Earnings Call Transcript
SUPERIOR GROUP OF COMPANIES, INC. (SGC)
Earnings Call Transcript - SGC Q1 2020
Operator, Operator
Good afternoon, everyone. Welcome to the Superior Group of Companies First Quarter 2020 Conference Call. With us today are Michael Benstock, the Company's Chief Executive Officer; and Andy Demott, its Chief Operating Officer, Chief Financial Officer and Treasurer. After the speakers’ opening remarks, there will be a Q&A session. This call is being recorded, and your participation implies that you agree with this. If you don't, then simply drop off the line. Now I will turn the conference call over to Ms. Hala Elsherbini, Vice President of Halliburton Investor Relations, who will read the Safe Harbor statement. Ms. Elsherbini, the floor is yours, ma'am.
Hala Elsherbini, Vice President of Investor Relations
Thank you. This conference call may contain forward-looking statements about Superior Group of Companies within the meaning of the Securities Act of 1933, the Securities Exchange Act of 1934, the Private Securities Litigation Reform Act of 1995 and all rules and regulations issued thereunder. Such statements are based upon management's current expectations, projections, estimates and assumptions. Words such as will, expect, believe, anticipate, think, outlook, hope and variations of such words and similar expressions identify such forward-looking statements, which includes statements on the impact of COVID-19 on the company's business, including inventory, supply chain, manufacturing capacity at the company's own and contract manufacturing facilities, service capacity and customer demand. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. Such risks and uncertainties include, but are not limited to the following: the effect of the COVID-19 crisis on the U.S. and global markets, our business, operations, customers, suppliers and employees; general economic conditions in the areas of the United States in which the company's customers are located; changes in the market where uniforms are worn, where promotional products are sold and where call center services are used; the impact of competition; the company's ability to successfully integrate operations following consummation of acquisitions and the availability of manufacturing materials as well as the risks and uncertainties disclosed in the company's periodic filings with the Securities and Exchange Commission, including the company's Annual Report on Form 10-K for the year ended December 31, 2019, the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and the 8-K filed recently. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein, and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to update the forward-looking statements contained herein to conform to actual results or changes in the company's expectations, whether as a result of new information for future events or otherwise, except as required by law. Please note that all growth comparisons that management makes today will relate to the corresponding period in 2019, unless otherwise noted. And with that, I will turn the call over to Michael.
Michael Benstock, CEO
Thank you, Hala, for the lengthy Safe Harbor statement. Good afternoon, everyone, and thank you for joining us to discuss Q1 2020 and our future business outlook. Before I provide an update on the quarter, I want to express our gratitude to all frontline workers for their courageous efforts and selfless dedication during these challenging times. Our thoughts are with those directly affected by COVID-19. I also want to recognize our SGC family for their passion and relentless dedication to the company and our customers. Today, I will outline our strategic response to the ongoing pandemic, highlight performance, and discuss the current macro environment, after which Andy will present operational and financial details. I will conclude with some thoughts on our outlook. As I mentioned in my April 2 communication with shareholders, our global operations performed exceptionally well under extreme pressure and uncertainty, while prioritizing the health and safety of our team members. Thanks to early insights from our team in China, we swiftly transitioned to a work-from-home model while maintaining exceptional service levels. Our IT support team proactively implemented business continuity measures to equip our teams effectively. As an essential business, we mobilized our global resources to meet the heightened demands of our customers. Clients are coming to us to support, protect, and enhance their brands, understanding that we provide more than just daily attire for their employees. We are a valuable brand partner. Furthermore, our distribution and manufacturing teams exhibited operational strength and adaptability during this evolving situation. Our executives have been relentless in their commitment to our company and our customers, while our Board has demonstrated strong governance and dedication to stakeholders. We maintained business continuity and showcased organization-wide resilience while also achieving increased sales and earnings. Reflecting on the investments we made over the past 18 months to enhance our leadership, optimize our structure, improve systems and processes, and boost innovation and automation, I can confidently say that those investments have been critical to our success today, mitigating risk and positioning us strongly during this historic time. Our redundant manufacturing and shared resources model has served us exceptionally well, enabling us to