Jerash Holdings (US) Inc (JRSH) 2019 Q2 法說會逐字稿

Greetings, and welcome to the Jerash Holdings Fiscal Second Quarter Results Call. (Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Matt Kreps of Darrow Associates, Investor Relations for Jerash Holdings. Thank you. You may begin.

Thank you, and good morning, everyone. Welcome to the Jerash Holdings Fiscal Second Quarter 2018 Results Conference Call. With me today are Sam Choi, Chief Executive Officer; Richard Shaw, Chief Financial Officer, and Karl Brenza, Head of U.S. Operations.

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 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 and other similar statements of expectations identify forward-looking statements.

Forward-looking statements are subject to certain risks, uncertainties and important factors that can cause actual results to differ materially from those reflected in the forward-looking statements. These risks and uncertainties are detailed in Jerash's public filings with the U.S. Securities and Exchange Commission. Participants on the call are cautioned to 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 statement, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of anticipated events.

We will 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. Please go ahead.

Hello, and thank you for joining us today. Jerash posted a record quarter of $33.5 million in sales for the period ended September 30, 2018. This is a more than 21% increase year-over-year and beat our guidance of $32 million. Even more exciting, we reported $6.6 million in adjusted EBITDA or 59% (sic) [$0.59] per share. We generated $8.9 million in cash flow from operations and convert working capital back to cash to increase our total cash and restricted cash balance to more than $30 million. We are also well positioned going into our second half and expect to report second -- a record second half revenue this year.

Our guidance of $80 million to $82 million for the full year compares to approximately $50 million, plus or minus, in the expected top line sales for the second half, an increase of about 50% year-over-year.

This outstanding performance was the result of hard work by our team and, in particular, our factory employees and in Jordan as they went above and beyond to meet very high customer standards. This demand is filled by Jerash reputation for high-quality work, attractive manufacturing costs and tariff-free status due to our location in Jordan. In short, we believe working with Jerash is a significant source of added profits for our customers. We are already in conversation with several customers asking for additional capacity allocations in the next year's first half.

I would like to reiterate our strong commitment towards -- to the 4 pillars of our growth strategy we shared previously. These are continued organic growth, enhanced production efficiency, substantial capacity expansion and the opportunistic acquisition of complementary businesses. We are executing very well on the first 2 points through the first 6 months of the year. We are moving aggressively on the second 2 in order to meet customer demand.

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Ladies and gentlemen, please stand by, our conference will resume momentarily.

We are executing very well on first 2 points for the first 6 months of the year. We are moving aggressively on the second 2 in order to meet customer demand for the next fiscal year that we believe is currently in excess of our capacity. Successful exclusion on this effort will not only yield further topline growth, but we believe will also scale our profitability and cash lines -- and cash flows.

Finally, I'm very pleased to announce that the Board of Directors has approved a dividend of $0.20 per share annually, which will be paid out of our operating cash flows, providing a way to return additional value to our shareholders while fully supporting our expected strategic growth trends ahead. I believe this is also a strong statement on our confidence in sustained profitability and growth ahead.

With that, I'll ask Rich to review the results and our outlook in more detail and then to Karl for a discussion of our strategic growth trends.

Rich, please.

Thank you, Sam.

I'm excited to report record quarterly results today. This includes record revenue in the second quarter ended September 30, 2018, of $33.5 million, an increase of 21.5% year-over-year and ahead of our outlook of $32 million. Revenues now stand at $51.8 million through the first half, on track for our full-year outlook calling for $80 million to $82 million. That is another revenue record for Jerash. This also suggests that we're back to a more normalized seasonality, with the first half being in the 60% to 65% range of expected full year revenue.

Second quarter gross profit declined slightly from the first quarter to 24.9%, reflecting increased volume on slightly less favorable mix. We expect gross profit to run approximately 25% to 26% over the next 2 quarters, reflecting the seasonally lower second quarter gross margin and a slight adjustment to our outlook.

SG&A expense in the second quarter was $2.3 million, which included $200,000 in noncash, stock-based compensation expense. Excluding this unusual item, SG&A for the quarter was approximately $2.1 million, in line with our expected run rate. SG&A includes the effect of increased headcount for growth as well as public company operating costs compared to the prior year.

Operating income in the second quarter was $6.1 million.

We recorded a tax charge of $1.5 million in the quarter relating to our status as a multinational company and U.S. tax reform. We expect our tax rate to be 24% for the remainder of the year.

Taking all this into account, GAAP net income was $4.6 million or $0.41 per diluted share.

For comparability purposes, in the second quarter, net income on an adjusted basis was $6.2 million or $0.56 per share on a fully diluted basis after adjusting for noncash, stock-based comp expense and tax expense, both of which were 0 in the prior year quarter.

Adjusted EBITDA, which is EBITDA adjusted for stock-based compensation, is our primary operating metric and provides a useful comparison due to the changes in certain line items year-over-year. Adjusted EBITDA for the second quarter was $6.6 million or $0.59 per share compared with $6.1 million in the prior year second quarter, which had 0 taxes and stock-based compensation expense.

