Jerash Holdings (US) Inc (JRSH) 2020 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Jerash Fiscal Third Quarter 2020 Results Call. Operator Instructions) At this time, it's my pleasure to turn the floor over to Mr. Matt Kreps.

Sir, the floor is yours.

Thank you, and good morning, everyone. Welcome to the Jerash Holdings Fiscal Third Quarter 2020 Results Conference Call. With me today is Gilbert Lee, our Chief Financial Officer. 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, 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 detailed in the forward-looking statements. Those 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 Gilbert. Please go ahead.

Thank you, Matt. Hello, everyone. I'm pleased to join all of you today for my first results call as CFO of Jerash Holdings.

Our strong fiscal third quarter results demonstrate the continued progress Jerash is making on key initiatives to drive second half production volumes, increase total capacity year-round, grow revenue, manage gross margin and increase net income.

Let's dig into the specifics of the financials and business performance for a few minutes. Revenue in the third quarter of fiscal 2020, which ended December 31, 2019, was $25.4 million. That is an increase of 36% from last year's third quarter, which was also a high-growth quarter for the company. The current year third quarter included just over $3 million of production from our second quarter that the customer requested to ship in October rather than September. This is an important trend for the company in our second half production volumes as higher utilization is better absorbing our fixed costs and driving improved profitability.

You may recall that Jerash made several investments last year in the second half to open new production programs with existing customers and add new customers. These efforts did have a short-term impact to gross margin, which we indicated was an investment in our future success within the ROI from those investments this year in revenue, gross margin and net income gains.

Speaking of gross margin, we recorded 19.3% for the quarter compared with 17.1% in the prior year quarter. I should note that second half product mix is naturally less margin favorable than first half being warmer season clothing and exercise wear versus higher-cost and more complex outerwear products, but we have been able to increase our margin performance through a combination of volume and efficiency. Our gains in margin were partially offset by our continued ramping of the Paramount facility, as we have previously discussed. This ramp-up process has progressed very well, and we expect this addition to potentially be profit accretive in the fiscal fourth quarter.

Notably, we have shipped more than 7 million pieces in the first 9 months of the fiscal year, with another 2 million-plus pieces scheduled in the final quarter this year. This keeps Jerash on target to exceed 8 million pieces this fiscal year, which reflects our target, with Paramount operating at full capacity. This already represented a 23% increase in capacity against the 6.5 million pieces produced last year, and we believe we can further scale our production at the existing facilities.

Working down the remainder of the P&L sheet. SG&A expense in the third quarter was $2.6 million, down from $3.1 million in the second quarter. SG&A included additional costs to onboard and train additions to our workforce for the new facility. We have also expanded our Asia-based team for sales and marketing activities to continue generating new customer orders for our factories based in Jordan.

Operating income in the third quarter was $2.3 million compared with $1 million in the prior year quarter.

Taking all of this into account, GAAP net income was $2.1 million or $0.18 per diluted share for the quarter based on approximately 11.5 million diluted shares outstanding.

Through 9 months, we are tracking very well to our objectives with revenue at $78.6 million, gross margin holding at 21.3% and diluted net income of $0.63 per share, up from $0.47 this year last -- this time last year.

Now turning to the balance sheet. We believe we remain well capitalized to fund our growth plans and self-fund our growing working capital needs. We also continue to pay a quarterly dividend of $0.05 per share, which equates to an annual dividend of $0.20 per share.

Cash and restricted cash at December 31 stood at $27.8 million. Inventory was $14.1 million and AR was $10 million. We continue to expect the business to generate substantial cash flow from operations on an annualized basis. We also have untapped lines of credit available for up to an aggregate of $26 million.

Year-to-date, we have begun to invest in additional expansion for the future, including $2.2 million we have invested into the purchase of the Paramount manufacturing assets and more recently land property to further expand our production facilities and worker dormitories as part of our multiyear facilities expansion plan.

As you can see, Jerash has reported strong sales growth and profitability in the first 9 months of fiscal 2020. We believe the third quarter performance keeps us on track for a record second half, as we discussed on the last update call.

I want to take a few moments to comment on other areas of the business as well, especially progress on new customer accounts. Our customer, VF Corp. and in particular, the North Face brand continues to increase orders each year with Jerash. They are a top global brand and excellent customer. We believe they have been growing their production with Jerash at a rate higher than the market growth the past several years, reflective of Jerash's important role in the global manufacturing and supply chain. That is not a position we take lightly, and we work every single day to ensure they receive the quality and timely delivery that has earned us this position.

However, we also recognize the importance of growing our business with other customers' logos. These include DICK'S Sporting Goods, New Balance, G-III and other well-known brands which we have previously stated are expected to add meaningful revenue. Those orders reflect a large portion of overall revenue in the third quarter as we scale with those new accounts. We expect that these new customers and more diversified orders will help minimize our quarter-to-quarter volatility and maximize our plant efficiency.

