Jerash Holdings (US) Inc (JRSH) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for joining us for this Jerash Fiscal Year 2020 Results Conference Call. (Operator Instructions)

To get it started with opening remarks and introductions, I'm pleased to turn the floor to Matt Kreps with Darrow Associates Investor Relations. Welcome, Matt.

Thank you, Jim. Good morning, and welcome to the Jerash Holdings Fiscal Fourth Quarter and Full Year 2020 Results Conference Call. With me today is Sam Choi, our Chairman and 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 an updated investor slide deck are available on our website, www.jerashholdings.com. 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, target, grow, seek, goal and other similar statements of expectation identify forward-looking statements. Forward-looking statements are subject to risks, uncertainties and are important factors that could cause actual results to differ materially from those reflected in the forward-looking statements. These risks and uncertainties are detailed

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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 statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

I will now turn the call over to Sam. Please go ahead.

Thank you, Matt. Hello, everyone. I'm pleased to join all of you today for this call. Fiscal 2020 turned out to be a very strong year of growth for Jerash with sales growing 9.5% to a record $93 million. A key goal for the year was to diversify our customer base. We did this with more than 7% of our revenue from new customers who are expected to further grow their business with Jerash in fiscal 2021.

We also invested in additional capacity during fiscal 2020, acquiring the Paramount manufacturing access for approximately $1 million. We estimate this increased our annual production capacity by more than 23% or 1.5 million pieces, which has been almost fully booked with new orders since we started this facility with our trained workers. I'm very proud of our team's hard work and dedication to that process.

We also opened a sewing workshop in Al-Hasa in Jordan through an exciting partnership with the Jordanian government. Jerash is a socially oriented company dedicated to not only profitability for our stockholders but also creating quality employment for people in Jordan, both permanent citizens and a global workforce that comes to Jordan on multiyear work contracts. The Al-Hasa project was designed to create local jobs for Jordanian women in an underserved rural area. This female-focused workshop is up and running with great success. One of their first projects was sewing customer -- was sewing custom North Face garments sold in Europe to celebrate International Women's Day. These projects are particularly exciting to Jerash because they advance both good business and also good social responsibility.

Fiscal 2020 was not without its challenges though, including the global COVID-19 pandemic that closed our facility in the last 2 weeks of the fourth quarter. The pandemic will have an impact on our fiscal 2021, but a number of orders deferred at the start of the pandemic have been reinstated, a good sign for Jerash. In fact, Jordan has proven to be a success story in this COVID response, and our factories are now 100% back to work with a number of additional considerations to protect our workers as well.

Before passing the call to Gilbert, I want to acknowledge our recent addition to our Board of Directors. Bill Korn has joined our Board as an Independent Director and Chair of our Audit Committee after Sean Socha stepped down. I want to thank Sean for his service since our IPO and wish him well. Bill is a Harvard MBA and currently the CFO of MTBC Inc., a fast-growing NASDAQ-listed company based in New Jersey, close to where our U.S. office is located. Bill has helped with more than 15 acquisitions since MTBC's 2014 IPO. This is an area where his knowledge and experience can be helpful to our future.

MTBC also has very loyal, long-term customer and uses a global workforce at facilities based in Pakistan to offer its customer economic advantages, such -- much as Jerash's long-term customer sees the best benefit of our high-quality, lower-cost workforce in Jordan. We believe his experience and specific knowledge of several areas key to our future plan will help our stockholders well.

With that, I turn the call over to Gilbert.

Thank you, Sam. Hello, everyone. I'm pleased to join all of you today to discuss our financial results. Our results demonstrate continued progress on our growth initiatives, although we were impacted by the global COVID pandemic for the last 2 weeks of the fourth quarter.

Let's cover some of the details from our financials and business performance for a few minutes. Revenue in the fourth quarter of fiscal 2020, which ended March 31, was $14.4 million, effectively flat year-over-year. We had to defer approximately $1.6 million in shipments scheduled late in the quarter when the country of Jordan announced a shelter-in-place order in mid-March to arrest the spread of COVID-19.