shift product movement and manufacturing during shutdowns effectively. Our logistics management also performed excellently during the crisis, thanks to our dedicated team members. Achieving sustainable profitability requires enhanced performance, risk mitigation, and balanced austerity measures. We faced many tough decisions but remained focused on our liquidity, engaging in regular discussions with our banking partners. We have taken proactive steps to strengthen our balance sheet, including targeted cuts to discretionary expenses and significant debt reduction during the quarter. Andy will provide more details on these initiatives and our overall cost-saving efforts, including workforce reductions. Now, let’s examine how our operating teams supported our customers. In our Uniform segment, Fashion Seal Healthcare and CID united to collaborate on major opportunities, resulting in new customer acquisitions, product rollouts, increased sales, and exceptional service for our core customers. Our products, such as isolation gowns, lab coats, and scrubs, are selling at an unprecedented rate. Last month, we achieved sales of products worn by caregivers that would typically take us four months to book, resulting in record sales across traditional and online retail channels. We have also assisted our retail partners at CID by creating strategies to alleviate their operational burdens. Additionally, our Uniform sales team is proactively reaching out to new prospects to provide urgently needed personal protective equipment. Thanks to the agility of our global sourcing teams at BAMKO and the Uniform Group, we quickly focused on sourcing essential products, including PPE for businesses preparing to reopen. We anticipate continuing high demand for our healthcare offerings through the second quarter, with potential sales slowdowns in the third quarter as normalcy resumes. We are also on track for our WonderWink scrub line launch in the third quarter, and initial market reception is favorable. Many competitors are struggling with lower inventory and supply chain issues, positioning us favorably for new opportunities. We have maintained price integrity throughout this crisis, emphasizing our commitment to being a trusted partner. In our employee ID business, our largest channels, HPI, dominate markets among big box retailers, grocery chains, and pharmacies. With increased purchasing power and employee counts, we’re supplying these essential businesses at unprecedented levels. Conversely, nonessential businesses, such as travel, dining, and entertainment, have seen a significant decline in orders. HPI has successfully expanded its product offerings to include PPE items, serving both existing and new customers. Overall, it’s still too early to fully understand how these changes will impact our results, depending on the pace of recovery for these businesses. BAMKO and the Uniform Group's global sourcing team have led our PPE procurement efforts, developing a website and marketing materials for PPE equipment and ensuring product quality at the highest levels. BAMKO is also collaborating with essential meal and grocery delivery services to produce safety kits for their staff. Although promotional product orders have nearly ceased, our ability to pivot and provide crucial supplies will help offset this temporary decline. Notably, in April, we delivered $13 million worth of masks to a major fast-food chain, which opens a path for further relationships within our other business segments. This and other smaller orders should contribute to a record second quarter. The promotional products sector is highly fragmented and competitive, with over 22,000 distributors. We expect many companies will not survive this crisis, allowing us to attract talented sales professionals with established customer relationships. We have a strong pipeline of sales talent but will be cautious with new hires until there is more certainty regarding sales opportunities, likely not until the end of the year. The long-term impact of the pandemic on BAMKO’s business is uncertain, as it is heavily event-driven, and the timing for the return to normalcy for large gatherings remains unknown. Moving to The Office Gurus segment, the transition to a work-from-home model was a significant challenge, especially after the unexpected shelter-in-place order in El Salvador. We successfully advocated for our employees to work from home, shipping computers to facilitate business continuity. Our El Salvador team has largely maintained operations, with 86% of our billable staff now active and improving daily. We're also conducting training for agents who are not currently engaged with clients needing our services. We anticipate returning to pre-virus operational levels by the end of Q2. The work-from-home model has yielded great results; our employees are engaged, which allows us to expand our business capacity without significant infrastructure investments in the near future. We do expect growth at TOG to be slower temporarily, but we estimate overall sales will still rise for the year. The global macro environment offers little visibility, but we will endure and recover from this pandemic, although the timing remains uncertain. The financial recovery could follow a V-shaped or U-shaped trajectory and vary by region. We will focus on what we can control, planning for various scenarios and relying on our experience and resilience to navigate the challenges ahead. I will now hand over the call to Andy, and I'll return for my closing remarks.
