Jerash Holdings (US), Inc. (JRSH) Q3 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the Jerash Third 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’d now like to turn the conference over to your host, Matt Kreps, Investor Relations for Jerash Holdings. Please go ahead Mr. Kreps.

Thank you and good morning and welcome to the Jerash Holdings fiscal third 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 quarterly results press release issued earlier today and available on the Investor Relations section of our website at www.jerashholdings.com. Today's call is being recorded and will be available for playback on that site. 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 presentation that are not purely historical facts may be forward-looking statements and are subject to Safe Harbor protection available under the applicable Securities Laws. Important factors that could cause actual results to differ materially from those in our forward-looking statements are discussed in our filings with the SEC. In particular our most recent Form 10-K and Form 10-Q. These documents are available in the Investor Relations section of our website under the link to SEC filings. We do not update our forward-looking statements. 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 December quarter demonstrate most of the typical seasonality in our business, but the most important parts of the quarter are marked in the financial reports. With orders collected during the quarter, we are now set up for not only a 38% plus revenue increase in the fourth quarter and also a record fiscal 2022 starting April 1st. That includes significant revenue growth in our first and second quarters, ending in June and September. That would generate three quarters in a row of strong year-over-year growth and take us back to gross margins in the high teens, driving better performance through the income statement. We have taken a conservative stance out of prudence during the past few quarters, and it has served us well and we are now back to groove. Right now, we are almost halfway through our fiscal fourth quarter, which we expect will show significant year-over-year growth compared to last year. We also expect a rise in gross margin thanks to our historical average range. We believe this will result in full recovery to last year's second half revenue levels and year-end revenue in excess of the 85 million target for the full year. Orders for the first six months of fiscal 2022 have our jacket and outerwear capacity so out even above our internal capacity through September at revenue levels that would lead to quarterly results near or about our prior record quarterly revenue of 33.5 million. Achieving those targets would place Jerash on track to which revenue well above 100 million and we ensure our initial guidance to support our assessment for this outlook. When the COVID pandemic first emerged, we initially saw cancellation from our customers and most of those orders were swiftly reinstated and any excess capacity taken by other customers. While that was good news the timing of shipments over the past few quarters was more fluid than in prior years, which is what you are seeing in our third and fourth quarter’s results right now. This is certainly a positive recovery and Jerash’s volumes has been left intact than sales in our end customers indicating that they prioritize production at our facilities to ensure access to high quality and zero tears [ph]. Based on this order we are now -- we are acting very fast to increase capacity in our existing facilities and secure additional capacity to meet their quantity needs. Revenues in the December quarter was 20.7 million, down 19% from 25.4 million a year ago mainly due to timing of shipments, which is when we recognize the revenue. As such, our fourth quarter is expected to be in excess of 20 million, up from 14.4 million a year ago, an increase of 39%. Taken all together, our second half revenue will be fully recovered to pre-COVID levels and more evenly distributed than in the past years, a positive for our business overall. Gross margins declined in the quarter to 12%, mainly due to mix as we shift higher volumes of local and discount store in the December quarter and we'll be shipping heavily our major brand orders with higher margins in the fourth quarter. As a result, we expect fourth quarter’s gross margin to be at least 18%, compared to 9% a year ago. We're excited for the next nine months as we return to growth and higher margins and can return to investment in our growth through capacity expansion and the relaunch of our construction plans -- from construction plans for new buildings on our land in the short-term. With that, I would turn the call over to Eric to discuss our factory operation in Jordan, then Gilbert will cover some financial data.

Thank you, Sam. Hello, everyone. My comments today will be somewhat brief as the news is all very positive and easy to state. As Sam said, our customers are returning to more typical patterns and doing so at much higher order volumes. Said in another way, we are past the pandemic and back to growth. Our factories in Jordan are very busy and we are actively acting capacity. Looking at the third and fourth quarters, revenue has evened out between these quarters, which was one of our long-term goals. The mix is a bit different between the quarter's accounting for the gross margin difference between our third quarter report and the fourth quarter outlook. Looking at mix in more detail, the third quarter has a higher percentage of local and discount store orders, which are usually lower ASP and margin that orders from our major brand customers. This is due to a tiny shift in the customer delivery schedule that shifted most of our major brand customer shipments into the fourth quarter. We usually refer to this major brand orders as FOB or free on board, a term disrupting the shipping method and upon that which we recognize revenue. So that means our fourth quarter will be almost all FOB orders for this major global brands raising both revenue and gross margin compared to last year as we are guiding in the press release. Even better news is that customer orders for the first half of the fiscal 2022 which start April 1 show we are back to growth. Orders from just our four biggest global brand customers have our capacity completely booked until the end of September and the bookings are heavily weighted for jackets and outerwear, which are better ASP and margin items. As a result, we expect that June and September quarters might be a near or above our previous revenue record of 33.5 million in the second quarter of fiscal 2019. In fact, I'm working extra right now to install additional production lines in our own factories and secure more capacity to ensure we meet the demand and that is just from our four largest customers. We are also restarting our construction programs that were planned for a year ago but put on hold due to COVID pandemic. We bought land some time ago for this project and we'll start construction on both the dormitory building and an additional factory. This will allow us to grow our workforce and manufacturing capacity and possibly also replace these facilities with more cost favorable owned facilities. The dorms also help us provide excellent housing to our workers in keeping with our commitments to ESG and doing what is best to care for the workers, which in turn drives our business. We are very excited about our developments and growth ahead over the next three quarters that we have booked, plus our opportunities to continue that growth into the second half of next year. And with that, I will turn the call to Gilbert for financials and outlook. Gilbert.

