Jerash Holdings (US) Inc (JRSH) 2019 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Jerash Holdings Fiscal Fourth Quarter and Full Year 2019 Results Conference Call. (Operator Instructions)

At this time, it's my pleasure to turn the call over to Mr. Matt Kreps. Sir, the floor is yours.

Thank you. And good morning, everyone, and welcome to the Jerash Holdings Fiscal Fourth Quarter and Year-end 2019 Results Call. With me today on the call are Rich 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 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 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 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 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. We will be discussing non-GAAP measures on this call. The reconciliation of non-GAAP measures we discuss during this call is available as Appendix A to the press release we issued this morning and in our 8-K filing.

I will now turn the call over to Rich Shaw, CFO of Jerash Holdings. Please go ahead.

Thank you, Matt. Hello, and thank you for joining us today. I am pleased to join all of you today to discuss our record fourth quarter and full year revenue results as well as strong profitability and cash flow for fiscal 2019. These results set the stage for expected continued growth in fiscal 2020 which Karl will discuss in a few minutes.

Let me start with the quarter. Jerash posted record fourth quarter revenue of $14.5 million in sales for the period ended March 31, 2019, representing a 64% increase year-over-year. This was similar to our record setting third quarter growth showing we are effectively ramping our second half production capabilities, a key goal for this year and for our long-term strategy.

First quarter gross profit declined to 17.7%, slightly improved from the prior quarter but below our typical range due to a few factors. First, we continued to run a number of sample orders for new potential customers and for existing customers expanding their relationship with Jerash to include additional categories. These sample runs tend to be at lower margins for a variety of reasons, including higher setup on lower volumes among other factors. Additionally, second half production is weighted toward exercise and warmer season apparel, which tends to have lower price per piece dollar values as compared to more complex and higher dollar value cold season wear such as jackets.

Finally, the third and fourth quarters typically have a larger contribution from, what we call, contract orders or non-FOB orders, which have lower margin but help us keep our factories operating at capacity during what has previously been a slower portion of the year for us. We believe that trend is now coming to a close as a number of customers have indicated they will be adding orders to the second half for fiscal 2020, including FOB orders from major global brands as a result of our efforts this year. In spite of the downward pressure on gross margins, we're very pleased with our overall progress in this area, as it propels our top line sales and more fully utilizes our factories on a full year basis.

We expect a progression to a higher proportion of FOB orders will validate our investments in this area and contribute long-term benefit to our results. SG&A expense in the fourth quarter was $2.8 million, slightly above trend due to share-based compensation, bonus provisions and expenses for onboarding new customers. Operating loss in the fourth quarter was $205,000, driven by the short-term gross margin decline and slightly higher expenses. Taking all this into account, GAAP net loss was $0.02 per basic share for the quarter. Adding back the noncash or nonrecurring items, adjusted EBITDA, which is a non-GAAP metric, for the fourth quarter was $286,000 or $0.03 per share.

Shifting our focus to the full year. I believe it is fair to say that we've demonstrated significant growth, profitability and cash flow, setting the stage for an exciting fiscal 2020. For the full year of fiscal 2019, Jerash reported revenue of $85 million, an increase of almost 23% from $69.3 million in the prior year. Importantly, this was accomplished with relatively minimal growth in the first half, as production was effectively at maximum both this year and the prior year and substantially ramping second half production by almost 63% year-over-year. This was a key point to our growth strategy, as fiscal 2019 was primarily focused on ramping the second half underutilized capacity. With Jerash 4, we believe we now have additional capacity year-round to fuel our further revenue growth. We believe this is initially about 1.5 million plus pieces but see that capacity going to well over 3 million pieces per year from the new facility and possibly higher.

As Karl will address shortly, that facility is ramping up now and customers are moving swiftly to place orders against this new capacity. Gross margin for fiscal 2019 was 22.1% compared with 25.9% in fiscal 2018. For comparison purposes, fiscal 2018 gross margins were enhanced by a greater-than-typical first half revenue, mainly due to outsized jacket orders, while fiscal 2019 was affected by lower second half margins as we onboarded new customers and product categories, some of which were through our contract channel.

