Jerash Holdings (US) Inc (JRSH) 2019 Q1 法說會逐字稿

Ladies and gentlemen, welcome to today's call. We are now about to begin. I would like to turn things over to Matt Kreps from Darrow Associates. You may begin.

Thank you, Adam. We'd like to welcome everyone to the Jerash Holdings 2018 fiscal first-quarter 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, guidance, outlook, forecast, target, 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 management's beliefs only as of the date hereof. The Company undertakes no obligation to publicly release the results of any revisions as forward-looking statements which may be made to reflect circumstances or events after the date hereof, or to reflect the occurrence of unanticipated events.

We will also be discussing non-GAAP measures on this call. A reconciliation of non-GAAP measures we discuss during this call is available as Appendix A to the press release we issued this morning. I will now turn the call over to Sam Choi, Chief Executive Officer of Jerash.

Hello and thank you for joining us today. We are excited to report a strong start to our fiscal year 2019, guiding for an expected record-setting second quarter. Expectation of a notable increase in year-over-year revenue in our second half and an increase in our full-year revenue outlook.

Many of you may be new to Jerash, so I will quickly summarize our business. Jerash is a US company with manufacturing operations located in the free trade show in Jordan, plus finance and marketing operations in Hong Kong. We are engaged in the manufacturing of knitted goods for leading global brands that almost any US or European consumers will know such as The North Face and Columbia.

By producing tariff free with Jerash our customers see a significant cost advantage which is shared with Jerash. We were recently awarded a similar tariff free status for the European Union as recognition of our socially responsible employment practices, including the employment of Syrian refugees. We anticipate this will further diversify our business by increasing demand of our products in the European Union.

Let me turn to the numbers for just a moment. In the first quarter of fiscal 2019 total sales were $18.4 million, a decline of 14% year-over-year. The decline was due to two factors. First, our prior-year fiscal first-quarter was disproportionately large compared to our normal seasonality.

Second, timing of the Ramadan holidays this year and customer receiving schedules moved shipment of several million dollars in orders from first to the second quarter. That revenue will add to our second quarter, which we expect to be in excess of $32 million and expected quarterly revenue record for Jerash.

I want to be very clear, seasonality and shipping schedules can vary from one quarter to the next, impacting when we recognize revenue. But those are timing issues and do not reflect the overall growth and health of our business. In fact, our factories were running at almost full capacity in the quarter and we have shifted the deferred orders as a significant portion of our second-quarter revenue since July 1.

We also continue to receive new orders such as the recent 670,000 pieces that we announced last week. As a result of this strong outlook we are raising our revenue guidance for the fiscal year to a range of $80 million to $82 million, which is at least 15% expected top-line growth compared with $69.3 million in revenue last year.

Today we have more than $68 million of debt outlook pre-booked or shipped to our customers. This outlook and stronger second half reflects early success in our effort to reduce (technical difficulty) by diversifying our (technical difficulty) and changing more orders [warm weather] and exercise goods.

We are very excited about this progress and our financial outlook for the second quarter and full-year. We are also preparing for future growth by increasing our production capacity and our capabilities. Customers are ready to take all of our new capacity as it comes online. For example, we are expanding our production line by approximately 500,000 pieces of new annual capacity, an increase of approximately 8%.

Additionally, our new mounted color screen printing workshop is scheduled to be operational soon. This will enhance our surface range for customers and help us schedule orders with higher profit margin.

Finally, we continue to look at strategic options to expand our capacity and diversify our capabilities. We will bring the same diligence to these considerations as we have to our current operations to ensure we maintain our productivity and profitability targets. With that, I will ask Rich to review the results and address our updated outlook in more detail and then we will open the call to your questions.

Thank you, Sam. I'm excited to report our results today. We are off to a solid start in the first quarter and, even more importantly, are expecting a record second quarter, a record first half and substantial year-over-year growth in the second half, as Sam mentioned. All these point towards continued progress and profitability in our business. Let me start with a few financial metrics for the first quarter.

For the first fiscal quarter ended June 30 revenue declined 14% year-over-year to $18.4 million. Although revenue declined we are actually positioned for a record first half and significant growth year-over-year. This is because the first-quarter decline was due to an outsized prior-year comp, shipment timing related to the Ramadan holidays this year and customer receiving schedules. Recognition of several million dollars of shipments occurred just days after June 30, meaning revenue will be recognized in the second fiscal quarter.

To make it abundantly clear that we are on track for growth, we announced expectations for a record second quarter at more than $32 million in revenue with a significant portion of that already shipped as of today.