I'm pleased to say that Jordan has handled the pandemic very well and reopened using a number of well-developed measures to facilitate a return to business while continuing to protect workers and citizens. Jerash is fully reopened and using enhanced screening and hygiene measures for the continued protection of our workforce.

Fourth quarter gross margins were expected to reflect the start-up cost for our Al-Hasa workshop, a very exciting project, as Sam mentioned. But the pandemic also had a significant margin impact due to the loss in productivity in the 2-week shutdown. As a result, gross margin was only 8.7% for the quarter.

Operating expenses have declined, though, to $2 million for the quarter as compared with $2.8 million in the previous fourth quarter, resulting in a net loss of just $0.07 per share.

For the full year, we were able to achieve most of our financial objectives, even with the pandemic's impact, setting the stage for continued focus on operating improvements in the year ahead. Full year revenue was a record $93 million, reflective of the $1.6 million in fourth quarter orders that shifted into fiscal 2021. This was an increase of 9.5% year-over-year. Our growth included more than 7% of revenue from new customers and increased utilization of our factory during the fiscal second half, which is warmer season garment production and was previously underutilized. With the factory expansion efforts in the past year, we can now produce more than 8 million pieces per year, a 23% increase. We believe we are actually able to scale volumes above this number with our current facilities but continue to focus on capacity expansion and adding new dormitory facilities for our workforce in the near future.

Gross margin for the year was 19.3% compared with 22.1% in the prior year. Approximately 110 basis points of the full year decline was due to the pandemic closures in March and the remainder due to higher production volumes in the second half at lower margins and start-up cost at our new production centers. We continue to focus on balancing margin with overall production and profitability.

Operating expenses for the year were $10.3 million, down 17% year-over-year. Operating income for the year was $7.6 million, an increase of 20% from 2019. GAAP net income for the year was $6.5 million or $0.57 per diluted share compared with $0.45 in 2019.

During the year, we paid out dividends quarterly at an annualized rate of $0.20 per share to our common stock shareholders. Our balance sheet remained very strong with cash and restricted cash on March 31 at $26.9 million. Inventory was $22.6 million and AR was $5.3 million. We have working capital in excess of $48 million as of March 31. We continue to 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.

In fiscal 2020, we have begun to invest in additional expansion for the future, including $2.3 million we invested into the purchase of the Paramount manufacturing assets and, more recently, land properties to further expand our production facilities and workers' dormitories as part of our multiyear facility expansion plan. I want to talk about a few other aspects of our business as well.

We have seen some volatility around orders as customers seek to adjust to new sales patterns in response to the COVID pandemic. Initially, this caused some orders to push out, reduced volumes or even request cancellation. Since then, we have seen the reopening efforts unfold and consumers adapt to new ways of shopping while social distancing or even some areas resuming more or less normal business as the reopenings have progressed. As a result, many of those orders have been reinstated. At this time, we are not yet ready to provide an outlook for 2021 until we have greater clarity on orders but remain focused on both maximizing that revenue and controlling costs.

To that end, we have taken a number of steps to reduce costs throughout our organization. We mentioned the addition of new customers over the course of 2020 accounting for 7.2% of revenue and helping further diversify revenue concentration. This is an ongoing effort in 2021.

As a large strategic supplier to those global brands, bringing on a new customer tends to be a long process for Jerash, including sample orders and initial smaller-volume orders, then securing larger orders. However, most of our customers tend to be loyal and find the value of our high-quality output and duty-free cost advantageous.

We are also adding products specific to current need. During the pandemic at the request of the Jordanian government, we produced some PPE supplies. Since then, we have produced and shipped masks to a new U.S. customer. We are in the process of exploring the opportunity of exporting our manufactured medical PPEs to the U.S. and Europe, and we should have a clearer outlook in the coming quarters. These new categories are good opportunities for Jerash, and we continue to build on our capabilities.