Andy Demott, CFO
Thank you, Michael, and good afternoon, everyone. I hope you and your families are safe and healthy. As noted earlier, we filed our Form 10-Q for the quarter this morning, so I'll begin with a quick review of business processes, investments and integrations summarizing our financial highlights for the quarter and reviewing in more detail the financial implications from the current COVID-19 crisis, as well as the actions we've taken to strengthen our financial position. Over the last two years, we executed several strategic initiatives that have transformed our operations with more efficiencies, innovation and processes that greatly enhanced our resiliency to manage through such unprecedented times. I cannot understate the superb responsiveness of our team serving our customers while at the same time, successfully executing SAP implementations at both CID and HPI with minimal disruptions. Our integration of HPI and the rest of our employee ID group is also complete, and our teams are operating synergistically across our organization. We are experiencing a pause in construction at our Eudora, Arkansas warehouse due to weather delays and manufacturing delays related to the coronavirus. This has afforded us two quarters of deferment on our capital expense plans and another opportunity to conserve cash. But we do intend to get back on track. We plan technology investments as this is a key part of our modernization upgrades to support our shared resources strategy. Now on to our financial highlights. We closed the first quarter with consolidated net sales, up 8.9% to $94.2 million. BAMKO led the sales increase, contributing 6.7%; with our Uniforms and Related Products business contributing 1.6%; and The Office Gurus, our Remote Staffing Solutions segment, contributing 0.6%. At the segment level, Uniform's quarterly net sales were up by 2.4% to $60.1 million. Of note, ASC 606 revenue recognition accounting standard had a minimal impact on the current quarter revenues, as expected. While we do not give quarterly guidance, we do have visibility into the next quarter. We are seeing increased demand for our health care products at both Fashion Seal Healthcare and CID to support uniform and other PPE essential needs, along with weaknesses in uniform purchases in some employee ID channels that are considered nonessential and that are impacted by closures. So there will be an offset to an extent as many of our customers in foodservice are asking us to stock up on PPE masks and gloves for their employees for their reopening. The Office Gurus reported positive results and grew sales by 6%. The division was tracking well with sustained customer demand prior to the disruptions from the pandemic. As Michael said, in compliance with the local government mandate, our El Salvador operations went into shutdown mode for a week and a half before being able to ramp up remotely. Outside revenues were negatively impacted by approximately $500,000 in the quarter as a result of this shutdown. Under this mandate, we were obligated to pay employees, even though they were not yet prepared to work, could not work from home, chose not to work from home, or because our customer no longer needed them to work. BAMKO delivered a strong first quarter with net sales, up significantly by 28.6% to $26.2 million. However, BAMKO has been the most impacted by the crisis. And as Michael mentioned, we are seeing significant declines in opportunities in traditional branded merchandise that would have been expected to have been converted to sales later in the year. The team has orchestrated a tremendous shift in operations to service PPE product orders and are filling significant orders in this area to help fill the revenue shortfall from traditional promotional business. For the first quarter, SGC consolidated gross margin improved to 35.5% compared to 35% a year ago. The slight uptick was generally due to customer and product mix. As a percent of net sales, consolidated SG&A expenses decreased to 29.2% compared with 29.9% in Q1 2019. The improvement is largely from sales growth leverage within all business segments. Changes in SG&A reflect severance costs and increased bad debt reserves recorded in Q1 2020. Let me provide some detail related to these expenses. In order to conserve cash and manage workforce costs, we reduced our workforce and implemented payroll reduction actions. We accrued nearly $400,000 in severance related to a reduction in workforce that will account for about $2.9 million in annual payroll reduction beginning at the start of Q2. Additionally, senior executives took a 20% salary reduction, and we applied a 10% payroll reduction for employees earning $52,000 or more. This amounts to approximately $2.4 million in annualized pay cuts. Reinstatement of full salaries will be reviewed as we navigate our way through the pandemic and its effect on our financial position. We also recently made the difficult decision to furlough additional warehouse workers in our Uniform segment. This equates to an additional annualized reduction in related payroll cost of approximately $0.8 million. We also amended our employer 401(k) matching contribution policy, which consists of two parts. As of April 1, we suspended our employee contributions. This reduced expenses by approximately $250,000 on an annualized basis. Separately, our annual discretionary contribution of 3%, which had been accrued during 2019 and which was scheduled to be paid in April of $1.2 million was eliminated and reversed. Additionally, we do not expect to make a discretionary contribution for 2020. And as a result, we did not make an accrual for this amount. On a comparative basis, in total, this resulted in approximately a $1.5 million reduction in expense in Q1 2020 in comparison to Q1 2019. This will result in a total reduction of expenses in full-year 2020 operating results of over $2 million in comparison to 2019. These initiatives are key to maintaining our financial strength as we navigate uncertain times ahead. Overall, reductions in payroll and workforce costs in excess of $8.5 million net of severance costs are expected to be realized over the next year. Lastly, we took a more conservative approach to accounts receivable, booking over $700,000 more bad debt expense in Q1 2020 as compared to Q1 2019, specifically related to nonessential channels in our employee ID uniform offering and in our Promotional Products segment. We believe this is a prudent approach given near-term uncertainty and our expectation that these businesses will have a slow ramp-up with potential difficulty in meeting payment