Jerash Holdings (US), Inc. (JRSH) Q2 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the Jerash Second Quarter Fiscal 2021 Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] I will now turn the conference over to your host, Matt Kreps. You may begin.

Thank you Shoumali [ph]. Good morning and welcome to the Jerash Holdings fiscal second quarter 2021 results conference call. With me today is Sam Choi, our Chief Executive Officer; Gilbert Lee, our Chief Financial Officer; and Eric Tang who leads our Operations in Jordan. Our results press release issued earlier today and available on the Investor Relations section of our website at www.jerashholdings.com. You can also see a link in the top navigation that introduces some of our new PPE products and a video of production in our factories and that list continues to expand. Today's call is being recorded and will be available for playback. All participants will be in a listen-only mode. [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, target, growth, seek, 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 those forward-looking statements, 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 Sam Choi. Please go ahead.

Thank you Matt, and hello to everyone joining us on the call today. Our September quarter show a strong recovery from the COVID-19 disruptions that occurred in Jordan during spring and early summer. For Jerash, we took conservative stance of great caution, but the impacts are much less than we have anticipated. Many of our customers have prioritized their production in Jerash, in Jordan over other countries around the world. While we did see some cancellations in the fiscal first half due to COVID impacts, which reduced revenue over year-over-year that is no longer the case. Now any capacity available for the rest of the year from an order being canceled has been snapped up by our newer customers helping us not only position for strong second half at least equal to last year's second half, but also make faster progress towards further diversifying our revenue base. Revenue in the September quarter increased rapidly to $27.1 million, up 45% from the previous quarter. Gross margins increased to 22% and net income increased to $2.6 million, or $0.23 per share. I'm pleased to say that we have increased our factory capacity estimates, reflecting both higher productivity and changes in product mix that allow us to generate more volume. We are fully booked to capacity into summer of 2021 and customers are still seeking additional capacity with us. To address this increased demand above our internal capacity, we are contracting with additional factory resources and actively looking for prospective factory acquisitions. We are excited for the rest of the year, as we continue to work on our growth plans and expand with both existing and new global brand customers. More and more brands are recognizing the high quality and favorable economics of manufacturing in Jordan. And Jerash is leading the way. With that, I will turn the call over to Eric to discuss our factory operation in Jordan then Gilbert can cover some financial data.

Thank you, Sam. Hello everyone. As Sam has just mentioned, our factories in Jordan are very busy and we are actively looking for additional capacity. We believe the strong return of the customer orders reflect several factors: firstly, shoppers have adapted to the COVID-19 pandemic and our customers are seeing increased sales of their products. Our core products of outerwear, athletic wear and casual wear are in high demand for work-from-home style; second, the new customers we won during the past year such as New Balance, American Eagle, G-III and some others are all placing increased orders as they continue to grow their production activity with Jerash. In fact, they are taking any capacity released by our largest customer helping us diversifying our revenue base more quickly. Thirdly, our largest customer is indicating order sizes for coming production cycles that give us increased confidence in growth for next year just by this customer returning to normal, while keeping the gains we made with other customers this year; fourthly, we have strong -- we have strongly diversified our products since the IPO, making investments to start new programs that added several categories of garments and more fully utilize our production capabilities. While we saw some deferrals early in our fiscal year, more -- in fact more than 85% of our customer orders have now been reinstated as our customers realize the high demand for the products. Those canceled orders account for most of our first half difference year-over-year. Any excess capacity that open up now is easily being booked very quickly as customers are competing for our capacity. We expect second half revenue to be at least on par to the primary year, although timing of shipments will weigh revenue more toward fourth quarter this fiscal year as opposed to the pandemic effect, which is causing shipping containers and some supplies to arrive later this year. So this is really a timing issue only. On the PPE market where we are producing both disposable and reusable products, our efforts are progressing very quickly. We shipped good quantities of masks mass and gowns to multiple customers in the quarter and continue to expand our sales reach as we work with a growing list of prospective customers and tenders. Today, our mask and gown products have been well received and we remain excited about this business. And with that, I will turn the call over to Gilbert for financials and outlook.