Furthermore, we continue to receive additional orders from customers such as the recent 670,000 piece order. We now have in excess of $68 million in orders shipped or pre-booked year to date. The fact that we have 83% of our year pre-booked less than six months into our fiscal year clearly indicates that we are positioned to exceed our prior revenue outlook. As such we announced a notable increase in our full-year revenue guidance to a range of $80 million to $82 million. That would be year-over-year organic revenue growth of 15% to 18%.

One other note on comparing our quarterly revenue to the prior year. Recall that the prior fiscal year had an outsized first half at 70% of our revenue, while this year we anticipate a more seasonally appropriate level of approximately 62% of revenue in the first half. That means we not only expect a record second quarter and first half, but also a very strong comp in the second half of the year.

First-quarter gross profit increased nicely to 25.4% compared with 22.7% in the prior year quarter. We expect gross profit to continue to rise running approximately 27% for the remaining nine months of the year. This significant increase is a result of mix, increased volumes and, very importantly, continued productivity improvements.

SG&A expense for the first quarter was $5.2 million, which included $3.2 million in one-time non-cash stock-based compensation expense related to equity awards granted at the time of our IPO. The stock-based comp was primarily comprised of a one-time expense associated with immediate vesting stock awards to longtime employees.

Exploiting this unusual item, SG&A was approximately $2 million, which we believe will be our approximate cash operating expense range going forward. SG&A includes the effect of increased headcount for growth as well as public company operating costs.

As a result of the stock-based comp expense, operating loss in the first quarter was $525,000. We recorded a cash charge of $360,000 in the quarter related to our status as a multinational company. Taking all of this into account, GAAP net loss was $885,000 or $0.08 per share.

Net income on an adjusted basis was $2.7 million or $0.25 per share on a fully diluted basis after adjusting for non-cash stock-based comp expense and tax expense. We believe adjusted EBITDA, which is EBITDA adjusted for stock-based compensation, provides a useful comparison due to the changes in certain line items year-over-year.

Adjusted EBITDA for the first quarter was $3 million compared with $3.9 million in the prior year first quarter which had zero taxes and only $117,000 in stock-based compensation expense. A table itemizing these adjustments in comparable quarters is included in our press release.

Let me reiterate and expand on our expanded outlook for a moment. Jerash is in a very strong position for both revenue growth and profitability for the rest of the year. We are expecting a record second fiscal quarter in excess of $32 million and a record first half in excess of $50 million, which would suggest approximately 5% growth year-over-year through the first six months.

But with our revised outlook of $80 million to $82 million, we are expecting 15% to 18% growth for full year. This suggests $30 million to $32 million in second-half revenues compared with $20.4 million in the second half of 2018, with a significant increase attributed to our growing orders in summer and sports garments.

We anticipate gross profit of approximately 27% in each of the three last quarters this year and anticipate cash operating expenses of approximately $2 million per quarter. This should indicate very nice profitability throughout the remainder of the year both on a GAAP and pro forma basis.

Turning to the balance sheet, cash at June 30 was $16.6 million, accounts receivable was $13.2 million and inventories were $20 million comprised of fabric, work in process and finished garments. Total shareholder's equity was up notably to $44.7 million at quarter end from $33.7 million at the prior quarter end.

Our balance sheet provides a strong position 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, 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 are off to an excellent start this year and forecasting the record second quarter at $32 million in revenue. We have also raised our revenue outlook to $80 million to $82 million for the year, and look to generate strong profitability for the next three quarters.

We are excited for the future and well positioned to continue our (technical difficulty). I look forward to reporting our continued success as we grow this business and drive increased profitability in fiscal 2019. We now welcome your questions.

(Operator Instructions). [Dennis Panulu], Le Pan Partners.

Congratulations on your recent order win and your revised outlook. Very much looking forward to the remainder of the year. You guys laid out -- you gave great detailed information as far as gross margins and your operating metrics and course.

If I'm doing my financial model correctly, it looks like you should come up with somewhere around $0.60 in EPS the next quarter. I'm just wondering if you think my metrics are close to being right. I don't think I'm -- you don't have too much variable so I should be pretty much on the money.

All the information needed to calculate EPS was disclosed really in our earnings release this morning. So, if your model is showing $0.60 (multiple speakers) -- again, all the data is out there. We haven't really delved to that level of detail, but the data is out there for you.

And that's why I was curious why you hadn't because you guys have a fairly straightforward model. Your costs are fairly fixed. Like I said, you don't have a whole lot of variables. It should be -- within a few pennies you should be able to figure out what your EPS is each quarter. Did you not feel confident putting out a number this morning or was there a reason why you didn't put out a number I should really ask?

No. Again, all the data has been disclosed. I'm not trying to be (inaudible) here. And again, as we continue this process we've been focused on revenue and clearly earnings. And Dennis, I will take that as a comment that, on a go-forward basis, we certainly could provide EPS guidance.