For the full year, operating expenses were $12.4 million, including onetime IPO stock-based compensation costs of $3.6 million and a tax pool of $1.3 million. GAAP net income for fiscal 2019 was $5.1 million or $0.45 per diluted share. Taking these costs into account, adjusted EBITDA for the full year was $11.3 million or $1.01 per diluted share. Again, we believe this non-GAAP measure is a useful approximation for our operating results for comparing purposes.

Turning to the balance sheet. We generated $9.8 million in cash flow from operations, providing cash and restricted cash on March 31 to $27.8 million or $2.46 per diluted share. Accounts receivable was $4 million, and inventories were

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we believe strong first half of fiscal 2020. We also have untapped lines of credit available for up to an aggregate of $23 million. We believe our balance sheet provides a strong position to evaluate acquisition opportunities and would contribute to both sales and profitability based on strict internal financial parameters. And finally, we have also announced the $0.05 per share dividend for this quarter as part of our planned $0.20 per year dividend target.

As you can see, Jerash has reported strong sales growth and profitability in fiscal 2019 and set the basis for expected further growth in the year ahead, as we maximize our existing facilities and ramp up our fourth factory. We believe this model will scale efficiently for the year ahead and support our plans for further capacity expansion, given our strong balance sheet. We continue to adjust our internal model for the onboarding of new capacity and updated mix projections in the year ahead and presently expect sales in excess of $100 million for fiscal 2020. We continue to believe that Jerash is positioned as a value stock with a compelling growth thesis as well as a dividend payer with sufficient cash flows to fuel further returns through a strategic expansion.

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

Great. Thank you, Rich. So clearly, Q4 and the full year of 2019 were exciting and transformative for Jerash. Operationally, we ran at full capacity during the first half, meaningfully increased second half revenue and commenced a 1.5 million plus piece annual capacity expansion for an acquisition cost of just $1 million that, we believe, will provide significant benefits in fiscal 2020 and beyond.

On the financial side, we generated a record $85 million in annual revenue, including record third and fourth quarter sales. We posted a GAAP EPS of $0.45 a share and an adjusted EBITDA, a non-GAAP measurement, of over $1 per share. We expect to beat these benchmarks in the coming year. We also generated almost $10 million in cash from operating activity over the course of fiscal 2019 and initiated a quarterly dividend policy, totaling $0.20 per share per year for our shareholders, providing them with additional return and value. In short, it was a very good year for financial execution, and we also see opportunity to improve our results ahead.

Rich's point about our growth in the second half is key, as it represents a critical step in our long-term strategic goal of better balancing revenue and profitability between our first and second halves. As the first half revenue was incredibly profitable, it grew just slightly year-over-year in 2019 as we were effectively maximizing our capacity.

However, better than 60% revenue growth year-over-year in fiscal second half is an important indication of the growing customer demand for Jerash. Revenue growth included sample orders from a number of new logos who are already indicating increased volumes in this coming fiscal year, as we can now turn our attention to maximizing the volumes and efficiency year-round to drive profitability.

In addition, we commenced production in our fourth facility this spring, which will represent an approximate 30% increase in expected total production capacity compared with last year when it's fully up and running. This provides an opportunity for new growth in both the first and second halves as our factories scale up. The expected facility will be primarily dedicated to non-North Face customer volumes as part of our goal to continue [growing] orders, while further diversifying our customer base. The factory is currently up and running with the first 500 or so employees and 5 lines, and we believe it will scale up to over 1,000 employees at full capacity later this year.

As such, we expect a partial contribution from this facility in the first half of fiscal 2020, which is this coming first half and a larger contribution in the second half of fiscal 2020. We also continue to look at opportunities to further our growth both organically and strategically. This includes construction of a satellite sewing facility focused on employing the Jordanian women, which is being built and offered -- and opened in close cooperation with the Jordanian government. We believe it will open later this year and employ about 500 local women producing about 1 million pieces annually. We are also pleased to take a leading role in this exciting socially responsible initiative offering quality employment to young women close to their hometowns in Jordan.

