Superior Uniform Group (SGC) Q3 2019 Earnings Call Transcript

Superior Uniform Group (SGC -1.66%)
Q3 2019 Earnings Call
Oct 23, 2019, 2:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone. Welcome to the Superior Group of Companies 2019 third-quarter earnings conference call. With us today are Michael Benstock, the company's chief executive officer; Andy Demott, its chief operating officer; and Mike Attinella, 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 to this. If you do not, then simply drop off the line. Now I will turn the call over to Hala Elsherbini, senior vice president of Haliburtons investor relations, who will read the safe harbor statement. Please go ahead.

Hala Elsherbini -- Senior Vice President of Haliburtons Investor Relations

Thank you. This conference call may contain forward-looking statements about Superior Group of Companies' business opportunities and its anticipated results of operations. Please bear in mind that forward-looking information is subject to risks and uncertainties, and actual results may differ from what you hear today. Many of these risks and uncertainties are described in Superior Group 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.

Michael Benstock -- Chief Executive Officer

Thank you, Hala, and good afternoon, everyone. Thank you for joining us to review our Q3 fiscal 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, followed by Mike's financial review.

While we're not satisfied with the third-quarter net sales decline, breaking our streak of 27 consecutive quarters of growth, we made significant progress against our strategic investment initiatives to align our infrastructure, support long-term enterprise growth and drive sustainable business value creation. We are encouraged by our expanding opportunity pipeline and the strategic engagements we're continuing to develop with both existing and new customers. We are staying ahead of potential market disruptions through proactive measures as we aggressively transform our business into a brand-building solutions leader. Overall, third-quarter sales results were mixed with promotional products in The Office Gurus, delivering solid results, while the uniform segments lagged.

BAMKO, our Promotional Products segment, delivered another record quarter of sales growth, up 37.9%. The Office Gurus, our remote staffing segment, maintained solid momentum with a 17.3% uptick in sales. Our uniform segment was down between comparable periods, largely the result of our working capital management to reduce merchandise levels, resulting in fewer receipts and lower sales under current revenue recognition rules. We also experienced an isolated disruption event caused by the WMS implementation at CID and the impact from Q3 2018 program rollouts that did not reoccur in the current period.

Andy and Mike will outline these items further during their remarks. Our teams are very active in executing our strategy to optimize our portfolio across our complementary business segments. Let's review segment performance progress as it relates to those integrations, our broadening capabilities and our technology investments. SAP integrations in our uniform segment are well under way with expected completion by the end of the first-quarter 2020.

Also, during the quarter, we announced the final consolidation of Superior I.D. and HPI, bringing both businesses greater depth of service under the leadership of seasoned executives, who have proven experience in elevating innovation, sales and creating additional operating efficiencies that strengthen our competitive position. Management is very focused on securing wins in the mid-tier segment of the market, as we have said on prior calls, with some successes already taking place. We are midway through our two-year sales cycle, following the sales strategy shift, and expect to capture market share as we work through a robust pipeline.

For Fashion Seal Healthcare and CID, our leadership changes, consolidation and organizational realignment continues to move forward. We believe we made the appropriate changes in the organization to leverage operational improvements, leaving CID's founders focused primarily on product design, development and delivery of more fashion-oriented and forward healthcare uniforms to the marketplace. Looking closer at promotional products, we are pleased with their continued momentum and record sales achievement as they drive stronger order flow and build a solid backlog. The expanded sales team is highly engaged, and we'll continue to expand the talent over the next year to capture market share and ultimately leverage BAMKO's capabilities for customized product offerings.

We see great opportunity for margin improvement as this division continues to scale higher. Shifting to The Office Gurus, their solid results were underscored by strong customer acquisition, and we expect a strong finish to the year. The Jamaica facility's a much needed in addition to our call center business, as El Salvador has reached capacity quicker than anticipated and Belize continues to grow at an increased rate. In this segment, we are working to stay ahead of expected growth.

Our macro environment continues to be driven by disruption in the retail space due to minimum wage expansion, automation, uncertainty around tariffs, cost pressures, geopolitical tensions and the variability of consumer and customer behavior. A long-term view is intrinsic to our company's culture, and this approach has served us well, especially in our current dynamic and very competitive market environment. We have always taken a proactive posture in anticipation of potential market disruptions, making the necessary changes in investments to mitigate our business risk, such as our early efforts to reduce our exposure to Chinese tariffs. Overall, we believe our strategic initiatives will improve efficiency and create long-term opportunities for sustained growth.