A table reconciling these adjustments is included in our press release.

We are reiterating our outlook of $80 million to $82 million for the full year, indicating expected 15% to 18% revenue growth from fiscal 2018. This suggests approximately $30 million in anticipated second half revenues compared with $20.4 million in the second half of fiscal 2018. The significant expected increase is attributable to our growing orders in summer and sport garments as we work to diversify our business with existing customers and also add new customers in the warmer weather and exercise for our categories.

We anticipate cash operating expenses of a little over $2 million per quarter. This should indicate profitability throughout the remainder of the year, both on a GAAP and pro forma basis.

Turning to the balance sheet. Cash and restricted cash at September 30, was $30.4 million, a substantial increase from $16.6 million at the end of last quarter. This reflected a return of working capital previously tied up in raw materials and inventory cost, plus more than $8 million in cash flow from operations. Accounts receivable was $15.7 million, up from $13.2 million in the first quarter, and inventories were under $9 million compared with $20 million at the prior quarter-end.

Total shareholders' equity was up notably to $49.5 million at quarter-end from $33.7 million 6 months ago prior to our IPO in May 2018.

We believe 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. However, that is a top priority for the company, and Karl will speak to that in a moment.

I want to close with discussion of our newly announced dividend policy. The board has approved a dividend amounting to $0.20 per share annually paid in quarterly installment beginning November 27 to shareholders of record on November 19. We're very excited about this development and see it as not just a way of rewarding our shareholders for their confidence in Jerash but also an affirmation of our sustainable profitability and operating cash flows. We expect to fund the dividend, which amounts to a little over $2 million per year in total costs, from operating cash flows and fund acquisitions from our substantial balance sheet cash and excess cash flows. We believe that this positions Jerash as a value stock with a compelling growth thesis as well as a dividend payer with sufficient cash flows to fuel further returns through strategic expansion, in short exactly what we believe a company in our position should do to build shareholder value.

With that, I will turn the call to Karl for discussion of our growth strategies.

Great. Thank you, Rich. Appreciate that.

Clearly, the second quarter was a very strong -- was very strong and an indication of our potential as a public company. But this is not enough. We are focused on significant growth beyond our current rates. In order to achieve that, we need to add capacity.

One thing I do want to point out is that unlike most companies that add capacity and then work to fill that capacity, Jerash's customers have already come to us with indications and capacity forecasts for next year, all of which are up and a number of them by significant amounts. This in -- this is a combination of 2 factors. First, Jerash is highly regarded as a quality producer of our -- for our customers, including some of the best-known brands in the world. This is a reputation we work hard every day to achieve. Second, Jerash is favorably positioned to benefit from the agreements between Jordan and the U.S. as well as Jordan and the EU to eliminate tariffs ranging from mid-teens into the low 30s on a percentage basis. This is a compelling financial reason to produce with Jerash. This tariff advantage is attractive for both winter wear, as evidenced by our record-setting first half, as well as for the warmer season of goods, which are produced in the second half of our year.

In order to meet this demand, we have a multi-phased approach to grow our capacity. On this front, we have built out an additional 500,000-piece facility, which we expect to have online by the end of the year. This is about an 8% increase in our capacity, which is a good start.

To further grow Jerash, we're aggressively pursuing 3 additional areas of expansion. First, we have subcontracted capacity at nearby factories. We have done this successfully before, and it is a relatively quick way to add production volume while being able to maintain quality oversight.

Second, we are pursuing joint ventures with facilities in our area, enabling a longer-term capacity solution with more dedicated capacity.

Third and perhaps most exciting to our investors as well as to us, we are aggressively looking at acquisition opportunities that meet our rigorous performance standards in order to maintain both our quality and profitability metrics.

These acquisitions may include both small factories that we can simply purchase and load with our existing orders, as well as larger factories that we -- that would not only add to our overall capacity but also bring new customers as part of the purchase.

We presently have a number of targets identified and at various stages of diligence and discussion and anticipate one of the more -- one or more definitive targets to emerge in the near future.

As Rich mentioned, we believe that our strong balance sheet will support these acquisition opportunities, and we look forward to executing on these efforts as soon as one of our targets passes our rigorous diligence process and agrees to appropriate terms.

In closing our prepared remarks, I want to reiterate that our focus is on growth. We have produced a record first half and are poised for an anticipated record second half. However, we believe this is just the beginning as we plan to drive even more growth and profitability ahead. And we're excited about the opportunity -- about the opportunities we see going forward and look forward to reporting our continued -- or reporting back to you our continued success. We now welcome any questions.

(Operator Instructions) There are no questions at this time. I would like to turn the call back over to Mr. Choi for any closing remarks.

Okay, thanks.

Now thank you for participating on today's call. We are pleased to report our second quarter and first half as well as our outlook for an anticipated second -- record second half. We look forward to continuing to execute on our operational and strategic goals as we work to grow shareholder value. Thank you for your participation, and have a great rest of the day. Thank you, everybody.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Thank you.

Thank you.