And last but not least, your new orders that you just recently announced, 670,000 pieces, quite a bit -- quite a nice order. I've got to believe that you're getting close to full capacity. Where are we as far as maybe adding or acquiring some new capacity? I know you touched upon it briefly in your remarks, but do you think you foresee something coming in the shorter term?

Sam, do you want to address that?

Yes, Eric, can you explain that? We substitute some CM order by the FOB order. Eric, can you explain that?

Yes, because for the month between September to next 2019 February, it is the low season for producing the winter jackets. So our major customers like North Face, like Columbia, okay, which used to place orders, so most of the orders are concentrated from March to end of August.

So during our peak season we need to fill up our capacity by getting some local CM orders from outside in order that we can prove up all our production lines. This is what we have been practicing for the past couple years. And most of the garments actually operate [like they stay] at the low season, they have the peak season (inaudible).

And Dennis, just to add on that, yes, we've spoken since we did the IPO about a transaction. Again, we continue to evaluate opportunities and when the right one comes along we are clearly in position to -- be a great way to increase our capacity in the short term. So certainly on the list as identified in my remarks. We haven't identified a transaction but, again, it's one of the ways that we could grow this business and one that we are focused on.

George Miller, private investor.

Yes, great job, guys. Two questions really or one is a remark. Number one, we have no analysts covering Jerash and I think that really hurts us because we are really, in my opinion, greatly undervalued. I understand that you're not giving actual earnings per share guidance, but on my back-of-the-envelope basis, it looks like we are on target to do at least $1.50 per share for fiscal year 2018, or I should say 2019.

And given that and our cash and positions and growth factor -- I mean, we need some coverage because, as I say, theoretically we are worth a multiple of what we are selling at now. And I think that we are somewhat hurt if we're not giving earnings per share guidance and certainly hurt if we don't have any analyst coverage. So any remarks you could make on that subject, or subjects I should say, I would greatly appreciate. Thank you.

So George, this is Rich. I'm actually on the road today and tomorrow and by the time I go to sleep on Thursday night I will have spoken to three analysts and they are continuations of conversations. So we have been speaking to analysts since the IPO and obtaining analyst coverage is high on our priority list.

I had some great calls last week, one this morning, two scheduled for tomorrow. So clearly we agree wholeheartedly that analyst coverage is important to us. And again, we are in the process of tracking that down as we speak.

That's wonderful, Rich. I may have missed -- because I got another call in the middle. Did you address the fact that we're not giving earnings per share guidance going forward?

I addressed that with Dennis. It's funny, so your model suggests $1.50, Dennis' suggests $0.60. We will -- it's something we need to --.

Okay, my model is $1.50 for the entire year, not just for a quarter or a half.

I understand. So we will -- on a go-forward basis it's something we will evaluate and begin to provide or consider providing EPS guidance. There's no reason we haven't. I think one of the things we're trying to watch is the normalization of the shares post-IPO. And so that's really what's held us back and (multiple speakers).

I understand and the reason I'm modeling that is I'm looking at the revenues, I'm looking at gross margins increasing. So that's just basic -- it's like what I used to do when I was a student at the Wharton School, [they make] make assumptions.

Now obviously expenses can change, we could be making investments and so forth and so on. We also have -- we're into this almost like a subscription-based service type of company because we are dealing with deferred revenues, seasonality.

I think a lot of people, Rich, are misled because, oh, geez, look, we reported a loss compared to last year; our revenues have declined a bit. You've explained that very nicely. That's why I think giving the full-year guidance not just for revenues but for earnings really ties a knot around that story and I think (multiple speakers).

No, I just said I agree wholeheartedly with you. That's fair and let's see what our next quarter brings. Maybe we'll begin to provide that guidance.

Great and great work, guys. I mean, I really think it's fantastic. But I've also -- I sometimes have posted on the Internet -- I really think we should be on 60 Minutes because the story is a wonderful story for 60 Minutes, us hiring Syrian refugees, providing really nice quality of life for them, them being productive, some of them working this first time ever for jobs.

Arguably they're probably getting more productive as time goes on based on your good training. It's just a wonderful story. It's a good feel story in an area of the world, the Middle East, where we don't get that many good news stories.

I appreciate that.

Thanks for the comment and we will perform to your satisfaction.

Well anyway, Sam, thanks for your efforts too and we look forward to more progress. I'm a very happy shareholder.

Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing.

Okay. Thank you for participating on today's call. We are free to report a strong start this year and improved guidance both for an expected record second quarter as well as the increased full-year revenue targets. We look forward to building upon this foundation that Jerash continues to execute on our operational and strategic goals that we work to grow shareholder value. Thank you for the participation and have a great rest of your day. Thank you.