obligations. Income from operations increased to $5.7 million, and operating margins greatly improved to 6.3% for the quarter compared to 5.1% in Q1 2019. Overall, we delivered strong net income of $3.4 million, a 41.7% increase compared to $2.4 million in the year-ago first quarter, and diluted earnings per share increased by 37.5% to $0.22 compared to $0.16 per diluted share in Q1 2019. Our effective tax rate for the quarter was 27.1% compared to 20.2% a year ago. The change in the rate was principally the result of the effect of foreign and state and local taxes between the comparable periods, as well as nondeductible losses on assets held related to deferred compensation programs. We also paid a regular quarterly dividend of $0.10 per share. Given the varying depth and duration of these unprecedented circumstances, our Board has elected to suspend our regular quarterly dividend until we have clearer visibility on improved macro conditions. As you know, we have consistently paid a quarterly dividend since 1977. And longer term, the Board continues to view a sustainable recurring dividend as an important component of SGC's value proposition. In accordance with the previously filed 10b5-1 plan, which will expire on its terms in early May, we repurchased 43,458 shares during the first quarter. We do not plan to execute further share buybacks given our austerity measures until we have more market clarity and financial conditions improve. Turning to the balance sheet. To further preserve our liquidity, we were early in our discussions with our banking partner and are pleased to have entered into a debt deferment agreement as of March 30, 2020. This allows us to defer principal and interest payments for a three-month period from April 1 to June 1, 2020, under our long-term debt obligations. We continue to be in close contact with our bank, exploring options to adjust the amortization schedule going forward. Additionally, we utilized operating cash flows, including the large deposits received under contract obligations for PPE orders to pay down $18.2 million of debt during the quarter. Traditionally, we take a long approach on inventory as well as aggressively manage working capital to yield the best overall results for our business. As we have previously discussed, CID was in an overstocked position that was expected to take an extended period to work down to more appropriate levels. However, the current crisis has greatly accelerated working through this to bring inventory to normalized levels in the second quarter. Moving through this large excess quantity of on-hand inventory will significantly reduce the need to offer deeper promotional pricing and potential write-downs in our operating results in the future while also providing critical goods to meet the needs of health care workers on the front line of this battle against COVID-19. Additionally, we plan to continue to utilize cash generation expected in the second quarter to further deleverage our balance sheet. For the quarter, working capital decreased to $129.7 million from $142.4 million compared to last year. Overall, our financial health is strong. We ended the first quarter with approximately $5.8 million in cash and cash equivalents. While we are moving forward with key capital investments, we are improving our debt structure and prudently planning to ensure we can withstand a variety of potential scenarios that may emerge over the coming months. As Michael stressed, our diversified business model is a true strength in times like these. Lastly, I would like to reiterate that through this extraordinary situation, one that can rapidly change and create unforeseen additional disruptions; our teams have stayed focused, flexible and determined to continue to service our customers and communities exceptionally well. I'll now turn the call back to Michael for his closing remarks and review our outlook for 2020.
Michael Benstock, CEO
Thanks, Andy. Overall, we are extremely impressed and proud of the level of planning and execution across our organization. From the beginning of this COVID-19 health care crisis, the decisions and actions taken by our teams have been guided by three principles: doing what's best for the health and well-being of our team members, supporting our customers as their needs evolve, and maintaining our organization's financial health. Our teams respond with innovation, resolve and meet the needs of our customers and communities. The global need for health care supplies and for courageous healthcare professionals is greater now than at any other time in our lives. Our company's philanthropic nature is an important part of our rich legacy. We are eager to support our health care workers and the communities in which we work and live now more than ever. We have allocated at retail value inventory in PPE worth approximately $5 million for donations in support of our frontline caregivers. We have designated donations to our communities in Arkansas, Florida, Texas, New York, El Salvador and Haiti. We are proud of our ability to contribute in the fight against COVID-19. And while we are tightening our belts in many ways, we're also supporting our global employees and their families by providing the appropriate PPE, paying employee insurance co-pays, and increasing hourly pay for our hourly distribution and manufacturing employees. As we watch crisis developments unfold and as local authorities phase in return to work guidelines, we will take a measured approach, lagging behind to reduce as much health risk to our employees as possible. We're also actively implementing strict health safety measures at all locations to protect our workforce before returning to work. In addition to providing PPE for each employee, protocols include thorough and frequent sanitizing procedures throughout the worksite, employee temperature checks and physical distancing to keep everyone safe and mitigate risk. We're being highly proactive in our internal responses, and formed the crisis management team tasked with overseeing contingency plans across all locations, including distribution and warehousing. So we are prepared, as needed, should the crisis extend for a prolonged period or there are times we must quickly adapt and ship back to evolving conditions. Even prior to the rise of COVID-19, we have been very intentional about our strategic planning, goal setting, and scenario analysis, as we set our cards for long-term growth. We routinely take into account disruptions and economic downturns and adjust our priorities as needed. Admittedly, no one could have been prepared for the challenges of this