I will now turn the call over to Andy, and then I'll return with my closing remarks after Mike provides the financial overview.

Andy Demott -- Chief Operating Officer

Thank you, Michael, and good afternoon, everyone. My comments today will focus on our key operational and integration highlights for the quarter. As Michael mentioned, the large portion of the decline in sales in our uniform segment resulted from our efforts to reduce inventory levels, yielding lower merchandise receipts. Additionally, the warehouse system implementation at CID, which went live at the beginning of the third quarter, resulted in a temporary interruption, which disrupted sales while also affecting operating efficiency.

Supplemental resources and overtime were required to resolve the issue, and normalization occurred mid-quarter. The lower sales impact of approximately $2 million is not recoverable. However, we still maintain strong relationships with these customers and expect to see improvements moving forward. Our MD uniform line is garnering extremely strong interest, surpassing our uniform.

To reconcile the anticipated demand and ensure a seamless delivery, the launch is now expected in mid-2020. We are fine-tuning the offering and our sales strategy to optimize market delivery for this robust opportunity. We look forward to executing on this exciting initiative that essentially fills a vacuum in the marketplace for a fashion scrub that can withstand the harsh requirements of the healthcare laundry system. Our new building in Haiti, which is 100% dedicated to CID products, is complete, and the factory is currently being equipped.

Operators are in training, and our management team is in place. We expect Haiti will benefit CID in multiple ways, including a duty-free market, gross margin improvement and quicker fulfillment capabilities. The modernization of our robotic fulfillment center in Eudora, Arkansas continues to progress with an anticipated completion toward the end of next year. Once finalized, we should see operational efficiencies at Eudora and in the divisions this facility will support, fulfilling an important facet of our shared services platform initiatives.

The ERP implementation at HPI continues on schedule, and we are realizing more operational efficiencies as we work through customer migration at a very deliberate one customer at a time pace. CID's ERP implementation is also moving forward at a good pace. Our small reduction in our domestic workforce continues on a paced schedule. We will continue to see savings benefit on an annualized basis from these actions.

We're responding to an increased level of RFP activity for new opportunities as we aggressively pursue new business wins. Overall, we are making necessary investments to fortify both our healthcare and non-healthcare uniform businesses. Turning to our Promotional Products segment. BAMKO reported another exceptional quarter of sales growth, and order flow has been coming in at a record pace, with backlog being at its highest level.

We continue to add to our sales force and emphasize cross-selling opportunities. We do expect to see gross margin improvement as the business continues to scale and its existing low-margin projects become a smaller portion of our total volume. As noted previously, The Office Gurus' new Jamaica facility has been online in the small incubator location. In the next couple of weeks, that group will move from the incubator to a permanent location.

Our posture has been to scale capacity ahead of anticipated growth, and we continue to see strong customer acquisition. While sales accelerated at a slower pace this year, we are extremely confident in our ability to achieve our guidance metrics over the five-year period. Now I'll turn the call over to Mike for the financial highlights.

Mike Attinella -- Chief Financial Officer and Treasurer

Thank you, Andy. This morning, we filed our Form 10-Q for the third quarter ended September 30, so I'll limit my comments to key income statement and balance sheet highlights. Net sales for the third quarter decreased 7% to $89.5 million. At the segment level, uniform's quarterly net sales decreased 21.2% or $14.8 million compared to last year, $9 million of which was a result of ASC 606 accounting.

During the quarter, our merchandise receipts of embellished goods under customer contracts declined, giving rise to lower revenues under ASC 606, reducing merchandise receipts as the result of our conscious efforts to better manage working capital. Under ASC 606 accounting, these low receipts result in lower revenues. This quarter also contains some lumpiness in our employee ID business, as we did not repeat significant program rollouts that occurred in the prior-year third quarter. As noted earlier, we expect to pick this up in the coming quarters.

Lastly, as Andy mentioned, the warehouse management system implementation for CID created a sales disruption of about $2 million. BAMKO delivered another record quarter of growth with net sales up 37.9% compared to the prior year. We continue to see strong sales execution from our expanded sales team at BAMKO. The Office Gurus continue to report solid results with a 17.3% increase in sales.

