Jerash Holdings (US), Inc. (JRSH) Q2 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day, and thank you all for joining this Jerash Fiscal Second Quarter 2020 Results Conference Call. [Operator Instructions] And as a reminder, today's session is being recorded. And now for opening remarks and introductions, I am pleased to turn the floor over to Mr. Matt Kreps with Darrow Associates. Welcome, Matt.

Thank you, and good morning to everyone. Welcome to the Jerash Holdings Fiscal Second Quarter 2020 Results Conference Call. With me today are Karl Brenza, Head of U.S. Operations. Today's call is being recorded and will be available for playback. [Operator Instructions] Before we begin, a quick reminder about forward-looking statements made during the course of this call. Statements made by Jerash management during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will, guidance, outlook, indicate, suggest, forecast, targets, seek, growth, goal and other similar statements of expectation identify forward-looking statements. Forward-looking statements are subject to certain risks, uncertainties and important factors that could cause actual results to differ materially from those reflected in the forward-looking statements. These risks and uncertainties are detailed in Jerash's public filings with the U.S. Securities and Exchange Commission. Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflect management's belief only as of the date hereof. The company undertakes no obligation to publicly release the results of any revision to its forward-looking statement, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. And with that, I will now turn the call over to Karl Brenza. Please go ahead.

Thank you, Matt. So welcome, and I'm pleased to join all of you today to discuss our business activity and continued progress on key growth initiatives in what has been a very important second quarter for Jerash. Before we get into our numbers, first, I'd like to -- first, let me pay recognition to Richard Shaw, our CFO, who passed away recently. We are all saddened by his loss, as Richard was not just a business colleague but also a close friend. Richard was instrumental in working to bring Jerash public, including restructuring a global business with operations and staff in the U.S., Jordan and Asia into a cohesive unit within -- as a U.S. corporation. He worked hard to achieve our business growth since the listing and played a key role in our success. He will be greatly missed by the Jerash team and his many friends in the financial community. Since Rich's passing, the financial team has rallied to take on his duties, enabling us to report on time in spite of his loss. The company is also engaged in a search for a successor CFO, and we will report our progress in due course. Let me now address the results of the quarter. Revenue in the second quarter of fiscal 2020 was $30.6 million, down slightly from $33.5 million in the prior year second quarter. This reflects 3 key considerations. First, revenue of $3.3 million of production was ready to be shipped in the second quarter, but at the customer's request, we need to wait until Q3 to ship those products. So that revenue was shifted into Q3. Secondly, we made -- you may recall that last year's second quarter was increased by $2.5 million in orders by capturing deferred revenue, resulting from the Ramadan holiday, which did not happen this year. And third, we are still capacity-constrained. We're at full capacity at our legacy plants, but still ramping up the Paramount facility. This facility is now online with its first 500-plus workers trained and burning in on efficiency with the second 500 workers coming online in the second half. We are also very excited about the development to achieve our full 1,000 employee initial target for this facility by fiscal year-end. Looking at the first 6 months of this year, total revenue was up slightly to $53.1 million. Bear in mind, we also lost that $3.3 million of deferred orders. This compares to $51.8 million in the prior year's first half. That reflects a 9% increase year-over-year for dollar value production. That's not a revenue number, that's a dollar value production, which is a very meaningful metric in the first half, even with the limited contribution of Paramount. Gross margin increased sequentially to 23.9% from 20% in the first quarter and was down slightly year-over-year from the 24.9%. As we discussed last quarter, gross profit reflect the investment in ramping the production at the Paramount facility, which was operating at a negative margin during the initial start-up phase. We expect to recover those investments in short order, increasing margins as new workers move toward proper efficiency levels. We do expect that some margin volatility through the second half as we bring the second wave of Paramount staff, but we believe we remain on pace for our full year gross margin target. Notably, we have shipped more than 4.5 million pieces in the first half with another 2.6 million plus pieces scheduled for the second quarter. This puts Jerash on target to meet or exceed the 8 million plus pieces in fiscal -- in this fiscal year, which represents our target with Paramount operating at full capacity, which we currently are not. This affirms our belief that we can ultimately scale above the initial production forecast, which would already represent a 23% increase in capacity over the 6.5 million in capacity produced last year. SG&A expense in the first quarter was $3.1 million, up from $2.6 million in the first quarter and $2.3 million in the prior year second quarter. Jerash has now included additional costs in SG&A to bring in and train our workforce for the new facility, additional repair and equipment investment and some initial costs associated with our land purchase in preparation ahead of our dormitory expansion project in Oman. Operating income in the second quarter was $4.2 million compared to $1.9 million in the first quarter and $6.1 million in the second quarter of last year. Taking all this into account, GAAP net income was $3.1 million or $0.31 per share for the quarter, based on an approximately 11.5 million shares outstanding. I want to also note that year-to-date, we have achieved $0.45 per share in GAAP EPS, which equals our GAAP EPS for the entire year last year. We now have 6 months in which every additional cent of EPS will be incremental to what we achieved last year. Turning to the balance sheet. We believe we're well capitalized to fund our growth plans and increase working capital needs. We continue to pay quarterly dividend of $0.05, which equates to an annual dividend of $0.20. Cash and restricted cash at September 30 stood at $24.4 million, down from $27.8 million in March 31, with the difference reflecting shifts in working capital allocation. Inventory was at $13.1 million and AR was at $14.3 million. We continue to effectively self-fund our working capital needs and expect the business to generate substantial cash flow from operations on an annualized basis. We also have untapped credit lines of $26 million. As you can see, Jerash has reported strong sales growth and profitability in the first half of 2020. We believe we're well positioned for a record second half due to a number of factors. First, we're going to capture that $3.3 million of deferred revenue in the second half. Second, our expanded workforce and production capacity will start to be reflected in the second half. Finally, we have made exciting progress on the new customer front. While VF Corp. and in particular, its North Face brand, continue to increase orders, we also are -- we are also seeing new production orders from additional accounts. These include DICK'S Sporting Goods, New Balance and other well-known brands. And we expect approximately $10 million of new revenue from new customers. This shows material progress on our growth continuing to increase our business at VF, a great customer who we truly enjoy working with, while also diversifying our revenue concentration through the addition of growth in new customers who will take advantage of our expanding capacity and bolster our second half revenue. These customers will help minimize our quarterly -- quarter-to-quarter volatility and maximize our plant efficiency. Our satellite sewing facility, being built in close cooperation with the Jordanian government to bring high-quality employment to women in rural areas, is progressing nicely and should open in October. This facility will start with small volumes and lower -- at lower margin -- with lower margin, but we expect it should grow nicely over time. Importantly, it reflects part of our ongoing commitment to social responsibility in bringing quality jobs to Jordanian public. With that, I just want to reiterate our excitement for the second half as we continue to grow this business for both the current fiscal year as -- and even more so for next fiscal year as our new capacity and customer relationships continue to mature. With that, I would like to welcome questions, and I'll bring it back to Jim, our operator, to make the transition.