In summary, Jerash produced a solid year of growth in both revenue and profitability for our stockholders in fiscal 2020. At $0.57 per share in GAAP EPS, we believe this is a valuable and exciting business enterprise with opportunity for further growth. While there will certainly be impacts from the pandemic this year, our well-positioned balance sheet with no debt provides ample resources to fund continued expansion of our business through both organic and strategic opportunities. We look forward to the year ahead and thank you for your continued interest in Jerash.

We now welcome your questions.

(Operator Instructions) We'll take our first question from Mark Argento at Lake Street.

Sam, Gilbert, just wanted to drill down a little bit more on -- when you're talking with your customers, how are they shaping up kind of the demand equation? Obviously, a lot of retail has been closed for quite a while in the U.S. and, I'm assuming, other parts of the world as well. Are you getting any indications on what their thinking is in terms of kind of inventory levels at retail? Will that impact longer-term order patterns for the rest of this year? Any thoughts there would be helpful.

Yes, Gilbert, you want to take?

Sam, do you want to answer?

Yes, Gilbert, you can take that first.

Well, I can say that we constantly are -- on a week-to-week basis, we communicate with our customers on a continuous basis to -- because right now, the situation is really fluid. Even in the U.S., states are shutting down or after the reopening, they're pausing. And so nobody really knows how and when everything is going back to normal.

But indications from our customers have really -- I guess it's really because of our relationship with the customers, our long-term performance, our quality and delivery, on-time delivery and low cost, our customers have largely reinstated their orders from the -- for those orders that they have deferred or canceled at the beginning. So we are kind of cautiously optimistic. But obviously, we can't predict what is going to happen in 2021, and neither can our customers.

So to -- I guess that really doesn't answer your question, but we will continue to maintain communications with our customers, and they update us on a weekly basis. So right now, we're looking at some decline in 2021. However, we are doing everything we can. And also, we have some new customers. So we don't think that this is going to be a disaster. But however, we think 2021 is still going to be a pretty good year if everything gets back to normal with a reasonable time frame.

Sam, do you have anything to add?

I was going to ask -- go ahead, Sam.

Yes. And in fact, for the coming year, based on the confirmed order from our over 10 customers and also based on some very conservative projections, I think we try at least at this moment, at least, we can have 80%, I mean, compared with fiscal 2020 in terms of top line. And of course, the coming few months the pandemic situation in U.S., in Europe is getting better. I think the reinstatement of the orders will be more encouraging, and we will try to meet -- to try to catch, I mean, the top line just like fiscal 2020.

And also, I would like to say, I mean, besides the garments we are making, in the last few months, in fact, we are also making some masks. And recently, we are also making some isolation gowns or medical gowns for the Jordan and also Israel countries. And we are also seeking the FDA approval for export of the isolation gowns to the U.S. and the Europe. If we are successful on that, then we expect that will contribute to the top line in terms of sales of the isolation gown as well, yes.

And Sam, how quickly do you think you could get approval to start shipping product, the PPE product?

Okay. So Eric, can you talk about the process of typically FDA approval?

Yes. Okay. So actually, we already started the process of getting various certification for our medical products, okay? So we have applied, okay, first of all, the Jordan FDA approval. So the Jordan FDA approval last month, we have already got the temporary approval that we can ship our exports to -- our medical products to all the Gulf countries, which is -- that is the Middle East countries.

Secondly, we are in the process of applying the CE, which is a prerequisite for exporting our medical products for all the European countries. According to the latest report from the consultant company, independent company who is doing the CE for us, it will take another 1.5 months before we can get the official CE, which allow our products to be shipped out to European country.

