Jerash Holdings (US) Inc (JRSH) 2018 Q4 法說會逐字稿

Good morning and welcome to Jerash Holdings' 2018 fiscal fourth-quarter and full-year results conference call. 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, and other similar statements of expectation identify forward-looking statements. Forward-looking statements are subject to certain risks, uncertainties, and important factors that could cause actual results to differ materially from those reflected in the forward-looking statements. These risks and uncertainties are detailed in the Jerash public filings with the US Securities and Exchange Commission.

Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflect managements' 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.

It is now my pleasure to turn the call over to Sam Choi, Chief Executive Officer of Jerash. Please go ahead.

Hello and thank you for joining us today. We are excited to report a strong year of growth and profitability in our first report as a NASDAQ listed company. I will provide an overview of the business and our strategic goals and ask Richard Shaw, our CFO, to address our financial results in more detail.

I'm sure many on the call today are new to Jerash, so I will begin with a quick overview of our business. Jerash is a global enterprise engaged in the manufacturing of knitted goods through our facilities located in the free trade zone in Jordan. We serve a number of leading global brands that almost any US or European consumer will know for their high-quality products; chief among them, the North Face, Columbia, and others. We produce these goods in our factories located in Amman of Jordan, where we believe from -- where we benefit from tariff-free imports to the US under an agreement established by US President Bill Clinton. This provides a significant cost advantage for our customers, which is shared with Jerash.

We were recently awarded a similar tariff-free status for the European Union as recognition for our socially responsible employment practices, including the employment of Syrian refugees. We have three factories operating at full capacity during the warmer season months when we produce winter wear, and at high capacity in the winter months when we produce athletic and warm weather apparel. We are currently expanding our line capacity and capabilities to support the increase of demand from our customers.

For our fiscal 2018, we grew our top line by almost 12% to $69.3 million and generated net income of $10.4 million. Results include our one-time tax charges for US tax reform of $1.4 million, meaning our comparable net income was $11.8 million, up more than 10% year-over-year. We are currently projecting 14% top-line growth for fiscal 2019.

I would like to spend the next few minutes discussing our strategy to achieve that growth. First, we are increasing both our coproduction capacity and our abilities, in anticipation of growth in orders from assisting a new customer. We are expanding our production line by approximately 500,000 pieces of new capacity, an increase of approximately 8%. Additionally, our new multicolor screenprinting workshop is scheduled to be operational in August. This will enhance our service range to customers and help us capture orders from higher profit margin.

Second, we are working to more fully utilize our production capacity year round. We are producing winter wear at full capacity and even leveraging contracted production with the approval of our customers. However, we have capacity available for more warm weather goods and [inside] clothing production. We are speaking with multiple major global brands interested in this capacity, each of them being a new opportunity to diversify not only our production, but also our customer base and geographic sales. We expect initial orders from at least one of these prospects and [a likely] multiple of them in the 2019 fiscal year.

Third, we continue to look at ways to improve our capacity for production efficiency. We have introduced automation into our factories and we continue to do so where we can gain further capacity benefits. We have also have proven successful at increasing the overall efficiency of our workforce to produce more pieces per capita.

Fourth, we are evaluating capacity expansion through both buy and build opportunities. With a strong balance sheet, solid cash generation, growing customer demand, and more diverse global customer base, we have the opportunity to grow our production capabilities in Jordan and even in other locations. This enables not just an increase in capacity for our current goods, but also the addition of new goods that we can produce. We will bring the same abilities to these considerations as we have to our operations to ensure we maintain our productivity and profitability targets.

In closing, I want to share our excitement for continued growth in fiscal 2019 and increased profitability in the year ahead. Those efforts are already well in motion with our top-line growth target of 14%, and we will report progress as we have [definitive apace].

I want to extend my thanks to our employees for their hard work and commitment to making Jerash a success. I welcome our shareholders as we move into the next exciting stage of our growth as a highly profitable publicly traded company on the NASDAQ.

With that, I will ask Rich to review the results and address our initial fiscal 2019 outlook, and then we will open the calls to your questions.

Thank you, Sam. I'm excited to report our first results as a publicly traded company today, and look forward to the quarters ahead as we continue to grow the business. Let me start with a few financial metrics for the fourth fiscal quarter, since it was a bit of an anomaly; then address the full year, which is more indicative of our growth and profitability.

For the fourth fiscal quarter ended March 31, revenue declined 27% year-over-year to $8.9 million. Demand for our products continued to rise, and the revenue variance was almost entirely related to the timing of orders and shipments. We saw a more pronounced growth in the first half of the year during 2018 when 70% of our revenue is realized, compared to 60% in the first half of the prior fiscal year; coupled with orders shipping in the first quarter of fiscal 2019, rather than the fourth quarter of fiscal 2018, which impacts when we recognize revenue.

This is relatively common in our business. And as our full-year results demonstrate, a single quarter does not indicate an overall trend. That said, we will be looking at ways to mitigate this timing variance as Jerash continues to grow, as Sam discussed.

Reflecting the lower total revenue, fourth-quarter gross margin was 24.1%, down from 34.6% in the prior-year quarter. Operating income was $0.4 million, and we included a tax charge of $1.4 million related to the December 2017 US tax reform. As a result, net loss was $1 million or $0.10 per share. On a pro forma basis, excluding the $1.4 million tax charge, Jerash reported net income of $0.4 million or $0.04 per diluted share to the fiscal quarter 2018, compared with $2.8 million in fiscal 2017.

