Jerash Holdings (US) Inc (JRSH) 2021 Q3 法說會逐字稿

Greetings, and Welcome to the Jerash Third Quarter Fiscal 2021 Results Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded. 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.

Joining the call 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 was issued earlier today and available in 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. (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 may be forward-looking statements and are subject to the 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 to link SEC filings. We do not update our forward-looking statements. The company undertakes no obligation to publicly release the results of any revision to its 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 demonstrates most of the typical seasonality in our business, but the most important parts of the quarter are not 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, but also a record fiscal 2022, starting April 1. That includes significant revenue growth in our first and second quarters ending in June and September. That would generate 3 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 growth. 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 impact to our historical average range. We believe this will result in full with recovery to last year's second half revenue levels and year-end revenue in excess of the $85 million we target for the full year.

Orders for the first 6 months of fiscal 2022 have our jacket and outerwear capacity, so even above our internal capacity through September at revenue levels that would lead to quarterly results near or above our prior record quarterly revenue of $33.5 million. Achieving those targets will place Jerash on track to reach revenue well above $100 million, and we issue our initial guidance to support our (inaudible) 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 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 results right now. This is certainly a positive recovery and Jerash volumes has seen less impact than sales in our end customers, indicating that they prioritize production at our facilities to ensure access to high quality and zero tariffs.

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 this December quarter was $20.7 million, down 19% from $25.4 million a year ago, into the 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 altogether, our second half revenue will be fully recovered to pre-COVID levels and more easily distributed than in the past years, a positive win for our business overall.

Gross margins declined in the quarter to 12%, mainly due to mix as we ship higher volumes of local and discount store in the December quarter, and we'll be shipping heavily on 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 9 months as we return to growth and higher margins and can return to investment in our growth through capacity expansion and relaunch of our construction plans for -- from construction plans for new buildings on our land in the (inaudible).

With that, I will 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 adding capacity. Looking at the third and fourth quarters, revenue has even out between these quarters, which is one of our long-term goals. The mix is a bit different between the quarters, 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 than orders from our major brand customers. This is due to timely shifts 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 describing the shipping method and point at which we recognize revenue.

So that means our fourth quarter will be almost all FOB orders for these 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 starts April 1, show we are back to growth. Order from just our 4 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 the June and September quarters might be 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 4 largest customers. We are also restarting our construction programs that were planted for a year ago but put on hold due to COVID pandemic. We bought land some time ago for this project and will start construction on both a dormitory building and an additional factory. This will allow us to grow our workforce and manufacturing capacity and possibly, also replace lease facilities with more cost favorable owned facilities. The dorms also help us provide excellent housing to our workers in keeping with our commitment to ESG and doing what is best to care for the workers, which, in turn, drives our business. We are very excited about our development and growth ahead over the next 3 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 31 was in line with our forecast 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 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, position 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 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 to 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 quarterly 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 sheet remain very strong with cash and restricted cash at December 31 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 the 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, that 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.

A few other notes. We continue to expand our PPE shipments and see this as a sustainable business. We're focusing on surgical gowns, disposable mask and reusable mask, where we believe we are cost and quality competitive. We continue to expand our capabilities in 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 capabilities 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 margins. We are 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.

(Operator Instructions)

The first question is from Mark Argento, Lake Street Capital.

This is John on for Mark. 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, do you want to answer the capacity question about how much capacity increase we can put in for the next fiscal year?

You mean that for the next fiscal year? Okay, we are planning for an increase of 4 production lines in-house, okay? 4 production lines means we will add additional around 500 to 600 workers, and then we can increase our capacity by around 0.5 million pieces. Okay. This is the -- I mean, this, we will try to implement within the coming 6 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?

Okay. So Gilbert, are you going to answer or I will answer?

I can answer and then you could add anything. So John, we are planning to start construction as soon as the -- as soon as we approve the engineering design of the dormitory and factory, but it's going to take at least 1.5 years to 2 years to complete. So nothing is going to add any capacity in the next coming fiscal year.

Okay. And then last question for me. 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 for the -- yes, I'll try to answer, please, Gilbert.

Go ahead. Go ahead, Sam.