We continue to see a robust pipeline of opportunities from new and existing customers at The Office Gurus. Gross margin for the third quarter remained relatively consistent at 35.2% compared to 35.3% a year ago despite changes in sales mix from our operating segments. Gross margin was impacted by customer mix at BAMKO and the highly competitive pricing environment in our uniform segment, offset by improved margins from TOG. As a percentage of net sales, consolidated selling and administrative expenses increased to 28.2% from 26.6% a year ago.

The variance was driven by several factors, including lower revenues in our uniform segment, investments to support growth across our business and incremental costs associated with our warehouse system implementation and our ERP system integrations. Additionally, selling and administrative expenses in our uniform segment benefited from the reversal of approximately $0.5 million of certain performance incentive accruals. During the period, we also recognized pension settlement losses of approximately $300,000. No similar costs were incurred during the third quarter of 2018.

Income from operations decreased to $6.2 million, and operating margins were 6.9% in Q3 2019 compared to 8.7% in Q3 of 2018. Lower revenues in our uniform segment and higher overall operating expenses pressured operating margins in the quarter. Our effective tax rate for the quarter was 15.3% compared to 15.9% a year ago. This decrease in the effective tax rate is generally attributed to an increase in the benefit of foreign source income, partially offset by an increase in foreign taxes.

Overall net income declined 36% to $3.9 million compared to $6.1 million a year ago. Third quarter diluted earnings per share were $0.26 compared to $0.39 a year ago. Now I'll address a few balance sheet items. During the quarter, we amended our credit agreement and increased the covenant related to our EBITDA to funded debt ratio from 4:1 to 5:1.

As of September 30, our EBITDA to funded debt ratio was 3.85:1. Capital expenditures through the nine months ended September 30 totaled $6.4 million, as we invest in the projects Andy outlined earlier to improve our overall business effectiveness and support our long-term growth. Quarterly dividends through the nine months ended September 30 were $4.5 million, representing an increase of 4.6%. I'll now turn the call back to Michael for his closing remarks and a general outlook for the remainder of the year.

Michael Benstock -- Chief Executive Officer

Thanks, Mike. Our integration efforts are continuing at an ardent pace, and we are making the right investments to service our customers better, capture sustainable sales growth and improve our profitability. We're in a good position to address the myriad of risks currently in the market through multiple actions taken across our organization. Looking ahead, we feel confident that we're in a position of strength as we move into the fourth quarter and 2020.

We're doing the right things for the long-term value creation for our stakeholders. As always, we appreciate all the contributions of our very hard-working SGC team members and thank them for their continued dedication. With that, we'd like to open the call for your questions.

Questions & Answers:

Operator

[Operator instructions] And the first question today comes from Kevin Steinke of Barrington Research. Please go ahead.

Kevin Steinke -- Barrington Research -- Analyst

Good afternoon, everyone. So, I just wanted to start off by talking about the revenue decline in the uniform segment, make sure I understand all the moving pieces there. So, you had the $9.1 million hit from ASC 606, and you also talked about your efforts to reduce merchandise levels to improve working capital. Are those essentially the same thing? In essence, what I mean is, if it weren't for ASC 606, would there have been that $9 million hit -- or would there have been that large of a hit from the reduction in merchandise levels if it wasn't for ASC 606?

Mike Attinella -- Chief Financial Officer and Treasurer

Kevin, hi. This is Mike. No, absolutely not. What happens with ASC 606 with respect to certain of our contracts, and those are the contracts where we have -- we provide specific product that are only sellable to certain customers with whom we have contracts, where, if we get to the end of the contract, the customer pay us for the product should we not sell it.

In those contracts, we have to recognize revenue upon the receipt of goods, not when we actually ship the goods. So, when we reduce the amount of receipts that we're making, ASC 606 would suggest that we have to reduce the amount of revenue that we recognize. So, we consciously -- through the course of the past one-and-a-half years, we've consciously been reducing the amount of inventory. We say merchandise in our release because it's either inventory or contract assets on the balance sheet should we bring in it under one of those contracts.