crisis, but we acted and reacted with speed and agility to weather the storm. And our near-term outlook takes into consideration that there is still a great deal of uncertainty ahead, and we will be negatively impacted in our Uniforms and Related Products business in the second half of 2020. Additionally, while we entered into increased sales of the products that I mentioned earlier, we do not yet have clear visibility on the timing of the market recovery. With BAMKO's shift in sales strategy, the team improved its growth cadence and achieved solid double-digit rates in 2019 and through the first quarter of 2020. We expect a record second quarter, but there are a number of variables that will negatively impact promotional sales in general the rest of the year and could offset next quarter's expected significant gains. As noted earlier, competitive disruption gives us access to new hires with a book of business. The question is whether they have the capability to drive enough sales to offset the gap as they and their customers ramp back up their marketing efforts. With TOG, in the short term, we expect lower growth rates than what the market is used to for 2020, but should be well on our way in Q3 and forward to accelerate at a faster pace. Of course, we are closely monitoring market drivers, and we will revisit our long-term outlook at year-end when we expect to have more clarity on the impacts of the pandemic. Our priorities are unwavering as we transformed our company into an even stronger brand partner resource for our customers, focused on leveraging our innovation and entrepreneurial drive, executing our growth strategies and thoughtfully deploying capital. Our strength is derived from the hard work and dedication of our global associates. That was true when we started the business 100 years ago this week, and it remains so today. We are guided by our heritage rooted in these values and in our ability to overcome adversity. And in fact, come out of each crisis we have experienced in our 100 years stronger than ever. We are incredibly proud of the resilience and ingenuity of our team and their ability to rise to the challenges we face, even in the most turbulent of times. As an organization, we remain focused on our long-term value creation and sustainability for all stakeholders. With that, we'd like to open the call for your questions.
Operator, Operator
Thank you. We will now begin the question-and-answer session. Our first question comes from Kevin Steinke of Barrington Research. Please go ahead.
Kevin Steinke, Analyst
I hope you're all well. So just thinking about the Uniform segment specifically here to start off with, it seems like at least for the second quarter, the businesses are going to balance themselves out pretty favorably, to where you might not see a dramatic fall off. You've got strength in the health care business, strength in sales to your essential customers, and then that's offset by some of the more economically sensitive areas. So I mean, is that a fair way to look at it, maybe some protection to the second quarter in the Uniform segment? And then, I mean, I guess that kind of buys you some time until we get closer to a recovery.
Michael Benstock, CEO
I think you found the midpoint of all the different stress testing and models that we've done, Kevin, that is how we see it. And I think you're pretty accurate in your assessment.
Kevin Steinke, Analyst
Okay. Do you think it's hard to tell, but with the WonderWink launch coming in the third quarter, do you see any continued lags in healthcare demand in Fashion Seal Healthcare and CID, excluding the laundry-friendly WonderWink launch?
Michael Benstock, CEO
Let's break this down. I believe Fashion Seal Healthcare will perform well in the institutional market in the future. It's difficult to predict specifically what the demand for reusable products will be once people return to work and elective surgeries resume. However, there was a comment made by Vice President Pence during a press briefing last week.
Andy Demott, CFO
Briefing.
Michael Benstock, CEO
Thank you. I want to acknowledge the reusable industry for their contributions and emphasize the importance of movement towards using more of these products in the future. As hospitals frequently change items like isolation gowns, scrubs, and patient apparel, we anticipate a higher turnover of clothing. This trend is favorable for our business. Additionally, most Fashion Seal Healthcare products are made nearby, which allows for quicker turnaround times compared to products sourced from Asia or Africa, which would take five to six months to arrive. We believe that Fashion Seal Healthcare has a solid opportunity to maintain its momentum in the upcoming quarters. Regarding the CID business, we are closing numerous deals across various channels but are concerned about the independent and particularly smaller retailers and their recovery from this situation. We are committed to supporting them, as they are significant to us. While they don't represent a large portion of our sales, many were our first customers at CID and have served as valuable brand ambassadors. However, I worry that some may not survive, which would mean losing them as customers. Nevertheless, there will still be demand for products at retail, with online channels performing well, including both their own websites and platforms like Amazon. I believe our health care sector will remain stable throughout the year. We've modeled various scenarios for every customer, including situations where business either starts and stops or gradually resumes, and our health care outlook appears positive. Stress points may arise in certain channels; for example, while we’ve seen excellent results from major customers in key verticals like pharmacy and grocery, where we have a strong presence, I'm concerned about sectors like movie theaters, which may struggle in the third quarter. The fast food industry remains uncertain; a quick return to normalcy could lead to better sales, but it largely depends on customer access preferences. By the third quarter, we expect to have a clearer picture, and with summer travel likely increasing, smaller hotel chains may also become busier. The situation for amusement parks is less predictable. The HPI business is currently harder to forecast, but they are diligently engaging with their existing customer base, including those without definite work restart dates, since companies know they will need PPE equipment for their employees upon returning to work. That includes masks and gloves, and we have been supplying a significant amount of these products.