Additionally, I want to note that while we are posting strong growth this fiscal year, our first half was still capacity constrained. Fiscal 2021, beginning in April, will be the first year that we have the full benefit of the Paramount capacity on a full year basis, affording us additional growth opportunity on the top line. That capacity is being focused and giving us a clear indication to continue buying and building additional capacity for future years to support the increasing customer opportunities we are seeing as more and more global brands recognize Jordan as a high-quality, tariff-advantaged manufacturing source.

I want to point out that we have seen some reduction in average gross margin as we have expanded volume. But that expansion is also driving increased net income for our shareholders, which we see as a fair trade. Gross margin has historically been an important metric for Jerash and will continue to be so in the future. However, we're implementing a number of processes to help us better balance the exchange between higher average gross margin and higher total net income.

Going forward, we will continue to manage gross margin closely but also make opportunistic decisions where we believe the incremental utilization of our production facility is positive to net income and beneficial to our investors.

Finally, I want to note that for fiscal 2020, we have adjusted our revenue outlook slightly, which -- to anticipate continued revenue growth through both expanding business with existing customers and the addition of new customers. Total revenues for fiscal 2020 are projected to be approximately $95 million, representing about 12% organic growth over fiscal 2019. The change primarily reflects some adjustments to customers' shipping schedules in our FOB orders, moving them into April rather than March.

With that, I just want to reiterate our excitement for the remainder of the year as we continue to grow this business for both the current fiscal year and even more so for fiscal 2021 as our new capacity and customer relationships continue to mature.

We now welcome your questions.

(Operator Instructions) And we'll go first to Mark Argento with Lake Street.

Gilbert, just a couple of quick questions. In terms of the gross margin, nice expansion, nice pickup on a year-over-year basis. The seasonality factor, what do you think is a good run rate for Q3 going forward? Is that kind '19, '20 level sustainable? Or how do you think about gross margins kind of quarter in, quarter out?

Well, there are going to be fluctuations in gross margins depending on the customer shipments and FOB customers which is shipping out of Jordan into the U.S. versus local orders. So it is really hard to predict the quarterly margin. But we tend to focus more on the full year average gross margin, and we anticipate that to be more than 20% going forward. So during the quarter, sometimes it will get down a little bit, 19% and whatever. But overall, from a full year standpoint, we will manage it to maintain it to be above 20%.

How big of a delta is it between FOB and local in terms of kind of gross margin impact?

Well, this also depends on different customers. Our biggest customer, VF Corp., which primarily is North Face, definitely give us the best gross margin. Some of the new customers that we are acquiring, we will, at the beginning, have a little bit of a lower margin but not that much lower. However, it will be a few percentage points lower than the normal gross margin.

I know you had mentioned the thinking shifted a little bit in terms of full year outlook from $100 million down a little bit. Could you just, again, remind us what is driving that shift or the move out? Is it just order -- timing of orders or...

Yes. I think the majority of it is because of the timing of the order. We also tend to be a little bit more conservative. This is basically what we have fully booked in terms of our shipments through the end of the year. There might be more that could come in that hasn't been booked yet.

Got it. And then last for me, in terms of capacity. I know it sounds like the new capacity is coming on and you're adding orders. Any additional thoughts above and beyond existing capacity expansion into 2020 in either new plant builds, another quasi acquisition? Or maybe something outside of Jordan, any bigger picture thoughts in terms of continued, I think, capacity expansion?

Well, I'm glad that you asked that question. Actually, we are in the process of building on a piece of land, actually 2 pieces of land, that we purchased that will increase our capacity. Now building that will take a while, maybe a year or 2, to really get up to speed. But in the immediate following year, we are going to scale up the capacity of Paramount that we have bought, so in fiscal year 2021, we have the benefit of the full capacity capability from Paramount. So that will enable us to grow from 2020. Plus, we are also going to improve our efficiency in our existing factories. So that will give us a little bit more capacity to take on newer customers and also to increase our sales to existing customers. But we are also constantly looking for possibilities of acquisitions, some existing factories or existing factories that have existing orders or customers.

We'll take our next question from Todd Felte with RHK Capital.

Congratulations on a great quarter first. Secondly, I noticed that VF Corp. recently closed about 60% of their stores in China due to the coronavirus. Do you anticipate any effect on your order flow from them because of that?

VF Corp. closed their stores in China?

60% of them, yes.

Well, our sales are primarily to the U.S. market. So the closing the stores in China, I don't think it will affect us much. And also, I have checked with our CEO, and they don't believe that the issue that is going on in China will affect our operations at all.

