certainly brought us into a fair amount of opportunities, but HPI Direct and Superior ID have brought them into many more and on both sides, that has resulted in actual business being written, some of which has been delivered and most of which has not been delivered yet. That will happen before the end of the year, but the activity has definitely ramped up, hardly a week goes by without some activity or dual presentations to a customer or both decision capabilities and introductions are being made all the time and again it’s not like, we get introduced, because we're doing the uniforms, we get introduced, it doesn't mean that they're necessarily going to move business to us, although some have.

Some of that business is pretty sticky too, not as much, not as sticky as the uniform business. I think we really set ourselves apart on the promotional side in the amount of customization we can do for our clients where they used to promotional product companies coming in that all pretty much do the same thing.

We are the outlier, we're the people who come in and do something very different for them and help them with their branding initiatives and I think they view us more as a marketing partner, group people trying to help enhance their brand through their promotional products and not just somebody trying to sell them a cup or a mug or something that one 100 other people can sell them. And that message will resonate more and more and more, the more we talk to people and sometimes we’re just not ready to purchase, but we’ve still done presentations.

But we're happy with the level of success we've had so far.

And then just lastly I’ll ask about, you mentioned the M&A pipeline being strong. I don't know if there's anything more you can add to it than that, but it sounds like you're pleased with the efforts.

Obviously, it's hard to predict timing on when things close, but overall, you're optimistic about what's going on in that initiative.

Yes, very much though. Not always hard to predict, but it's sometimes hard to share.

So stay tuned. We're working very hard at it and we're talking to a lot of folks, you have to kiss a lot of frogs along the way.

But we've also seen some great companies where owners are not ready to sell and we've seen some great companies where owners are ready to sell and we’re continuing to have discussions with them and I can say this is probably the most robust activity we’ve ever had at the company in the M&A front, in terms of the number of people we're talking to and the number of people who are considering us as a partner. So, it bodes well for the future.

I have very little concern around the guidance we've given with respect to our acquisition with BAMKO.

Okay. That's great to hear.

Thanks for taking, yeah, go ahead.

Yeah. Let me just comment on the uniform side.

Uniform side is, we're talking to people, we're trying to step up our activity. Everybody seems to be pretty happy in the uniform business these days.

They don’t want to sell their businesses, maybe their children are working harder in the business than before, maybe they've gotten confidence in the people around them and the future. And that's why, there will come a day they know who we are, where they will turn to us for help and to create some kind of partnership and we'll be ready for them.

We continue to keep that door open all the time.

Thank you all for joining us today. We look forward to reporting equally great results in the third quarter in October.

And we will continue to make progress and try to keep you posted along the way as we can. Thank you.