We reduced the amount of inventory that we're bringing in that reduces the amount of revenue that we recognized associated with those particular contracts. So, the $9 million is absolutely related to the reduction of those inventories.

Michael Benstock -- Chief Executive Officer

And the purpose of that, this is Michael, is to improve working capital. We've said over and over again, when we met with investors, and even on these calls, that we have the ability to turn our balance sheet into cash when necessary. You see what our bank borrowings are to bring in more cash. We have made a concerted effort to apply some new strategies to our inventories.

And certainly, with -- particularly with HPI, about 75% of their business is on SAP now. They have much better tools to manage their inventory, and that's been progressing since the beginning of the year. And that should get even better and better. But, again, as we reduce inventories, where there's going to be a negative impact because of 606 on what looks like the revenue line, but a couple of years ago, before 606, that was not a revenue line.

Kevin Steinke -- Barrington Research -- Analyst

OK, perfect. That's very helpful. That's -- I thought that was the case. I just wanted to clarify that.

So, in essence, you're taking actions here to improve your business by reducing inventory levels, but you're getting penalized in terms of reported revenue just because of an accounting change. So, I just wanted to make sure everyone understood that, I guess. But, yes, so how much do -- benefit do you think you've garnered in terms of cash flow generation from the reduction of inventory levels? Or how much more do you think you can benefit from that?

Mike Attinella -- Chief Financial Officer and Treasurer

Well, if you look at the cash flow statement, Kevin, you'll see that our contract assets are down from the beginning of the year by about $11 million. We -- and our inventory -- our inventories are down about $600,000. So that's -- in essence, that's the amount that we've been able to reduce our working capital investment in those two-line items over the course of time. Now, of course, the reduction of the contract assets, as we sell that product and as we bring in less product to support the sales associated with those businesses, is offset by some growth in receivables that you also see on the cash flow statement, you see on the balance sheet.

So it's the balance between those two where we see the benefit as it specifically relates to the working capital investments and activities we've undertaken.

Kevin Steinke -- Barrington Research -- Analyst

OK, that's very helpful. And so, I calculate that the $9 million hit is about a 13-percentage points deduction to uniform segment growth year over year, which leaves you with an 8% decline. I noticed in the 10-Q that your shipment metric was also down in that 8% to 9% range. So that remaining 8%, is that just mostly related to, one, the WMS disruption you mentioned, and then also just the timing of shipments or the timing of program rollouts against kind of a difficult comp in third quarter of last year, as you mentioned?

Mike Attinella -- Chief Financial Officer and Treasurer

Yes. If you take out the $2 million of the CID event, that's about 3% of the decline. So that leaves about 5%, 5.3% associated with what I would say are normal course activities within the business.

Michael Benstock -- Chief Executive Officer

It's about $3.7 million is what you're left with after those two items. And, yes, much of that is timing and the timing of rollouts. People ask us all the time, Kevin, "Well, when's your next rollout?" We do -- in the course of the quarter, we do sometimes dozens of rollouts. Some of them are quite small, a few hundred thousand dollars.

Some of them actually roll out over multiple quarters a few hundred thousand dollars or millions over multiple quarters. Some straddle three quarters, some straddle a year. So you can imagine, every customer has their preference of how we roll out. Sometimes it's by region.

Sometimes it's by franchisees before company-owned. I mean, there's all kinds of manners in which people do this. And, oftentimes, we have big rollout in a period that might straddle a couple of quarters. It doesn't impact you as much because it gets spread out over a couple of quarters, and we don't talk about it.

Last year, in third quarter, we did have some major rollouts. We also had a customer that -- in that $3.7 million. And then some has decided they're a customer who relies heavily on the number of employees they have. They've gone to a less expensive garment.

We're not making necessarily less money with that, but they've gone to a less expensive garment, which means less revenue. Simplifying their program to some extent across their divisions, it's a strategy we helped them implement because it gave us leverage of having had the program for so many years and understanding it to be able to find ways that we could help them economize. Everybody's looking to economize. We're in a very, very strange economy right now, and for all the reasons that we mentioned when we spoke a few minutes ago.

And so we're going to see some of those. But, again, I could say over the next couple of quarters, we have our fair share of rollouts that are going to happen again. And the anticipation at this point is unless something happens that we'll more than make up that $3.7 million of business that was lost in this quarter in the coming quarters in additional rollouts. Also, there's some timing.