Thank you, Eric. Hello, everyone. The third quarter ended December 31st was in line with our forecasts and demonstrated a shift in mix and timing between the third and fourth quarters, as well as leveling out our second half revenue compared to prior years where the fourth quarter was far smaller than the rest of the year. Revenue in the third quarter was $20.7 million, a decrease of 19% from $25.4 million in the third quarter of fiscal 2020. The change in revenue reflected a shift in customer timing we related to the COVID-19 pandemic, causing several third quarter orders to ship in the fourth quarter, which delayed revenue recognition. Gross margin for the third quarter was 12%, compared with 19% in the third quarter of fiscal 2020, mainly due to a shift in product mix with third quarter being weighted toward local and discount store orders, while our fourth quarter will be heavily global brands. We are guiding for higher gross margin in the fourth quarter to reflect this. Operating expenses for the third quarter of fiscal 2021 was $2.4 million, a decrease of 9% from 2.6 million in the third quarter of fiscal 2020, mainly due to slightly lower labor cost. Operating income for the third quarter was $0.1 million, GAAP net income for the third fiscal quarter was $0.1 million or $0.01 per diluted share. In short, the third quarter was solid, but positions us for an improved fourth quarter ending in March, plus the trends that Eric described positioned Jerash for potential record quarters in June and September and a record fiscal year breaking the $100 million in revenue target. Digging into that more, we expect fourth quarter revenue to be in excess of $20 million, an increase of at least 38% on a year-over-year basis with gross margins in the high teens due to more favorable mix. We're booking orders now for our fiscal 2020 first half, which will be the June and September quarters. We're fully booked for all capacity through September with orders from our major brand customers, mainly jackets and outerwear, which provide more favorable ASP and gross margin opportunities. We believe those orders represent an opportunity for both the June and September quarters to be near or above our previous quality record revenue of 33.5 million. We expect the favorable mix in orders will put gross margins in the high teens. Achieving that goal would put Jerash well on track to break $100 million in revenue in fiscal 2022, as we would expect this momentum to carry into our second half as well. Additionally, the Board has announced approval of another $0.05 dividend for the December quarter. Our balance sheets remain very strong with cash and restricted cash at December 31st of $29.2 million and working capital of $50.3 million. Inventory was 19.2 million, up from 10.3 million at the end of the second quarter, reflecting goods produced for shipment in the fourth quarter to FOB customers. Receivables collection remains consistent 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 an opportunity for additional asset based lending should it be opportune. We expect full year sales to be more than $85 million, down slightly year-over-year from a record $93 million last year due to COVID-19 impacts in the first half, then increased to a range of $100 million to $102 million in fiscal 2022. This is just our initial forecast and more complete fiscal 2022 guidance will be provided at a later date. To fill out our notes we continue to expand our PPE shipments and see this as a sustainable business. We're focusing on surgical gowns, disposable masks, and reusable masks where we believe we are cost and quality comparative. We continue to expand our capabilities and sales in this product category, including registrations with the FDA to expand our sales opportunities in the U.S. market. Second, we previously discussed that Jerash is diversifying our geographical production capability to enhance our competitiveness in Asia Pacific, particularly for customers like VF and New Balance who have multi regional sales networks. This effort includes working with overseas subcontracting partners in APAC locations who have existing certifications required by these customers. We collaborate with these manufacturers to place the order on behalf of our brand customers and ensure quality and timely delivery. We believe this is a good growth opportunity and represents a capital light and minimal risk approach to expanding our reach into Asia Pacific markets. In terms of revenue recognition, we will recognize the full value of the order and the cost of production. Because we do not do the actual production, our margins will be lower on these sales, but our cost structure is minimal, resulting in net positive impact to the bottom line as we get to scale. In conclusion, we reported a solid third quarter, expect strongly improved financial performance in the fourth quarter with revenue growth of approximately 38% and higher gross margin. We also sold out on capacity through September of this year and expect at or close to record revenue June and September quarters, which are the first and second quarters in fiscal 2022, with strong gross margin to accompany the increased revenue. Jerash is back to growth and moving swiftly to take full advantage of these opportunities. We now welcome your questions.