Okay. That's great to hear. And also, has there been any discussions on increasing the dividend or making any adjustments to the dividend as you improve your earnings and cash flow?

Well, that is definitely on the table. We have been talking about this, but no decision has made so far yet, but we are looking into that.

(Operator Instructions) We do have a question coming through from John Morris with D.A. Davidson.

Congratulations on a great quarter as well.

Thank you.

If -- yes. If you could tell us again the -- of the accounts that you mentioned besides VF Corp., which of those were actually new this quarter? And just the progress of some of those new accounts, if you can elaborate on that. But I -- you mentioned a number of other names, including New Balance, et cetera. So we wanted kind of a little more color there.

Yes. New Balance -- one of them was the New Balance. New Balance is new. And then G-III and DICK'S Sporting Goods. And Eddie Bauer was another one.

And are those new categories or classifications for you in terms of what you're actually producing? Or is it primarily continuing to be outerwear? Just wondering if there's any additional classifications that you're doing.

No. It's both, primarily outerwear for our existing customers, but we also have some new categories, such as polo shirts, t-shirts, sports -- or exercise pants and so on.

And we'll take our next question from David Schneider.

I was wondering, when you get new customer inquiries as they seek to diversify their manufacturing, let's say, from China, if the coronavirus normalizes and goes away, what steps can you take so that you keep these new clients when China gets back to normal?

That's a very good question. I probably have to check with our sales and merchandising people as well as our operations people to understand more about this. However, because of the timing or the lead time it requires in our industry that we take orders and then it will probably take 6 months for you to deliver, it is very tricky to switch from suppliers, especially from a completely different region of the world. So once a customer switch, it would be less likely -- I mean, of course, this is based on my understanding -- for the customer to kind of switch back and forth. It is not that easy.

Okay. So that's good. In any of the new categories that you're moving into, do different categories have -- let's say all other things being equal, with that as a caveat, any specific categories that may have higher gross margins than other categories? I'm thinking longer term, as your product mix may change slightly, so obviously it would be positive if you moved into categories that longer term had higher gross margin than lower gross margin.

Well, looking at our capacity, we don't have unlimited capacity. So definitely, we will pick and choose the customers as well as the categories that would provide us the best possible gross margin. So I'm sure our merchandising team and also our factory people, they kind of decide what customers to go after and also what pricing. They tend to not choose customers who would -- whose pricing is not even favorable. So we turn down business if the margin is not at our level. So it's kind of how they evaluate the customer or the product category that the customers are bringing to the table.

Right. Okay. That's good. And as far as the March quarter goes, my understanding is that the shift in revenue -- is that just a timing thing from March -- some orders that you thought might land in March could fall in June?

Right.

Okay. So that's no big deal. That's good. Just if I could give you my two cents' worth, my peanut gallery opinion. As far as raising the dividend, you've got a very good dividend right now. And giving the valuation on your stock, even though it's very illiquid right now, if you could be buying back -- if you could be buying back stock at this price, it would be extremely attractive, if you could. It's very hard to buy. But you pull -- you have over $2 net cash per share. The whole -- your numbers are kind of crazy. It's like you're a stock from another planet. It's so chill. But -- so I think if you could somehow even buy back stock, that would be much better than raising the dividend. I mean -- but that's just my opinion.

That's a very good suggestion. And in fact, we have talked about it.

Just my opinion.

Yes. Sure.

We'll take our next question from Ivan Su with Morningstar.

Just a follow-up question related to the coronavirus. What's your supply chain exposure to China? And the reason I'm asking this is because we've seen some Taiwanese apparel manufacturer coming out saying how the -- so they are facing some supply chain challenges because they source a lot of their raw materials from China. So I'm just trying to see -- so what's -- are you seeing anything from the supply chain side of things given the recent coronavirus outbreak?

Well, actually, fortunately, we don't have any major suppliers that are based in China, believe it or not. Most of our fabric suppliers are in Korea, in Vietnam, Taiwan. So yes, we don't really have any major suppliers in China at all. So it doesn't affect us in terms of our supply chain.

And at this point, there are no further questions. Mr. Kreps, I'd like to turn the call back over to you for any closing comments.

Thank you, Tom, and thank you to everyone for participating on today's call. While we are excited about the third quarter and 9-month results, we expect this excitement to continue through the remainder of the year and into next year.

Jerash will be conducting multiple outreach and conference events this spring, including the Roth conference in Los Angeles and the D.A. Davidson consumer and industrial conference in New York, both in March, plus other events. We welcome an opportunity to meet with you in person at these events or arrange a call if you desire. If you have additional questions or would like to arrange a meeting, please feel free to contact me using the information included on the bottom of the press releases.

Thank you for your participation, and have a great rest of your day. Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect your lines at this time, and have a great day.