In addition to ramping, Jerash facility 4 and the satellite facility, we continue to look for compelling strategic growth and M&A opportunities that meet our strict financial criteria. We looked -- we have looked at a number of opportunities with keys to find the right business to integrate into our successful operations. We're willing to be patient and prudent in this search. Our strategic growth will likely emanate from a variety of approaches, including the addition of Jordanian factories similar to Jerash 4. We're also looking at ideas that would add new production categories to our factory capabilities, add new geographies outside of Jordan and incorporate vertical integration in close collaboration with customers. While we can't provide specific time frames for new strategic transactions, we remain diligent in our efforts to enhance our growth through responsible, strategic and M&A execution.

In closing my prepared remarks, I want to reiterate that while we had a strong year in fiscal 2019, our focus is on growth both organic and strategic. We have a number of key efforts in place to increase capacity. And much of our new capacity has been spoken for, with customer orders well ahead of factory completion. We're also working hard to increase our profitability for shareholders in the year ahead and look forward to reporting these efforts throughout the upcoming year. So that concludes our prepared remarks, and we'd now like to welcome any questions.

(Operator Instructions) We'll go first to Mark Argento with Lake Street Capital.

Rich and Karl, just a quick question on margins as you guys are thinking about ramping up the capacity. I know 2019 looks like mid-20 gross margins in the first half, high teens the second half of the year on a blended basis. Do you anticipate a similar type of first half, second half? Do you see the 2 kind of halves starting to look a little bit more like each other, a little more consistent? Maybe you could walk us through your thoughts on gross margins as the year progresses.

Sure, Mark. It's a great question, one that we've spent a lot of time on ourselves and with our models. So here's our thought. With our current factories, so Jerash 1, 2 and 3, I'll call them for this purposes, we'd expect similar gross margins as we're bringing on new capacity and essentially make shifts to what you saw this year. As we ramp up our fourth facility that -- we would expect to generate gross margins below Jerash 1, 2 and 3.

So at this point, we're being conservative, Mark, and we're really not going to provide a precise range. But again, I'll just reiterate, I think Jerash 1, 2 and 3, we would expect similar performance to what we saw this year. And as we ramp up the fourth factory and can begin to fully absorb the fixed cost, we would expect that that ramps up nicely, although I think that'll maybe serve to depress our margins in the short term.

Follow up to that. In terms of capacity of Jerash 4, is it a 3 million? Did you say it's 3 million pieces? Is that right?

Yes. So it depends on mix, right? What's in that factory. There was a press release out there. We mentioned it in my prepared remarks, initially our capacity is -- our view is 1.5 million to 1.8 million pieces. The operators are telling us that look, the [tenure] we run through there, we can do in excess of 3 million pieces. So I think really that comes down to what SKUs we want to run through there, what's the best ROI? But there's definitely -- gives a nice capacity there.

And do you think you'll have better understanding in terms of the margins after you have it up and running for a couple of quarters? Or what -- when do you...

We do. We began operations about 2.5 months ago, so the first 500 employees. After the first quarter of operation, we expect to add another 500 employees. I think it will become clear to us, Mark, throughout the year, and we'll certainly share an update with you guys what our margin expectations is as the year progresses.

I'll just add to that, that as we have the facility fully up and running, we don't see, at this point, any reason it shouldn't have similar margins to the other 3 factories. So that's our expectation at this point.

We'll take our next question from Dave King with ROTH Capital Partners.

I guess, first off, following on Mark's line of questioning on the gross margin. So fully appreciate that too early to tell on the facility and the pace of ramp, of utilization, et cetera. How should we be thinking about the first 3 facilities? And the gross margins there as we progress into fiscal '20? I guess my question is, the second half, do you expect to still be running a lot of these kind of discount rush orders? Or is it fair to assume that you might be able to see an uptick in margins at the legacy, call it, 3 facilities?