Kevin Steinke, Analyst
Right, right. So the increase, the large increase in PPE sales, that's going to benefit BAMKO and at least they'll have a strong second quarter because of that. And then afterwards, unless we somehow get a quick snapback in large events, we should expect to see that fall off in the second half of the year, I guess?
Michael Benstock, CEO
I would expect some of it will fall off; some people are going to trail behind and then realize they got enough to get started, but not enough for replenishment. It's important to note, and maybe I should have put it in the script. But we've sold over $60 million of PPE equipment, which we're trying to give divisional credit for it. And you could spread it out between our Uniform divisions at BAMKO with the lion's share of it being at BAMKO. But our Uniform divisions have done quite well. And quite frankly, everybody's collaborating with everybody to make it happen because of the different sources of supply and the different relationships we have in the Uniform Group and in the Promotional Group.
Kevin Steinke, Analyst
Right. Okay. So in The Office Gurus, you mentioned you expect to be back to pre-virus operating levels by the end of the second quarter. What gives you kind of a line of sight to being able to return to those levels?
Michael Benstock, CEO
Good question. Our billable agent is working 86%. And the reason why we're not working more is because there are some customers we have who needed fewer seats than they had before because their businesses are down. There are some customers who didn't need seats at all; for instance, we have a travel customer who didn't need seats at all, a smaller travel customer. And there are some customers who need more seats, but the net effect of that is 14% of our workforce is not currently engaged at home. A small percentage of those are people who can't work from home. They don't have Internet; their conditions at home are too crowded for them to work from home in a call center type of environment, a quiet environment they need. But here's the good news. We've already run classes for a couple of customers, new customers and expanding customers for new at-home agents that they want going forward. So we believe that most people on this call have met Dominic Leide, the President of that business; he says, by the end of the second quarter, we'll be there. And so far, he hasn't been wrong in any of his predictions over the years. And quite frankly, it might even happen sooner. The line of sight of that is that we have a lot of customers who want us to put on more seats now, and we're doing so. And we have customers that are telling us who have either had to reduce or back off completely that as soon as this is over, they're coming back. So feeling very, very good about that.
Kevin Steinke, Analyst
Okay. Good. Just following up on PPE. What kind of margin do those sales generate? Should we consider it to be a normal margin similar to the Promotional Products, or will it have any impact in either direction?
Michael Benstock, CEO
I would say the larger deals tend to be at margins, maybe even a little bit less than the promotional business. But keep in mind that we don't have to handle any of these; a lot of these are full containers. A lot of these we took prepayments on, so we're not chasing money on them. So we can afford to take it at lower margins. So we've discussed this a lot of times; that we don't chase gross margins, we chase net margins. And we really have modeled all these deals out to make sure in the end that we're making the kind of money we deserve, while at the same time, making sure we're not overcharging anybody. And I would say that the margins will be slightly higher for BAMKO on these items than they have been in the past.
Kevin Steinke, Analyst
Okay. All right. Got it. I think you mentioned that the new opportunity pipeline is a strength or actually remains a strength; I guess your ability to continue sourcing effectively would be one point in your favor, at least. You mentioned others might be price gouging. But just maybe talk about the new opportunity pipeline you have now and that might come to you because of this crisis, I guess, across all of your businesses.