In contrast to the quarter, fiscal 2018 revenue increased 12% to $69.3 million. The increase in revenue reflected continued growth in demand from multiple customers as Jerash continues to prove itself a highly attractive production partner from both a quality and cost perspective. Full-year gross margin increased 110 basis points to 25.9%, and we generated an operating profit of $11.8 million, up almost 11% year-over-year. These results are indicative of our overall business operating targets and consistent with our growth in operating metrics established over the past three years.

GAAP net income for fiscal 2018 was $10.4 million or $1.07 per diluted share. Net income includes a tax charge of $1.4 million relating to the 2017 US tax reform. This charge does not represent a cash expense in the fiscal year, but rather is paid out on a graduated schedule over the next eight years. On a pro forma basis, adjusting for taxes, fiscal 2018 would show net income of $11.8 million or $1.21 per share compared with fiscal 2017 at $10.7 million.

Turning to the balance sheet, cash at March 31 was $12.2 million, up from $4.1 million at year-end fiscal 2017, and was further augmented by the net proceeds from the $10 million raised as part of our IPO. Accounts receivable was $5.2 million, up from $2.5 million at year-end 2017. Inventories were up slightly to $20.3 million, comprised of fabric, work in progress, and finished garments. Total shareholders' equity was up notably at year end to $34.1 million from $22 million at year-end 2017.

Turning to our outlook. Jerash anticipates continued revenue growth through both expanding business with existing customers and the addition of new customers in fiscal 2019. Our outlook is structured through a combination of long lead time orders and additional anticipated orders, as described in our press release.

We are starting our revenue outlook for fiscal 2019 at $78.5 million, representing 14% organic growth over fiscal 2018. Getting a bit more granular, we have $58.5 million of confirmed orders in hand to date for fiscal 2019. That represents 84% of prior-year total sales and 75% of the current year outlook pre-booked, a good start toward our growth targets.

As customers place orders twice a year for spring/summer and fall/winter seasons, we believe projects in the pipeline with these customers represent potential additional revenue of approximately $15 million. Initial orders from new customers are expected to commence in the second or third quarter, depending on order and shipment dates. This brings us to our initial full-year outlook of $78.5 million.

With anticipated further improvements in worker efficiency and new production lines sharing fixed factory overhead, unit production cost is expected to decline in fiscal 2019, positioning Jerash to continue its steady march to enhanced profitability.

The Company also intends to evaluate acquisition opportunities that would contribute to both sales and profitability based on strict internal financial parameters. No acquisition targets have been identified at this time, and there is no guarantee that an acquisition may be completed within fiscal 2019.

With that, and I will turn the call back to Sam for Q&A.

Thanks, Rich. In closing our prepared remarks, I want to reiterate that our focus is on growth. We look to grow our top line, which has been increasing by a steady double-digit rate year-over-year. We also look to continue our profitability. We are excited for the future, and well positioned to continue our execution. We expect some seasonality from quarter to quarter, but confident in our annualized growth goals. I look forward to reporting [our] as we continue to grow this business and drive increased profitability in fiscal 2019.

Let's now open up for Q&A. In order to facilitate the Q&A process, participants will be permitted to ask one question and one follow-up question. You may then rejoin the roster for an additional question and follow-up, if time permits. We now welcome your questions.

(Operator Instructions). Roger Smith, a private investor.

In terms of Jerash being a new company, being traded on the NASDAQ in the US, what are some of the efforts the Company has planned to make the Company a bit more known to the investor community? I mean, are we going to expect some PRs in terms of reporting some milestones being reached, in terms of production, new customer orders, such? Can you just shed some light for that, please?

Yes, (technical difficulty) I'll try to answer your question. In fact, we are excited being listed in the NASDAQ because it's the first Jordanian company and also the first Middle East company to be listed in Jerash -- in NASDAQ. And in fact, reason why we choose NASDAQ because major of our customer base was in the US, so we expect more people will know our customers and more people will be interested in our company, Jerash.

And in fact, in the last year -- in the last two years, especially recently, there are some big brand names either from Europe or from US are also interested in placing order to us. And in fact, in the last week, at least three new customers visit our factory in Jordan and show keen interest in placing order in the coming months and the coming years. So we expect, in the coming years, our customer base will be more diversified either to the US and also to Europe as well. Yes.

So, in our forward estimation, we are quite confident that we can achieve that goal. And we will closely review that, and we'll try our best to let the public know our progress.

Roger, this is Rich. I'll -- thank you, Sam -- I just want to chime in as well. We have begun a PR effort, attending microcap conferences, and speaking with institutions and analysts. Our goal would be to get an analyst or two to cover us here in the next couple of quarters. So, in addition to what Sam said, we're also working it on that side as well.

Excellent. Thanks so much.

(Operator Instructions). [Dennis Panella, Lapin Partners].

On your yearly guidance for fiscal year 2018, approximately 70% of your income was in the first two quarters. The prior year, it was -- 60% of your income was in the first two quarters. If I'm modeling for fiscal year 2019, what would be the more typical -- or which one -- which number should be the more appropriate number to use in my model?

It's a good question, Dennis. And I would say we -- I would say probably the former, so the 60%. We are, as Sam mentioned, working to bring on new customers that would add capacity or volume orders for us for the second half of the year. So I think that 60% would be more normal.

Perfect. Thank you, and look forward to hearing more from you.

There are no further questions at this time. At this point I'd like to turn the call back to Sam Choi for closing comments.

Okay. Thank you for participating on today's call. We are pleased to report a strong year of revenue growth and profitability. We look forward to building upon this foundation as Jerash continues to execute on our operational and strategic goals, as we work to grow shareholders' value. Thank you for your participation, and have a great rest of the day. Thank you, everybody.