No. It is a fair question, Dave. Good question and again, in our prepared remarks, we touched on it a little bit, and what we -- we set a goal of -- I think we've set it in some of these public forums about growing, trying to equalize first and second half revenue. As we grew our second half revenue basically 2% this year, a lot it was, what we'll call, the contract channel, right, non-FOB, nonbrand business. But what we're learning -- what we're seeing is the brands, if you will, the FOB orders are looking to utilize that capacity in third and fourth quarters.

It won't be the warmer weather jacket biz, but it will be -- hopefully lots of this contract biz, more of the brand biz with a little bit higher revenue per SKU leading to better margins. So that's I think how we take a look at that. I think it'll migrate up, as we -- as it will move up margins second half of the year, as we migrate away from the contract business more into -- to more FOB. As it sits again, it's -- again, not going to put a number, but that's sort of how we see this playing out.

Okay. No, that helps. And then how -- just remind us again how different are the margins on your warm weather versus your winter items?

Warm weather could run in the high teens, the winter items can run in the mid-20s.

Okay. And then the second question, with the fourth facility now being fully booked for FY '20, the capacity ramping, how are you thinking about the trajectory of revenue growth as the year progresses? I guess I want to understand how should we think about the -- by quarter, by half versus that 17% plus you guided to?

Yes. Great. So good question. So first half of the year revenue last year was really maxed out, right? So we'll get a little benefit from Jerash 4, as this will have, call it, 50% capacity -- 50% new capacity second half of the year, I would expect us to grow -- I guess I'm saying that I think we'll grow linearly, so if I think -- $100 million revenue is about a 15%, 17% revenue growth. I'd expect to see that in a linear fashion. I don't think you're going see outsized growth in the second half versus the first half of the year.

(Operator Instructions) We'll go next to Michael Kawamoto with D.A. Davidson.

Just can you share any thoughts, the first -- your fiscal first quarter is just about over. Any thoughts on how it shaped up versus your expectations so far?

Yes. I think it is going to be at expectation. Yes, I think -- I don't think there's any -- we're not expecting any surprises in there.

Okay. And then you talked -- I think in a previous release, you had 400 of the 1,000 workers in place for Jerash 4. Are you confident that you can find the labor to meet your needs there?

We can. We've actually -- the government of Jordan has actually worked with us to go out and recruit the labor. So again, pursuant to Jordanian law, we've mentioned in the past, 25% of our workers need to be Jordanian. But we recruit labor outside in other areas as you all know and the government has actually worked with us to draw and recruit labor. So we don't expect there'll be a difficulty in finding the labor that we need.

Yes, we've never really had trouble bringing labor from the other countries that we recruit from, Sri Lanka, Nepal, Bangladesh, et cetera. I mean, the -- we have -- we actually have employees stationed in each of these countries to lead the recruiting effort and what Jerash offers is very attractive for many of these people in these various countries. So -- and we tend to also be able to bring in quite highly skilled labor from these countries that have had a long history of apparel manufacturing, so bringing in the additional employees, we don't see any issues. Sometimes it's more of a timing issue of getting all the visas and their work papers filled out. That's probably the biggest hurdle, which is always obviously something that we can easily overcome with the help of the Jordanian government.

(Operator Instructions) Mr. Brenza, there appears to be no further questions at this time. I'll turn the call back over to you for any closing remarks.

Yes. So thank you everyone for participating on today's call. While we're excited about the record sales in the fourth quarter and the full year, we believe -- we truly believe the best is yet to come. We look forward to continuing to execute on our operational and strategic goals, as we work to grow shareholder value. We will -- we'll be conducting various outreach and conference events both this summer and in the fall, and we certainly welcome an opportunity to meet with you at these events. Also, please contact Matt Kreps from Darrow Associates, who's listed on our press release that was issued today to arrange -- if you'd like to have a phone call or an in person meeting with us. We're more than happy to meet with you and look forward to that. And thank you for participating today and have a great rest of your day.

And thank you, ladies and gentlemen. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.