You win customers, you lose customers, very sticky. I mean, we talked about the 90-plus percentile of our stickiness with our contract customers. And the fact of the matter is we do lose some and we gain some. Unfortunately, when you lose them, you generally -- within six months, you're done with the customer.

When you gain them, you're not unboarding them sometimes for a year or later. So there is a gap there, a little bit in between all that. We've been very successful with our strategies, particularly at HPI. And I believe that with our -- with the leadership we have at HPI now, which are two of the most seasoned executives we have in the company, who have -- one who has over 30 years' experience and the other one has been with us for more than a decade on the sales side, that we should start seeing some results very, very quickly in that division, maybe even sooner than the normal sales cycle.

Kevin Steinke -- Barrington Research -- Analyst

OK, great. That's helpful. And I'll just ask one more question on this topic and then move on to some other things. And just lastly, in terms of the year-over-year decline, can you maybe just add any color at all about the disruption from the WMS system at CID? It sounded like that was isolated.

Maybe what happened, and how confident are you that that's behind you?

Michael Benstock -- Chief Executive Officer

I'll jump in. Andy might jump in at some point, too. We've put in now, I think this is our fifth WMS system in the last 20 years, and have watched other companies, companies that we've looked at to buy, some companies we have bought, who unsuccessfully put in their WMS'. We had six weeks of serious dislocation.

And it wasn't through a lack of effort on our people's part, it had to do perhaps with not enough testing, testing it under full mode, which is awfully difficult to do in a warehouse system, unless you have a second warehouse that you can test it under. We've been through a lot of these over the years. And it's one of the reasons why our Eudora warehouse expansion that we're anticipating is being done actually at an adjacent warehouse that we're building, so that all the testing will not impact any of the shipping that we're currently doing. We'll be able to turn it on and off as we wish, but we didn't have that luxury with CID's WMS implementation.

People work hard. They work long days, long hours and they pull through it. I can say they pull through it in six to eight weeks and with 90 whatever percent of issues behind them. And that is the fastest I've ever seen a WMS implementation.

We've done ones ourselves many years ago that impacted us a lot worse than theirs did. They're in good footing now. They're moving forward. And, Andy, I don't know if you have anything to add?

Andy Demott -- Chief Operating Officer

I think you covered it pretty well. I would add that -- I mean, it really -- while it's always painful for customers when you go through this, there is -- this one went very well, relatively speaking. The nature of the business with CID being retail, though, and when we say the $2 million of sales that was lost, it doesn't mean we lost the customers. It just means those retail buying opportunities during that period of time that we were having service issues were filled by other competitors.

And that's why we won't make up the bulk of that sales in the future. We will, over time, reestablish and continue the relationship we have with those customers, and we expect to be in a much better position and able to service them better in the future even more efficiently. And as Michael mentioned, at this point, really the vast majority of issues associated with it are behind us, and we're starting to just realize some of the efficiencies that we expect to get out of having put that warehouse in, and we'll see improvement in our costs as we go forward in the future.

Kevin Steinke -- Barrington Research -- Analyst

OK, great. That's helpful. So, I think you mentioned that you're encouraged by the pipeline, and the uniforms business still responding to a good deal of RFP activity. Are you starting to see some of the fruits of those efforts of responding to RFPs in terms of wins? What have your win rates been like? Any more color, I guess, on all the RFP activity you've been responding to?

Michael Benstock -- Chief Executive Officer

We don't normally discuss our win rates or who we won. In many cases, we're restricted from even doing so by contract with our customers. But our win rate has been fine. We've won a nice piece of business in the sweet spot that we've spoken about, in the midpoint of that sweet spot, as a matter of fact won some smaller pieces of business as well.

And we're talking about the employee ID side of our business, HPI. And we're encouraged by it. There's a lot of business up for grabs there right now, given, as I've said, in previous discussions, there's more RFPs than ever that we're responding to. I mean, clearly, that creates the risk of loss -- a greater risk loss of existing customers, but the greater opportunity is much bigger than the risk of loss.