[Operator Instructions] We'll hear first from Roth Capital Partners and the line of Dave King. Please go ahead. Gus Galá;Roth Capital Partners;Analyst: This is Gus, stepping on for Dave. Could you just discuss some of the revenue pressures you saw in the quarter? And whether you expect the orders to come later on in the fiscal year?

Sure. So the revenue -- we had -- there were 3 things that happened in Q2. First of all, we mentioned this $3.3 million of deferred orders. If that had hit when it should have hit, we would have exceeded last year. Secondly, last year had sort of the opposite effect. It benefited from a $2.5 million deferred order from Q1 of last year as -- due to Ramadan. So if you sort of normalize the quarter based on those 2 facts, we're actually well ahead of last year. And then the final thing is that in Q2, we were still capacity-constrained. We were still ramping up the Paramount facility and training our first 500 employees. They're now trained and manufacturing, and they're going to generate revenue going forward, and that takes time to happen. It's a pull for management, but it will be -- we will be generating some sizable revenue from Paramount in the second half of the year. It will be -- we'll see some volatility due to the addition of 500 workers that we're going to be bringing in. But since we've already gone through the training process with the first 500, the second 500 should go much smoother, and they should be in operating mode in short order. So those are really the reasons why we had a lower revenue in this second quarter versus last year. Gus Galá;Roth Capital Partners;Analyst: That's helpful. Also, do you have any updates on potential M&A or tuck-in acquisitions to expand capacity further?

Well, we're always looking to expand capacity. I mean we're going to have no problem throwing up the Paramount facility once it's fully up and running. And at that point, we're going to be looking for additional capacity. Now the easiest -- probably the easiest but most expensive way to do it is to go out and buy a company. We've been very active in looking at companies. We just have -- we have pretty strict criteria, and a pretty conservative criteria. So we haven't found that good fit yet other than Paramount. I mean we'd love to do another Paramount, and there may -- there certainly may be another opportunity like that in Jordan, but we're not counting on that. We're looking at acquisitions. We're looking at other countries where we think we need to expand, namely Vietnam, so that we have better access to Asia. So the M&A process is definitely going forward. And we actually had one deal that we were close to bidding on. It was a proprietary deal, but the owners changed their mind and didn't want to give up a majority of their company. But -- so we were close on that one, and we're going to continue to work very hard on that front.

We'll move next to Mark Argento with Lake Street Capital.

Karl, just quickly, I don't know, the Paramount facility looks like it's up and running nicely now. Is there any kind of a shift out from the original expectations in terms of when you could have seen that benefit to get pushed a little bit farther into Q3 versus Q2 and weren't able to see the benefit of that?

Yes. Good question, Mark. I think that Paramount -- it's taken a little bit longer to train the first group, so -- but they're now fully trained and up and running. So we're going to see the benefit of that group. And the training for the second 500 should be a lot smoother. And you probably -- we probably won't see the full effect of Paramount until beginning of next fiscal year, but we are going to see a benefit in the second half, but the big benefit is going to come right -- beginning of next year, which is why we said we're -- while we're very excited about what's happening this year, we feel that 2021 is going to be an amazing year for us.