Thank you. [Operator Instructions]. The first question is from Mark Argento, Lake Street Capital. Please go ahead, sir.

Hey guys, this is John on for Mark. Thanks for taking my question. First, can you just update us on where your total capacity is at currently? And then second, how much capacity can some of this new construction and new production lines add over the next year or so?

Eric, you want to answer the capacity question, about how much capacity increase we can put in for the next fiscal year.

You mean for the next fiscal year, okay. We are looking for an increase of four production lines in house. Okay, four production lines means we will add additional around 500-600 workers, and then we can increase our capacity by around 0.5 million pieces. Okay, this is the -- I mean, this we will trying to implement within the coming six months.

Awesome, okay. And then as far as some of the new construction that you guys are resuming, what is kind of the timing as far as the dorms and facilities go from a construction standpoint and then at what point can that additional capacity start to come online?

So Gilbert are you going to answer or I will answer.

I can answer and then you could you could add anything. So John, we're planning to start construction as soon as we approve the engineering designs of the dormitory and the factory. But it's going to take at least one and a half year to two years to complete. So nothing is going to add any capacity in the next coming fiscal year.

Okay, and then last question for me, I'm just thinking about the strategic partnership business in Asia. How quickly can you start to ramp that up, I know you mentioned some of the profitability dynamics, but really, how long is it going to take to get that portion of the business to scale where it has a meaningful impact on the bottom line?

In fact…

I tried to answer this.

Go ahead, go ahead Sam.

In fact, for the time specification of our orders to factories in Asia, just like Indonesia or China, and we have tried some trial orders already and we will see very good feedback from New Balance, our existing customer. And we expect in the coming years that we will be close to at least maybe $5 million to $10 million U.S. of order that we can secure through this diversification to the offshore factories in Asia Pacific region. And profit wise, I mean, the margin will be maybe around 10% to 12% or some up to 15%. And because we don't need to produce ourselves and our course in pursuing this order is low, so we expect can at least get I mean net margin of 8% to 10%, I can say through this kind of orders of this scale diversification to APAC countries. Yes.

Okay, thanks guys.

Thank you.

Thanks, John.

Your next question is from Rommel Dionisio, Aegis Capital. Please go ahead, sir.

Yes, good morning. Thank you for taking my question. As you guys are adding production capacity, I know that different countries have different rules and regulations regarding, people from overseas coming in and quarantine's and all that. So is the plan to continue to import workers into Jordan from Bangladesh, India, Sri Lanka, subset countries or to increase the percentage of workers that come from Jordan, and if so would there be an impact on margins, would there be a margin implication if you use more domestic labor in Jordan? Thank you.

Eric, you can answer that.

Yes, okay. Actually, okay, our percentage for migrant and local workers is 75% is from overseas and 25% from local is the ratio under the direction of the Ministry of Labor here. But for the last year 2020 because of the epidemic, Jordan government already I mean, banned the coming of the migrant workers. So almost one year we do not have newcomers from overseas. And starting from the 15th of January, when the epidemic is well controlled in Jordan, the Ministry of Labor has reopened the migrant workers visa. And now starting I mean this month, so every month around 50 new migrant workers will be coming to Jordan to join Jerash factory. At the same time, because last year we cannot bring in the migrant workers we also have increased some of the local numbers of local workers in one of our factory. And this year we also have the plans to increase the number of local workers by giving them appropriate training so that they can, I mean, be able to handle more complicated stuff than before. So if our training program turns to be successful, then we can employ more local workers and we can also reduce the costs of the operation of the factory, this is our plan.

Great, that's very helpful, thank you very much.

In terms of margin -- in terms of margin impact there should be minimal or maybe no negative impacts to our overall manufacturing cost or to the bottom line or to the gross margin impact. Is that right. Okay, thank you.

Perfect, thank you, Gilbert. Thank you Eric.

Thank you.

We have a question from a private investor, Michael Woo. Please go ahead, Mr. Woo.

Hello, hi. I wanted to ask a question about revenue shift from like the latest shipment from Q3 to Q4. So could you disclose how much is that?

It's about $1.1 million, and those orders were already shipped as of today.

Yes, so like it's around like 1.1 million order, right, is that…

$1.1 million.

Yeah. So that means, like I've seen you previously you have guided like Q4 and Q3 together should be roughly the same as last year. So it seems even adding back that 1.1 million so I don't think you can get around that numbers like this year, so Q4 is tiny, this quarter is tiny so it is 40, right?