So, we believe that while we may lose some business along the way, we're going to gain more business than we lose. There may be timing issues with respect to how all that happens, but we don't think that anybody is in a better position than we are with our technology and with our ERP and our design staffs and all that we bring to the table from a distribution standpoint and kind of product development standpoint that anybody is in a better position than we are to secure business. I think in the last year, since we refocused ourselves on the mid-tier-sized customers, we've realized how valuable we can be to them and as opposed to, as we spoke about earlier, the much larger customers that really had some very, very big tremendous companies that were bidding on their business. And quite frankly, we're the safe choice for those customers.

We feel like we're the safe choice. And not just safe, but we're probably the most innovative of any other smaller competitor than us out there, for which there are many. But we are winning our share. We expect to win more and -- but we don't necessarily ever quantify what size of our pipeline is, who's in our pipeline.

And obviously, for competitive reasons, we'd wish not to.

Kevin Steinke -- Barrington Research -- Analyst

OK. No, fair enough. That's helpful. And I think, also, you talked about, in your comments, a market launch mid-2020 for the fashion scrubs, given the synergies you've seen between Fashion Seal Healthcare and CID.

I mean, can you give us maybe a little more sense of just the size, the pace, timing of that rollout, how meaningful it is in terms of the numbers. Just trying to get a -- put my arms around what that means for the business.

Michael Benstock -- Chief Executive Officer

We are -- we have created a product in a market for which there really was a serious void and need. And we recognize that if you go back three years ago or four years ago, Kevin, when we were selling into the direct marketplace, one of the things we keep bumping up against is you're going to sell in the direct marketplace, you have to have a fashion product. And if you're going to sell in the direct marketplace, why don't -- since you guys owe -- since we, Superior, at Fashion Seal Healthcare, is a company that sells to commercial healthcare laundries, why do you -- have you not developed a product that would be accepted by healthcare laundries and their healthcare partners as a product of choice? And so, we try to create some fashion products within Fashion Seal Healthcare. And I know this is an explanation, but I'm going to go with it anyway.

And -- but there was no market recognition among the people making the decisions with respect to those products. The people making decisions often were chief nursing officers, nursing committees within healthcare systems. And let's face it, nurses are a very, very important part of healthcare systems today and are big influencers in what their nursing groups are going to wear. And so, realizing we didn't have a brand that was recognizable is one of the reasons why for many, many years, we looked at many of the companies out there manufacturing, designing fashion scrub apparel.

And the one that we were most set on buying, we did, at CID resources with their WonderWink brands. And now we have a product that we've introduced to the marketplace. And we -- everyone always hopes that their product lending introduce is well accepted in the marketplace. But when the acceptance is so overwhelming that you realize that if you released it at that point in time, you'd have a disappointing marketplace because you didn't anticipate the demand.

And with all the surveys we did, with all those discussions we had with customers and everything else, we could not anticipate the demand. We are in discussion with a number of people with respect to this product and how we will properly launch it to the marketplace, so that it serves us best. And we expect by midyear to see some results. Those results are going to be in the couple few million dollars on a very ever-increasing basis from there.

So that's really all the intel we're giving away at this point about the product. We think we have a competitive advantage in that we're out there sooner than everybody. We won't retain that competitive advantage much longer if we don't get it out this year. So that's currently where we stand.

Kevin Steinke -- Barrington Research -- Analyst

Got it. That's great. You happened to mention again a little bit about the pricing pressure in the market in the uniform space from the competitive environment. I think Mike even commented that it hit the gross margin a little bit.

But gross margin in uniforms was still up year over year, so, I mean, should we think about this having a meaningful impact? Or it's still something you can manage through and offset with all the various ways you manage the supplier base and cost efficiencies, etc.?

Michael Benstock -- Chief Executive Officer

Yes. We -- I don't want to talk out of both sides of our mouth because on one hand, we always tell somebody gross margins are great, but you need to look at our operating margin. Because we have customers who are at a 20% gross margin, and we make more money on the customers of 40% margin because of the service component of what we have to do for that customer. But if we're looking purely at gross margin, the sourcing group has done a great job as they move product from China to Vietnam.

It hasn't always been perfect from an execution standpoint. I have to admit there've been a couple of service hiccups along the way as they've done that and certainly things that we can be better at in the future, but they've done a good job from a negotiating price standpoint. And -- but there's a lot of pressure out there. And if it were not for the long-term relationships we have with suppliers, many of whom, quite frankly, have left China with us.