The Paramount facility, is that going to be a generalist-type facility? Or are you going to do specific types of product out of that facility relative to your existing facilities?

It's generic. It's similar to our other facilities. I mean, we start off producing -- just for training purpose, producing lower-margin easier-to-produce garments, and we've now graduated them to more complicated garments. And it's going to certainly be used to support North Face. Its primary purpose is to support new customers. And we want the excess capacity to really go as much as possible to new customers for diversification purposes. So it's very easy to set up a complex line for production versus a much simpler line. So we can -- we have a lot of flexibility in what we can do in that facility, but I think it's going to be really driven by the new customers that we're bringing in, like New Balance and others. So that's kind of how it works.

[Operator Instructions] Next, we'll hear from D.A. Davidson and the line of John Morris.

Yes. My question is on the gross margin. I think you had mentioned in the release that it was favorable also due to product mix. And so I'm wondering if you can give us a little bit more color on what the aspect of that product mix was that contributed to the gross margin increase, especially in light of, I guess, potentially the offset from your last answer about ramping up Paramount with potentially lower margin, at least, initially. So just what was driving the favorable -- what is behind the favorable product mix that contributed to the gross margin?

Sure. So the bottom line is, we had more -- we had a lot more jackets for North Face to produce than we had expected or been told by them. They give us an order usually 6, 9 months in advance, and they changed the order, and we captured an additional revenue as a result of doing more North Face jackets, which are, by far and away, our highest-margin product. So the favorable mix was really doing higher-margin products for North Face.

Yes. Good. That's helpful. And then just to kind of clarify. I assume this is the case, you all had said in the release that you're still very comfortable on a full year basis exceeding $100 million in revenues. But I just want to kind of check with you on that for Q3 and Q4, in light of the comments this morning that Paramount gets pushed out a little bit here, pretty significant ramp ahead then for Q3, Q4. Are you still comfortable with that kind of a projection?

Yes. And I don't want to make too much about this pushout. I mean, we expect some substantial contribution from Paramount starting in Q3. I mean we have had 500 trained employees who are working now and learning, and they're going to be producing more and more complex products as we move forward. So we're going to see a pretty substantial benefit from Paramount in Q3 and even more so in Q4. So I think that the idea that we're not going to meet that $100 million because of Paramount, I don't think that's really the case. We feel we're going to get a good -- a great contribution from Paramount. Our 3 legacy facilities, very large facilities, are all going to be at full capacity. And -- so we foresee hitting that $100 million plus number of revenue for year-end. I mean, at this point, we would have -- if we thought we weren't going to hit it, we would have made that point in our press release, but we didn't. Instead, we reaffirmed the number. So I think it's going to happen. I mean, I think we're on track, put it that way.

Yes. No, that's -- it's good to hear the clarification. And then finally, any color you can -- I know you all, as I'm getting to know the business, do a fair amount of testing with new customers. And I'm wondering if you can give us any color around how those are progressing qualitatively and directionally.

Yes. Sure. So we do, do a lot of testing. And we have some big names, which I can't really mention their names because they're in the testing phase, and we're under confidentiality, but we have some really recognizable names that -- like real household names that are going through the testing process. It can take anywhere from -- I mean, if it's a -- like, a good example is Reebok needed some orders done -- don't quote me on Reebok, it was one of the major brands that we're bringing in. But they needed an order done like yesterday, and their producer couldn't do it. So they came to us, we shifted things around, canceled some other orders and got their order done. And now they've become a good customer and growing their orders every year. So production testing, in that case, was 0 pretty much, but it was an emergency order. Generally speaking, production testing will take 6 to 12 months, depending on the company, and it starts with small batches and then grows easier-to-manufacture products and then it grows to the 12-month level. And we have a number of very big customers that are in that process right now.

And I would like to thank our audience today for submitting their questions. Mr. Brenza, we have no further signals in the queue. I'd like to turn it back to you for any additional or closing remarks.

Great. Thank you, Jim. So I want to thank everyone for participating on today's call. While we are excited about the second quarter and first half results, we expect this excitement to continue in the coming quarters and years. First and foremost, our #1 priority is to grow shareholder value, both through continued expansion of our operational capabilities and advancing our efforts to identify and execute the right strategic growth opportunities. We will be conducting multiple outreach and conference events this fall, including LD Micro in Los Angeles and the Roth Consumer Conference outside of Salt Lake. We welcome an opportunity to meet with you at these events. In addition, please contact Matt Kreps at Darrow Associates listed in the contact section of our press release just to arrange a phone call or in-person meeting as we would love to meet with you directly. Thank you for your participation today, and have a great rest of your day.

Ladies and gentlemen, thank you all for joining us. This does conclude today's meeting. You may now disconnect your lines, and we hope that you enjoy your weekend.