Thank you, Eric. Hello everyone. The second quarter ended September 30 was a good quarter with revenue rising sequentially, gross margin improving back to our targeted range, efficient OpEx and solid net income. Our results continue to demonstrate the benefits of new customer wins as well as the high demand from our long-term customers who are increasingly moving production out of China in favor of higher quality and more cost-effective locations such as Jordan. We're even seeing customers booking our capacity to take over production done in other low-cost markets such as Haiti, where they just can't get the quality of work we offer. Let's cover some of the details from our financials and business performance for a few minutes. Revenue in the second quarter of fiscal 2021 was $27.1 million. We had guided for revenue of $25 million leading to a strong beat over guidance. Revenue was only down 12% from the prior year, primarily due to COVID-related shipping changes. Our factories are again operating at full capacity and customers continue to seek increased volumes with Jerash. We're diversifying customer relationships by growing new business faster than we grow business with historic clients. And we're using the pandemic as an opportunity to more quickly ramp new customer orders in our capacity allocations whenever we have a deferral or push out from a legacy customer. In fact, for the September quarter, the North Face was 74% of sales versus 87% last year. North Face will still be our number one customer though we are seeing any capacity they release being snapped up by other customers helping us accelerate progress on this key metric. Turning to gross margins. Gross margin improved to 22% from the first quarter's 16% and was down slightly from 24% a year ago. The sequential increase was the benefit of more fully utilizing our factory overhead across the higher order volumes and the absence of shutdown costs incurred early in the first quarter due to COVID lockdowns in Jordan. The decline year-over-year reflected our efforts to further diversify our production and fully load the factories by adding new categories, most of which have lower average gross margin than our jacket products that dominated first half production in prior years. However, we believe that the growth opportunities and year-round maximization of our factories can drive overall improvement in net income and continue to work towards that target. Operating expenses were $2.9 million down from $3.1 million a year ago, even though we have increased our workforce by several hundred employees and added the Paramount and Al-Hasa sewing workshop to our operating base. Bringing all of this to the bottom-line, net income for September quarter was $2.6 million or $0.23 per share. Through the first half, we have now generated $0.30 per share in net income and declared $0.10 per share in dividends. We expect to be profitable in the second half as well and to maintain our dividend policy, which is reviewed periodically by the Board for potential increases. Our balance sheets remain very strong with cash and restricted cash at September 30 for $28 million up from $19 million a quarter ago. We converted inventory back to cash per our typical seasonal trends. We self-funded our working capital needs, which were $51 million at September 30 out of our cash reserves and have the option to deploy our bank facility should it be needed or should we find a suitable acquisition with which to expand our production capacity. Inventory was $10 million and includes goods produced, but deferred for shipment until late part of fiscal 2021. Accounts receivable increased to $20 million due to seasonally typical large number of shipments in the quarter. Receivables collection continues to be strong with no customer issues. We expect the business to generate cash flow from operations on an annualized basis. We also have untapped lines of credit available for up to an aggregate of $26 million, which does not include the opportunity for additional asset-based lending should they be optimal. Turning to our outlook. We expect full year sales to be approximately $85 million down slightly year-over-year from a record $93 million last year. The difference is entirely orders impacted by COVID-19 in the first half, as we are expecting a second half at least equivalent to the prior year. This could be increased by additional shipments that deliver early or additional PPE activity, but we believe it is prudent to remain conservative in the current environment. I want to talk about a few other aspects of our business as well. First, we began shipping PPE to a few customers last quarter, including a U.S. customer and we see this as a sustainable business. We are focusing on the selection of PPE supplies such as surgical gowns, disposable masks and reusable masks. These new categories are good opportunities for Jerash. And we continue to expand our capabilities and sales in this product category. Second, we are diversifying our geographical production capability to enhance our competitiveness in Asia Pacific and Europe, particularly, for customers like VF and New Balance who have multiple regional sales networks. This effort includes working with overseas subcontracting partners in locations such as Indonesia and Cambodia, who have existing certifications required by these customers. They can collaborate with Jerash to meet our exacting standards on behalf of these important customers. We believe this effort will generate additional revenue in the second half and set us up for further growth next year. Finally, we continue to look for acquisitions and partnerships to expand our business and put our capital to work. This includes both garments and PPE acquisition candidates, but we remain careful and diligent on both pricing and risks in the current environment. Upon finding the right candidate for strategic actions, we look forward to moving ahead. We now welcome your questions.

[Operator Instructions] Our first question is from Mark Argento with Lake Street Capital. Please proceed with your question.