Yeah roughly.

Yeah, so last year you got like 40, around 40 for the large data harp, right. Okay, that's great. Could you provide what is the status of a Facebook order, sorry, sorry, North Face order like what is the percentage of this quarter and next quarter, like is that Q4 and Q3, roughly?

I don't understand this…

Sorry, sorry, sorry, sorry. So what is -- like what's the order kind of compared to last year, like from North Face, previously you kind of [Multiple Speakers] yes, yes?

One minute, let me find that information about North Face sales. Our North Face sales declined in the last quarter, pretty significantly in the third quarter…

Because of the epidemic. Okay, our whole year, whole fiscal year the North Face order was reduced around 18% to 19% for the year.

Okay, so the trend is almost the same, right, like I mean Q4-Q3 are almost the same, right?

Well, because of the timing of this shipment, Q3 on North Face sales was down significantly. But it will pick back up in Q4 because some of the shipments were delayed to Q4.

Yes, I guess only 1.1 million, right. I mean, that's probably the most from North Face?

Yeah, only 1.1 million was supposed to ship in Q3, but it got delayed to Q4.

So that's from North Face?

Yeah.

Okay, great. So about the next fiscal year or so, do you have an estimate like order flow from North Face, you said, like the jacket were back kind of normal, so what does -- I mean, what is the order number from North Face for next fiscal year 2022 compared to…?

For the next fiscal year, which is April 1, 2021 to end March 2022. Okay, the North Face has already given us a projection for the first, I mean, six or seven months, which is around 3.4 million pieces, which is already maybe more than $60 million U.S. And for the latter half of 2021 to the early quarters of 2022, North Face is going to face another order I mean, for around 1.5 million to 2 million pieces, which is I think another -- I think more than $10 million to $15 million U.S. So the hope for the whole year North Face projection is 35% more than last year.

Okay, so it's around like six or something, I forgot what you said?

Yes, and the reason why Gilbert has just said in his speech that, okay, we will come to, I mean, rest of year of over 100 million sales.

But yeah, I'm not trying to question this but, like previously your revenue from North Face is actually quite bigger than it is actually entirely the fiscal ending like 2020 around 72 million I guess. So you -- so we can use in case you will get orders from other companies to add up to the 100 million range?

Yes. We will have also increased especially from New Balance order. Okay, New Balance has rapidly increased by 50% for 2021 to 2022, according to the projection.

Okay, okay great. That's all my questions. Thank you very much.

Okay, thank you.

We have a question from another private investor, Mr. Chris Glenn. Please go ahead, Mr. Glenn.

Hey, thanks for taking my question. So historically, VF Corporation has made up a majority of Jerash’s revenue. So I'm looking to get a sense of if there are any specific reasons why you believe that VF will keep giving you business into the future, are there any major switching costs if they were to change to a different manufacturer, is there a specialized technology Jerash has that other manufacturers don't have? Just trying to get a sense of why you think the VF relationship is likely to stick and why they aren't likely to move their business from you to another manufacturer?

Okay, Gilbert can I answer this question.

Yes, please.

Okay, actually the reason why VF is placing a lot of order to Jerash, there's a couple of reasons. First of all, according to the hierarchy of most major reputable brands like VF, North Face they are now selecting countries which is eligible for free duty for exporting to the U.S. market. So for free duty to U.S. the buyer don't have much choices. The free duty countries mostly include Jordan, Egypt, and some countries in the Central America and also Africa. But, among all this country and among all the factories located in these countries, the Jordan factories are among the most capable one of manufacturing complicated jacket style for North Face. And among all the 50 and 60 factories in Jordan, there are only less than five factories in Jordan who can handle complicated jacket style and Jerash is one of them. And Jerash is also located in a free duty country. This is the reason why North Face is continuously placing order to Jerash. At the same time. We have also -- we'll consider the on time performance, the quality performance, designs or factors are also important factors that North Face will consider placing additional orders or increasing the orders for next year. For the past five years our track record with North Face is excellent. We awarded almost on time performance, quality performance also 98%. So we are the number one sometimes number two as classified by North Face. This is the major reasons why North Face is continuing placing order to Jerash.

Got it, thank you.

Thank you.

Gentlemen, there are no more further questions. I would like to turn the conference over for closing remarks to Mr. Matt Kreps. Please go ahead sir.

Thank you Jerry and thank you everyone for participating in today’s call. Jerash will be conducting several outreach and conference events in the coming weeks and months. If you have additional questions or would like to arrange a virtual meeting with management, please contact me directly using my e-mail and phone number that are included at the bottom of our press release. Thank you everyone for your participation and have a great day.

This concludes today’s conference, you may disconnect your lines at this time. Thank you for your participation.

Okay, thank you.

Okay, thank you very much everyone.