Michael Benstock, CEO
Yes, I'll give you a brief overview. We began strategic planning recently in each division, focusing on identifying opportunities and how competitors are falling short. We've seen that our Uniform business, HPI, has garnered strong loyalty from customers who appreciate our service during this crisis, even more so than before. Some of HPI's competitors have struggled to serve their essential clients, leading these clients to approach us for help. We prioritized taking care of our existing customer base, and we've unexpectedly expanded our reach by selling PPE. Many inquiries came to us directly, as customers sought alternatives when their current suppliers could not provide PPE. There's a sense of gratitude from customers for our assistance. Looking at the airline sector, we do have minor involvement with JetBlue, Frontier, and Spirit Air, but our market share there is negligible. Thankfully, areas where our market share is low, such as hotels, fine dining, and cruise lines, won't significantly affect us. We anticipate continued strengthening in our markets, particularly as essential businesses flourish and consumers rely more on them. On the health care side, I am optimistic; there's a chance that our health care business could actually increase this year, and we plan to order more products to meet the anticipated demand from hospitals. Regarding BAMKO, their business relies heavily on events, which are currently scarce. We don't expect a surge in events right away, possibly not until early next year or after a vaccine is available. However, BAMKO is resourceful and has identified other products to offer. Once this situation resolves, there will still be marketing dollars available, especially from essential businesses currently operating at heightened levels. BAMKO serves some of the country’s largest food and grocery delivery services, and their business with us remains strong. While BAMKO's performance will likely fall short of our budget, it may approximate last year's sales, but it's too soon to make definitive predictions.
Kevin Steinke, Analyst
Okay. All right. Got it. So you mentioned some delays in the Eudora facility filled out. What does that do for your capital expenditure plans for the year, not only that, but maybe just trimming back or delaying in other areas as well?
Andy Demott, CFO
The delay in the project will likely push back our timeline by one to one and a half quarters, possibly up to two quarters, which should lower our capital expenditures this year by approximately $1.5 million to $2 million. We're also critically reviewing all our capital spending and postponing items that do not have a quick payback. I now anticipate that instead of the originally planned budget of about $12 million to $13 million for capital expenditures, we will likely spend around $8 million to $9 million.
Kevin Steinke, Analyst
You had strong operating cash flow in the first quarter, allowing you to reduce some debt. You've previously mentioned that if sales decline in this environment, it may not impact the second quarter immediately due to certain factors you discussed. However, if sales do fall later in the year, you mentioned that the balance sheet could start converting to cash, leading to increased cash flow temporarily. In that case, would there be an opportunity to pay down more debt?
Andy Demott, CFO
Yes, I see that opportunity, Kevin. Our balance sheet tends to convert back to cash during economic downturns. The significant sales at CID related to excess inventory in April will generate cash from operations, as we will not replace that inventory. However, we added an additional $700,000 in bad debt reserves, which means some nonessential businesses that aren't currently operating may delay payments for their receivables, potentially impacting cash flows. Right now, estimating the extent of that impact is challenging. For the bulk of our business involving PPE, we have required substantial prepayments, which helps us avoid tying up too much liquidity to service that part. As the year progresses, I expect we will continue to pay down debt. In the third and fourth quarters, as business may slow down further, there is a possibility we could borrow a bit more towards the end of the year, but overall, I believe we're in a strong position.
Kevin Steinke, Analyst
Okay. Got it. And then, Andy, I think all the various cost-saving measures you outlined totaled about $8 million annually. Is that correct?
Andy Demott, CFO
It was $8.5 million.
Kevin Steinke, Analyst
$8.5 million. Are there other things you can consider if you had to cut further? Hopefully, it doesn't come to that, but in your view?
Andy Demott, CFO
Yes, there are other things that we talked about generally that were discretionary spending. Obviously, our travel expenses are down significantly. Our marketing expenses in certain parts of our business will be down significantly. There are other things that will generate cost reductions in addition to what we listed out specifically in that area.
Kevin Steinke, Analyst
Okay. I think lastly, you mentioned upfront, Michael, how the investments of the last 18 months have been critical to what you're doing today, what you've kind of been able to accomplish or how you're able to manage through this situation. Can you just maybe touch on some of the benefits of those investments, not only in the near term, but longer-term as you see it?
Michael Benstock, CEO
I’ll begin by discussing the leadership changes we implemented by merging HPI and Superior I.D. into a single SAP computer system with one leadership team overseeing both sales and executive functions. This consolidation has allowed us to achieve significant economies and operational efficiencies. Moving forward as a unified entity rather than two separate ones after many years is a welcome change, and we are already seeing the positive impact through the opportunities they have been pursuing and their subsequent successes. Similar efforts were made when we combined Fashion Seal Healthcare and CID, which led to remarkable collaboration across all levels including sales, marketing, operations, and sourcing. It has been inspiring to witness this dynamic group of individuals collaborating and becoming stronger than ever. Additionally, don’t forget that we went live with SAP in February.
Andy Demott, CFO
February.