And for the U.S. FDA, so actually, we just started our process to apply for the U.S.A. FDA certification. So it will be quite, I mean, a long procedure because U.S. FDA requirement is a little bit complicated and also very strict. We have already -- because of the COVID-19, the U.S. FDA cannot be able to send representative to come for inspection of our factory in Jordan. Instead, they're asking Jordan FDA to visit the factory on behalf of the U.S. FDA. So our -- they already come to our factory for a couple of times for certain inspection. We have also, I mean, sent our products to the FDA for -- to the laboratory for testing. So we are still waiting for the result of the lab test. And then after all the results has been come out, we will get a registration for the U.S. FDA, and we will have the registration number for JRSH. And it -- approximately, it will take another 2 months before we can get all the certified approval if everything is going smoothly.

Great. And will that be then medical -- basically, medical-grade PPE then? Or what types of products will you guys manufacture?

About the medical products, we are now producing or prepared to produce. We already started producing the surgical disposable face masks. And then we are also producing now which is the fashionable, washable face masks. Some of them we are producing for a particular brand for our buyers and some we are producing for other customers according to their requirement. And also, we already started producing in our #5 factory in Al-Hasa the blue medical gown which is also for disposable purpose.

Later, we are also planning to develop the coverall which is used by the operation room and also the reinforced blue medical gown, which is a sterilized product, after we get all the certification. These are the products we are producing now.

(Operator Instructions) Next, we'll hear from RHK Capital and the line of Todd Felte.

Congratulations on a great fiscal year. Just had a question. On the PPE and mask, what are the margins going to be on that business compared to your garment business?

This is Eric. I'm calling from Jordan. Can I answer your questions?

Sure. Eric, please go ahead.

You're asking me for the -- okay, approximately the profit margin for our medical product. Okay. So we have actually different profit margin for different kinds of medical products. And it depends on which country we are exporting. In the Gulf area, in the Middle East country, we already know about the market price of each kind of product, the face mask, the medical gown, the cover-up. And we are making it -- in order to compete with the local main factories supplying to the Gulf area, our profit margin is about 10% to 15%. But we have checked the price, the market price in EU and also in U.S. If we can successfully get the CE and FDA approval, we can export our product to those, to U.S.A. and also to EU, the profit margin is much higher than those we are supplying to the Gulf countries. The profit margin will be -- for all the products will be between 20% to 35%.

(Operator Instructions) Next, we'll hear from the line of John Morris at Davidson.

So following up on that last question in margins, Eric, that you're giving, are those -- whether it was the Middle East or the U.S., are those higher than what your current average -- or not current, but as of last year margins are? It sounds like they are significantly higher in the U.S. on the PP&E (sic) [PPE]?

Yes, yes, definitely.

Okay. Switching gears. I just wanted to -- I think a question for Gilbert, probably. Just a clarification. Given the volatility, and I think Sam was saying, like at this point, just clarify for me that you are thinking 2021 could be -- when he said 80%, does he mean sales down 20% from last year, from last year full year? Just a clarification on that.

Yes, John. I mean, right now, to be honest, we really cannot have any solid basis to project what our 2021 top line is going to be. I think Sam is kind of looking at all the existing customers, their orders and current cancellation or reinstatement of the orders that he estimates maybe it would be down 20% from 2020. But that doesn't include any new customers or any -- like the PPE products that we are currently working on. So I would say the 20% reduction would be kind of like the worst-case scenario.

Yes. Okay. Super helpful to give that context. I mean it's a little bit of kind of a smaller detail here just thinking about the June quarter. But just for modeling purpose, I'm just trying to kind of understand, could -- were you at all open? Were factories open? I know you had the dormitory labor force in place. I'm wondering whether or not the June quarter still registered sales were things open. Obviously, it would be down significantly from the run rate seen in fourth quarter.

Yes. The June quarter which is ending already, yes, tomorrow, sales is definitely down. I don't have the numbers yet. We have been shipping. Actually, we have been shipping in the June quarter. All the factories are fully resumed their operations. I think starting from June 1, every -- all the local workers were allowed to go back to work and -- but way before then, at the beginning of May, we have already got all the dormitory workers or the workers from -- well, Jordan was only shut down to kind of like not having the local people traveling in and out of the industrial zone. So -- but most of our workers are in the industrial zone. So we were able to produce even when the country was officially shut down.