Yes. In fact, for the diversification 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'll be close to at least maybe USD 5 million to USD 10 million 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 so -- and our cost in fulfilling these orders is low. So we expect and at least get, I mean, net margin 8% to 10%, I can say, through this kind of orders or for this kind of diversification to APAC countries, yes.

The next question is from Rommel Dionisio, Aegis Capital.

As you guys are adding production capacity, I know that there are -- different countries have different rules and regulations regarding people from overseas coming in and quarantines and all that. So is the plan to continue to import workers into Jordan from Bangladesh, India, Sri Lanka, these types of countries ought 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?

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. This is a ratio under the direction of the Minister of Labor here, okay? But for the last year 2020 because of the pandemic, Jordan government already, I mean, banned the coming of the migrant workers.

So almost one year, we do not have newcomer from overseas. And starting from the 15th of January, when the pandemic is well controlled in Jordan, the Minister of Labor has reopened the migrant workers visa. And now starting, I mean, this month, so every months, around 50 new migrant workers will be coming to Jordan to join Jerash factory.

At the same time -- because last year, we did not 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 staff than before. So if our training program turns to be successful, then we can employ more local workers, and it can also reduce the cost of the operation of the factory. This is our plan.

Okay. That's very helpful.

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?

Yes.

We have a question from a private investor, Michael Wu.

I want to ask a question about the revenue shift from like the late shipment from Q3 to Q4. So could you disclose like 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 in dollars, right?

$1.1 million.

Yes. So that means like -- I think 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 it can get around that numbers like this year -- so Q4 is 20. This quarter is 20 so it's 40, right? Yes, roughly.

Yes, totally, it's about 40.

Yes, so last year, you got like 40, around 40 for the later half, right? Okay, that's great. Could you provide what status of Facebook order -- sorry, sorry, North Face order, like how -- what's the percentage of this quarter and the next quarter? Like is that Q4 and Q3, roughly?

I don't understand this line, unfortunately.

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 did sound like 25%.

From North Face?

Yes, yes.

Well, let me find that information about North Face sales. Well, North Face sales declined in the last quarter pretty significantly -- in the third quarter, right? It was like...

Because of the pandemic, 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 the shipments, Q3 North Face sales was down significantly, but it will pick back up in Q4 because some of the shipments were delayed to Q4.

But you said it's only $1.1 million, right? I mean, that's probably the most from North Face?

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

So that's from North Face?

Yes.

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

For the next fiscal year, which is '20 -- okay, April 1, 2021, to end March 2022. The North Face has already given us a projection for the first, I mean, 6 or 7 months, which is around 3.4 million pieces, which is already maybe more than USD 60 million. And for the later half of 2021 to the early quarters of 2022, North Face is going to place another order, I mean, for around 1.5 million to 2 million pieces, which is, I think, another, I think, more than USD 10 million to USD 15 million. So the hope for the whole year North Face projection is 35% more than last year.

Okay. So it's around like around like 60 or something? I forgot you said, like you've added...

Yes. It's the reason why Gilbert has just said in his speech that we will come to, I mean, record year of over $100 million sales.

But yes, I'm not trying to question this, but like previously, your revenue from North Face is actually quite bigger than the effects in ['20,] the fiscal ending like 2020 is around $72 million, I guess. So which means any case you will get orders from other companies like to add up to the $100 million range?

Yes, we will have order increase, especially from New Balance order, okay? New Balance has rapidly increased by 50% for 2021 to '22, according to the projection.

We have a question from another private investor, Mr. Chris Glynn.

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?

Gilbert, can I answer this question?

Yes, please.

Okay. Actually, the reason why VF is placing a lot of order to Jerash, there is a couple of reasons. First of all, according to the priority of most major reputable brands like we have 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 I mean, Central America and also Africa. But among all this country and among all the factories located in these countries, the Jordan factories are 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 5 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 -- will consider the -- on-time performance, the quality performance, these kinds of factors are also important factors that North Face will consider placing additional orders or increasing the orders for next year.

For the past 5 years, our track record with North Face is is excellent. We are -- we awarded almost on the on-time performance, quality performance also 98%. So we are the #1. Sometimes #2 as classified by North Face. This is the major reason why North Face is continuing placing order to Jerash.

Gentlemen, there are no more further questions. I'd 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.