Hey, guys. Good morning. Nice to see the business bouncing back here pretty nicely, especially going into the second half. Just a couple of quick questions. I know you're back at -- effectively at full capacity. When you think about the type of product you guys are manufacturing, the balancing capacity utilization with kind of gross margins or average kind of gross profit per piece maybe talk about how you're thinking through that in terms of new business and keeping some additional supply or should – I should say capacity available to land some newer potentially higher-margin business going forward.

Sam, do you want to answer that or Eric?

Maybe, Eric you try to answer that first. Yes?

Okay. So, Mark, how are you? Long time no see.

Yep.

Okay. So I think okay – we okay. Now, Jerash is moving towards – I mean to other kinds of manufacturing, like what we have already mentioned as the PPE products. Okay. Because before that okay most of the U.S. medicals buyers are buying from China. But now okay, I think – okay, they are looking to the purchases in other countries. So Jordan I'm expecting Jordan will be the one of their – I mean good option, because we are also selling to U.S. on a duty-free basis. We are now converting our – one of our factory, we call Jerash number five to produce which is 100% PPE product in this factory. And this is – and in this factory we are producing the washable face mask, the disposable onetime face mask, the medical gown and also to couple – or for different customers okay. Now this factory is in full operations, and we have full orders to – okay, to continue. So looking forward, we are expecting more orders to be coming in 2021. And no matter in the – I mean, what area or number of workers we are planning to expand also in 2021 to move our demand from the medical company in Europe and also in U.S. Okay, this is one of our major plans for the next year.

And when you're thinking about these new customers and on-boarding them when you think about the gross margin per piece there's one part of the model that fluctuates quite a bit is that gross margin line. So historically, the winter wear jackets, or some of the higher-priced units ended up being the biggest kind of gross margin generators per piece. On the flip side, if you're filling capacity with say t-shirts or something with a lower kind of dollar value gross profit profile. I'm just trying to better understand, should we be thinking about a target gross margin kind of the mid to low 20s going forward? Or – that's really what I'm really trying to get at.

Okay. So let me answer you like this. Okay. So for the PPE product, if we are not going to – I mean, to participate in the form of a tender, okay, if it is a confirmed order with a particular customer what we are doing now, okay. Some of the orders, we meant for the face mask and also for the medical gown we are maintaining around 15% of the GP of the gross profit at least. Okay. Sometimes it is as high as 20% or even more than 20%. Okay. But for a very big order, which we have to – are invited to participate in some kind of a tender, like in the Middle East market, the Ministry of Health in Jordan, or the Ministry of Health in Saudi Arabia also invited Jerash to participate its tender, then we are facing severe competition from other suppliers, especially in Vietnam, Turkey and China. Then we have to lower our profit margin, okay, up to maybe 8% to 10% in order okay to be able to have a better chance to be awarded the tender. So this is the two ways, we are doing – dealing with this kind of business.

Got it.

I think Mark is more concerned about the other business, the garments business, because he is thinking about okay the jackets are probably in the 20% margin or 25% margin but then when we're producing t-shirts Polos and those smaller items the ASPs are much lower, as well as the margins are lower even though the volumes are higher. So I guess Mark is trying to figure out, what kind of margin can we expect. Of course, the PPE is a growing segment of our business. But we're still – the majority of our sales are coming from the garment manufacturing.

Actually, okay for the government manufacturing okay most of our I mean, capacity are producing outerwear jackets athletic jackets these kind of things. Okay. For the other products, we are manufacturing in relation – which is garment-related, we are also producing T-shirts and pants. For the T-shirts, okay, we normally will not – okay, T-shirts we usually produce during the low season, which we took as a – on a CM basis okay to – in order to fill up the capacity okay but, okay. This is when we don't have enough FOB orders. But for the pants, okay, which now we get a big number from the our new customer New Balance, our average GP is still on the 16% to 18%, okay for the pants. This is another category of garment-related products.

Great. Thanks guys. That’s all. I'll hop back in the queue.

Okay. Thanks. Okay. Thanks Mark.

And our next question is from Kenneth Fink, a Private Investor. Please proceed with your question.