They -- we were in Chinese factories, and those factories upped and moved to Vietnam, so that we could still enjoy the relationship with them, but in a factory Vietnam that didn't have tariffs. And that's what's going on around the world right now as Chinese are extending themselves into other countries, so that they're not as impacted by the tariffs themselves. I see us there being a lot of margin pressure. I've never -- well, as I said, I've never seen so many RFPs out there.

So sometimes, we have an RFP for five years. Generally, we might go in pretty tight on that RFP. And over a four- or a five-year period of time, our supplier picks up efficiency. We pick up operating efficiency.

And actually, we're making more money at the end of that contract than we're at the beginning. They've put that out to RFP. The person coming in is low volume prices. Much of the gain we had in those third, fourth and fifth years, we've got to give some of that back in order to maintain the business.

So it is a very competitive environment. And I think what's happening with our customers, they're impacted by tariffs. They're impacted by minimum wages. They're impacted by all these things which is forcing them to try to push that pressure downhill.

And unfortunately, we're downhill from that. So, there's a lot.

Kevin Steinke -- Barrington Research -- Analyst

Right, right. OK. In the promotional products business, really nice growth the past couple of quarters, I assume being driven in part by your organic growth strategy. You're expanding your sales force, and it sounds like you want to continue to add there in terms of headcount.

Is there an opportunity over time, do you think, to kind of smooth this business out a little bit from quarter to quarter as you continue to ramp it, as it grows larger, and maybe just some of the lumpiness that we've seen in the past from larger jobs as kind of smoothed out just as volume increases?

Andy Demott -- Chief Operating Officer

Yes, Kevin, that's definitely the case. I mean, I think we've said that for a while that as they grow, they're substantially larger now than they were at the time that we bought them. It takes a much larger individual piece of business to impact realizing in their growth. The growth really is coming from the -- it's totally organic growth at this point, tied to the sales efforts of the new sales that we've brought in, oftentimes coming with some business relationships they already have.

We see the opportunity to scale that and improve our operating margins over time as we continue to grow with that.

Kevin Steinke -- Barrington Research -- Analyst

OK, yes. And you did talk about improving operating margins and promotional products. So, I think in the past, you had -- you've talked about getting the operating margins and promotional products up to kind of what historical corporate average was. Or it's not where it was a couple of years ago, given some of the investments you're making, etc.

But how are you -- is that -- how are you still thinking about the margin potential of promotional products? Just trying to get a -- kind of a maybe a baseline target of what you think that business could do, profitability-wise.

Andy Demott -- Chief Operating Officer

Yes, we have. I mean, that is what we've said in the past. I think it's growing in a -- I mean, we're getting there a little slower than we thought we were initially, but we did also change somewhat the approach where we expect that we were going to do more acquisitions. We kind of switch to the approach of bringing in seasoned salespeople to help grow that business organically.

So, we are at a state, as we grow, that we're investing a little bit -- similar to what we're doing in The Office Gurus, we're kind of investing a little bit ahead of that to get the structure in place and to be able to service that volume of business. As we've become more efficient with that, we do expect to see those operating margins improve and continue to go up.

Michael Benstock -- Chief Executive Officer

Yes. And, I mean, you were making a really good point. So, we made that statement two or three years ago that we -- and we started making it that we expect that business to achieve the operating margins that we had at that point. And that is still the case.

Kevin Steinke -- Barrington Research -- Analyst

OK, great. Got it. Let's see. So, The Office Gurus continues to grow nicely.

You're kind of on -- you're investing ahead of growth there. How much revenue capacity do you have now given what you build out in the various geographies in terms of call center capacity? I mean, just trying to get a sense of if you can maybe slow down the pace of investment a bit and grow into the footprint you've built. Or what's the outlook there?

Michael Benstock -- Chief Executive Officer

The outlook there is what we've done from our -- the expansion of beliefs and the addition to Jamaica, which is in its full expansion mode when we get to that because it's kind of in pieces that we can grow into what we have. The capabilities we'll have will take us out about three years. And so, you know that our current guidance is that we'll grow that business at $7 million a year or in excess of that. So, it should give us the capacity to do about another $21 million of business.