So we were producing. In fact, we started producing back at the beginning of May with a limited number of workers. So June quarter is not too bad. But definitely, it had an impact because of the cease in shipment and because of -- yes.

Okay. That's very helpful. The -- you talked about the cost controls, given the circumstances, that you're putting into place. As you look out over the course of the year, well, I'm wondering to what degree you're able to manage that SG&A. Can you give me some -- can you give us some feel for whether SG&A dollars year-over-year would actually be down or flat or up at a slower rate of growth on full year, for 2021, in terms of kind of what you've been able to impact?

Well, we have cut some head counts, especially in the area of SG&A. So I mean, even though most of our head counts are in production and manufacturing, but we did have some laid off in our administrative area. And I think the majority of our people who are remaining, they did have a temporary reduction in their salary. So I would think 2021 SG&A, if not a reduction from 2020, it would be at the most flat from 2020.

(Operator Instructions) We'll take a question from [David Schneider].

In your online presentation, it suggests that you're still looking for additional capacity. So is that the correct interpretation?

Yes, David, thank you for the question. We are definitely actively looking for additional capacity. But due to the COVID-19, we're kind of, at the moment, putting that on hold, just wanting to see how the top line is coming back and how the demand from our existing customers as well as new customers are putting on us. So I mean, it -- obviously, it doesn't make sense to build new capacity when there is no sales.

But we're currently still actively looking either through building on our existing facilities, on land properties that we have purchased as well as M&A opportunities. If there is good opportunities, some companies that have already existing customers or they are in a distressed mode that it will be a good deal for us, then we definitely will consider that.

This is Eric. Can I add something to the questions? Okay. So actually because of the COVID-19, some of the existing factory, which is doing orders for some American brand, so some of them were already closed for a lot of reasons.

So recently, we have picked up one new customer because this customer, originally, they placed a lot of order to one factory in Jordan. But unfortunately, this factory was closed before 2 months. So now they are trying to talk to us for capacity to ask us to provide, I mean, capacity to them for the rest of the year and also for 2021. So after several -- the name of the customer is American Eagle. I think we also made some announcement on this. So recently, we have already picked up one new order, the first order which is 9,500 pieces of jackets from American Eagle. This is the first order we took from them. And they are still talking to us, asking for further capacity for the rest of the year. This is -- I mean, so Jerash may have some good opportunities even during the COVID-19 because of the shutdown of the other facility in Jordan.

That's a very good point, Eric.

Yes. I think that's all pointing -- it's all a very good indication that as this virus subsides, that the world definitely wants what you can produce.

Also, the second question is on the geographic distribution end markets for you. It's overwhelmingly United States. Do you see that changing over time?

Sam, do you want to take that?

Yes. I think one area is -- I mean, phenomenon is between the U.S.A. and the China relationship. In fact, there's quite some China-based factories or manufacturer, they would like to shift their order from China to Jordan. And some of them even talked to us, they would like to lock up some of our capacity for their orders to the U.S.A. Instead of producing in China, they would like to shift their production base from China to Jordan for the export to U.S.A. and also to Europe as well. So we are discussing with them about that. Yes, so in the coming few months or next year, we will reserve some capacity for their orders as well, yes.

(Operator Instructions) And it appears we have no signals from our group. I'll turn it back to Mr. Matt Kreps for any additional or closing remarks.

Thank you, Jim, and thank you, everyone, for participating on today's call. While 2020 produced both strong revenue and profit growth, Jerash remains focused on opportunities ahead in fiscal 2021. Jerash will be conducting multiple outreach and conference events in the coming months, including the Sidoti Virtual Investor Conference tomorrow.

If you have additional questions or would like to arrange a meeting at an upcoming event, including our events tomorrow, please contact me using the contact information on the bottom of our press release. Thank you for your participation, and have a great rest of your day.