Michael Benstock, CEO
Thank you. I'm pleased we accomplished this before now. At the outset, while things slowed, many people were already working from home and had extra time for training. We have a highly dedicated workforce. The changes we've implemented in our sourcing teams, particularly the collaboration between the BAMKO sourcing group and our Uniform sourcing group, have yielded significant benefits. We've closed our Costa Rica operations, which handled web development, and transitioned that work to India, a process that took most of last year. The resources we've acquired have helped us onboard people on BAMKOM, our e-commerce solution. We're close to having all our customers set up on that, with just a few remaining. This has been achieved at a lower cost and with a higher level of excellence than before. These are just a few highlights; there are many more I can't mention. Andy, would you like to add anything?
Andy Demott, CFO
I believe the new warehouse project in Eudora will significantly enhance our efficiency and capacity to manage the volume for the Uniform business. Additionally, we have integrated many of the distribution capabilities within the uniform sector to better support BAMKO in some of the markets that Michael mentioned earlier, particularly with home delivery companies and other related areas where we now handle and service their inventory, something they were unable to do in the past. All of these efforts are yielding substantial benefits.
Kevin Steinke, Analyst
Okay. Great. And just lastly, I'll say thanks for putting out that shareholder letter in early April. I thought that was very useful and very thorough in kind of framing what you're seeing in the market and relative to your business in these extraordinary times. So thank you and thanks for taking all the questions.
Michael Benstock, CEO
Thank you, Kevin, and be safe.
Kevin Steinke, Analyst
You too.
Operator, Operator
The next question we have will come from Mike Disler.
Unidentified Analyst, Analyst
I hope everyone is doing well. As a long-term and multigenerational shareholder, I want to acknowledge the company's dedication and adaptability during these challenging times. You all have communicated clearly, and I appreciate that, even though Mr. Steinke addressed most of my inquiries. I'm proud to be a shareholder, as are many of my peers. My only question is regarding capital allocation going forward, particularly since the decision to reduce dividends from $0.10 to $0.00 raises concerns about future access to capital. My question isn't about the board's decision to waive the dividend; I'm curious if this was related to debt covenants or simply a choice made by the board to suspend the dividend rather than lowering it to $0.01 per share. I'm focused on your ability to access capital markets in the next three to five years.
Michael Benstock, CEO
I believe that given the current level of uncertainty in our markets, we decided it was best to suspend the dividend for now. However, we want to emphasize that both the company and the Board understand the importance of the dividend as part of our capital allocation and value proposition for shareholders. I expect that in the long run, we will resume paying a healthy dividend. Currently, there are no specific covenant issues; we are in compliance with all our covenants. The bank considers various factors when assessing our situation, and their decision to grant us a three-month deferral on principal was influenced by the measures we are taking, such as suspending the dividend, management pay cuts, and reductions in the fees of the Board of Directors. This approach has reassured them, placing us on solid footing should we need to address anything further with the bank. Given the uncertainty, we believe it's prudent to take this route. We will reassess our position after this quarter, hoping for a quicker recovery in the economy and avoiding a deep recession, though we cannot predict the future at this point.
Unidentified Analyst, Analyst
I have no personal objections to your decision; I'm only considering what would benefit the company in the next five to ten years. I just want to ensure that you all have taken into account the perspective of those in the New York area. I understand that every decision has its implications, and while it's a small amount over time, it's more significant when it comes to employee salaries or co-pays. I appreciate everything you’ve done and don’t want to come off as critical. I just wanted to ensure all aspects were thoroughly reviewed. Thank you for your hard work in protecting your employees and customers. Please continue the great work, and we truly appreciate it.
Michael Benstock, CEO
Mike, thank you very much. I don't think we have any more questions at this point. Do we?
Operator, Operator
No, no, sir. I was going to go ahead and conclude, sir. I hand it over to you, Mr. Benstock.
Michael Benstock, CEO
Great. I stand here, it's 100 years in, I've been doing this for 41, my father, God bless him, he's still in good enough health to worry about the company every single day. His 90th birthday is actually on our 100th-year anniversary on May 7. We're scaling way back in our celebrations, obviously. We don't want to spend the money and we don't want to do large gatherings. So nonetheless, I think it's quite an achievement for a company to have achieved what we have over the years. We're very proud of our heritage. We're very proud of our shareholder base and our customers, of course, our employees. This is the most extraordinary group of employees, and I have to tell you that I knew how extraordinary they were before, but I never really understood how much they had to give as much as they've given during this crisis, and my hat goes off to all of them. I thank all of you for your trust and your support in the company. We look forward to updating you on the second quarter 2020 results in July. Please stay healthy.
Operator, Operator
And we thank you, sir, and to the rest of the management team for your time also today. The conference call has now concluded. At this time, you may disconnect your lines. Thank you, again, everyone. Take care, and have a great day.