Kevin Steinke -- Barrington Research -- Analyst

OK, perfect. Before I forget, with the Haiti facility rollout, are there any meaningful costs associated with that over the next couple of quarters? I think there have been some mention of some increased costs related to that on your last call, but I was just wondering how we should think about that.

Mike Attinella -- Chief Financial Officer and Treasurer

Yes. So the costs that we'll be incurring in Haiti, there certainly is going to be some capex as we put in equipment into the facility, but we'll also have costs with respect to bringing management in there, getting training under way within the facility and other start-up operational costs that we will incur with respect to the establishment of that facility and getting it ready to go. We expect it to be ready to go with respect to actually producing product in the latter part of this year with getting up to speed with full capacity in the middle part of next year. So, we will be operating this year.

We won't be operating at full capacity, so there will be some operating expense that we'll be incurring that's not typical or traditional for us in a manufacturing facility. They'll be at full speed, but we will be operating and manufacturing by the end of this year.

Michael Benstock -- Chief Executive Officer

If you remember with the first Haiti facility that we've put in, much in the same schedule as that.

Kevin Steinke -- Barrington Research -- Analyst

OK, got it. Just something popped into my head that I want to backtrack on to. How -- are you still in the process of trying to reduce inventory levels, such that we should expect more of a headwind from the ASC 606 impact based on that initiative? Or are you pretty much done with rightsizing inventory? I mean -- or is it -- yes, I guess, should we think about it still as being a year-over-year headwind even if you have leveled off that initiative just because of the year-over-year comps?

Mike Attinella -- Chief Financial Officer and Treasurer

We're going to continue to try to manage our inventory turns. We're going to continue to try to manage our contract assets to where we can provide the services that our customers need at the lowest possible in-stock position. So, there will be headwinds continuing. Now, certainly, when we started, we got off to a big blast on that.

So, I don't know that the headwinds will be as robust as they've been historically, but we will still continue to try to constantly drive down our inventory positions and increase our turns.

Michael Benstock -- Chief Executive Officer

Most of -- this is Michael. Most of the impact of that comes from our contracted assets, as Mike said. And most of our contracted assets reside with HPI. And that's visioned because of the nature of their business, we don't see as much of that in our healthcare business with Fashion Seal Healthcare and CID.

So, you would expect that we had a big push at HPI to do that. They're on SAP, and we're getting much better information and analytics from that anyway. So naturally, we will manage the inventory better. You will see reductions in our inventories in other places in the business as we finish up these integrations, but they won't be contract assets, which means they won't be affecting our revenue until they ship.

Kevin Steinke -- Barrington Research -- Analyst

OK, got it. I guess, lastly, just I noticed dividend, you're still paying a healthy dividend. I think, historically, you maybe increased it a bit at this time of the year and this quarter, but I think it remained consistent year over year. So, any -- just any thoughts on dividend or dividend policy?

Mike Attinella -- Chief Financial Officer and Treasurer

So, we -- so as you said, we are paying a healthy dividend. Our dividend yield is in the mid-2% range. We -- every quarter, we talk with the board about where we're going to be with respect to dividend policy and our dividend -- what we're paying out with respect to dividends. So, we continue to -- we will continue that process.

As you know, we've been paying dividends since the mid-1970s. New guy on the block. They are making sure. I'm confirming with my compadres here.

But we -- dividends are very important to us, and we expect we'll continue to make dividend payments and continue to assess our ability to maintain or increase dividends as we move forward.

Kevin Steinke -- Barrington Research -- Analyst

OK, great. Well, thanks for taking all the questions. That's all I had. Thanks.

Operator

[Operator instructions] As there are no further questions in the queue, this concludes our question-and-answer session. I would like to turn the conference back over to Michael Benstock for any closing remarks.

Michael Benstock -- Chief Executive Officer

You saw I jumped the gun there. OK. Thank you very much. We appreciate all of your time today, and we look forward to updating you on our fourth-quarter 2019 results in February.

Enjoy the rest of your year.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Hala Elsherbini -- Senior Vice President of Haliburtons Investor Relations

Michael Benstock -- Chief Executive Officer

Andy Demott -- Chief Operating Officer

Mike Attinella -- Chief Financial Officer and Treasurer

Kevin Steinke -- Barrington Research -- Analyst

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