Good morning everyone. Thank you for the update. Yes. I have been a private investor with a number of my friends since inception, since the IPO, when the stock was released at $7. So, I've been -- certainly follow it since inception and wondering what we can do to boost -- I understand the latest dynamic relating to the COVID. But really your stock hasn't moved much. And I would expect it to move up. The -- since the previous years have had good earnings growth, good margins. So, I'm wondering, what can we do to bolster the stock? It looks to me like -- and I don't discuss this with anyone. So help me out here. It looks to me like, there's just not enough stock being floated. So, maybe, is there any type of conversation, what we can do to increase the float? And thank you for this.

If there are any more questions? Gilbert, go ahead.

Well, let me try to answer that question. We do realize that the float of our stock in the market is limited. And actually, a lot of investors or funds, they're trying to buy but they just can't buy enough in the open market. So, we're working on multiple ends. We're talking to some larger shareholders to see, if they can give up some of their shares to sell as block. And then, on the other hand, we have filed an S-1 -- no S-3 shelf registration. So, we're just waiting for the right timing. And when the timing is right, we could raise some capital and put some more shares out in the market. But ultimately, I think what we're working is, focusing on growing our business and delivering good performance, financial performance, so that people will continue to support our company and people will continue to buy our shares. And when the share price goes up that will be the good timing for us to release more shares into the market. And we're looking for acquisitions. And once we get a good candidate perhaps at that time we will need more capital and maybe raise a few million dollars, just a very small fundraising, but that will also put some more shares out in the market.

And our next question is from Rommel Dionisio with Aegis Capital. Please proceed with your question.

Yes. Thanks for taking my question. Good morning.

Good morning.

You guys talked about expanding your supply relationships and looking for acquisitions. I just wanted to reconcile though -- and you also talked about expanding potentially in Asia, as some of your customers have businesses there. So, as you look to expand production capacity either through acquisition or through strategic relationships, is that primarily Asia then? Or are you also considering Jordan? And also, is there room to expand production capacity within your existing facility in Jordan whether that's through additional labor shifts or just building out the factory a little further? Thank you.

Hey, Rommel, this is Gilbert Lee.

Yeah, hi, Gilbert.

First of all, we do have room to expand our capacity in our existing facilities. Eric has told us that we could potentially hire more people, especially in the satellite factory. We still have room over there. Just hire more people, and then increase the machines then we can boost our capacity over there. I think Jerash 4, which is Paramount, it's still -- we still have room there to put -- to add more people. So...

Yeah. A couple hundred.

But, at the -- yeah. But at the same time, we are also conducting a engineering study, because we have a couple of pieces of land inside the industrial zone that we plan to build dormitories and factories to expand. But that will take a longer time. So that is also ongoing. However, we are also looking at renting additional factories inside Jordan to increase our capacity over there. So there are multiple ways that we can do it. And we're doing it all, to see just which one will be successful acquisition, buying, and other factory. And that doesn't limit us to just Jordan. But we are also focusing on, countries where there are better agreements with the U.S. and with Europe, so that we can also take advantage of that. So yeah, but what you're talking about, expanding our sales and customer relationships in Asia Pacific and Europe. What we're talking about is, with our existing customers such as, the North Face and New Balance they have sales in those areas. They have -- but we cannot really supply those from Jordan, because it wouldn't make sense, to make it in Jordan and then ship it to China. So we're working with some of our partners in Asia Pacific to -- so because we already have the relationship with the North Face and such. And we're just going to subcontract, if we have -- in fact, we are already doing it. We have done this in the past and substantially in the second quarter of this year. So that will be ongoing. And that will be a way for us to expand our sales, in other geographical regions. But we don't have to really produce, in those regions. But by subcontracting to factories that we have a relationship with, that has -- the factories that have the quality standards, that our customers can accept, so that is what we're talking about.

Great. Thank you. That's very helpful. Thanks very much.

Thanks.

Thanks, Rommel.

And we have reached the end of our question-and-answer session. And I will now turn the call over to, Matt Kreps for closing remarks.

Thank you. And thank you all for participating in today's call. Jerash is off to a strong start in fiscal 2021. And our outlook anticipates continued performance, in the second half. Jerash will be conducting multiple outreach and conference events, including several events next week. If you have additional questions or would like to arrange a meeting at one of our upcoming investor conference events, please contact me using the information at the bottom of our press release. Thank you for your participation today. And have a good day.

Thank you.

Thank you.

Thank you.

And this concludes today's conference. And you may disconnect your line at this time. Thank you for your participation.