Greetings. Welcome to Jerash Holdings’ fiscal 2023 third quarter financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Roger Pondel, Investor Relations for Jerash Holdings. You may begin.

Thank you, Operator, and good morning everyone. Welcome to Jerash Holdings’ fiscal 2023 third quarter conference call. I’m Roger Pondel with PondelWilkinson, Jerash Holdings’ investor relations firm. It will be my pleasure momentarily to introduce the company’s Chairman and Chief Executive Officer, Sam Choi, his Chief Financial Officer, Gilbert Lee, and Eric Tang, who leads the company’s operations in Jordan. Before I turn the call over to Sam, I want to remind our listeners that today’s call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous conditions, many of which are beyond the company’s control, including those set forth in the Risk Factors section of the company’s most recent Form 10-K and Form 10-Q as filed with the Securities and Exchange Commission, copies of which are available on the SEC’s website at www.sec.gov, along with other company filings made with the SEC from time to time. Actual results could differ materially from those forward-looking statements and Jerash Holdings undertakes no obligation to update any forward-looking statements except as required by law. With that, it’s my pleasure to turn the call over to Sam Choi. Sam?

Thank you, Roger, and hello everyone. Our fiscal third quarter performance demonstrated the company’s ability to navigate through continued challenging market conditions in the sector. Although orders received from our major global brand customers continued to be smaller compared to last fiscal year, our team in Jordan was able to keep our facilities running at full capacity by adding supplementary production for other customers. Accordingly, we achieved record third quarter revenue. Nevertheless, we continue to see fiscal 2023 as a transitional and opportunistic year for Jerash while we made progress on our initiatives to diversify our customer base and product mix. Since the last conference call, we have successfully begun to ramp up production on orders from Timberland and Skechers, which are a newer group of brand customers. Additionally, test runs for our previously announced first European-based high-end apparel brand were well received with initial shipments to begin at the end of March. Our plans to form a joint venture with Busana Apparel Group are proceeding well. We anticipate launching the venture early in our new fiscal year, giving Jerash additional opportunities to serve Busana’s group of brand customers that have expressed interest in shifting their production from Southeast Asia to Jordan, which has longstanding duty-free agreements with the U.S., EU, and other countries. Additionally, we are gaining visibility into the athleisure wear and technical clothing segments. The company is well known for its high-quality woven apparel production in technical garments, active sportswear, and formal wear. Before I turn the call over to Eric, who is based in Jordan, I want to say that our thoughts and prayers go out to all of the families that were impacted by the recent devastating Turkey/Syria earthquakes. I will now turn the call over to Eric Tang to talk about our operations, and Gilbert will then discuss the quarter’s financial results.

Thank you, Sam. Hello everyone. As Sam mentioned, with the challenging retail environment, orders placed by our top global brand customers have been smaller while retailers continue to work through economic and inflation recovery. We expect these trends to continue for several more months. During this time, we are actively communicating and maintaining excellent relationships to better understand our customers’ needs going forward as market conditions improve. Fortunately, we continue to receive inquiries from other premium brands as global brand trends remain to diversify supply chains away from Asia, especially China. On the new customer front, we introduced and shipped initial orders for Timberland and Skechers in the third quarter and are scheduling additional production for both. In the current quarter, we recently began production for our first European-based high-end apparel brand with initial shipments to start soon. Please keep in mind that new customer inquiries and test runs for premium brands typically take several months. Also, initial new customer orders are in relatively small quantities with generally lower margins to start. During this timeframe, we are able to maintain our full staff and our facilities fully booked by adding supplementary production of products for buyers other than our major customers in the U.S. We are also expanding the capacity at some of our factories to gear up for our joint venture with Busana that Sam mentioned earlier. Lastly, please note that our sourcing of fabric and other materials from new partners in the Middle East and North Africa is continuing and is not expected to be impacted by the earthquakes. With that, I will turn the call to Gilbert to discuss our financial results and the fiscal 2023 outlook. Gilbert, please?

Thank you, Eric. Revenue for our fiscal 2023 third quarter increased 17% to a record $43 million from $36.8 million in the same period last year. The increase was mainly due to supplementary sales to customers outside of the U.S. with lower margin products. The gross margin was 13.5% in the fiscal 2023 third quarter compared with 18.8% in the same quarter last year. The decrease was primarily driven by the lower proportion of export orders to two major customers in the U.S. that typically generate higher margins. Operating expenses totaled $4.5 million in the fiscal 2023 third quarter, mainly from SG&A, compared with essentially the same amount in last year’s third quarter, including SG&A expenses of $4.2 million and stock-based compensation expenses of $319,000. Operating income totaled $1.3 million in the fiscal 2023 third quarter versus $2.4 million in the same period last year. Total other expenses were $111,000 in the fiscal 2023 third quarter compared with $80,000 in the same quarter last year. Interest expenses were $249,000 versus $73,000 a year ago. Net income for the most recent third quarter was $900,000 or $0.07 per diluted share versus $1.7 million or $0.13 per diluted share in the same period last year. Comprehensive income attributable to Jerash Holdings common stockholders totaled $929,000 in the fiscal 2023 third quarter versus $1.7 million last year. Jerash’s balance sheet and cash position remain strong with cash of $26.2 million and net working capital of $47.1 million at December 31, 2022. Inventory was $26.7 million and accounts receivable amounted to $5.5 million. Net cash provided by operating activities was $9.9 million for the nine months ended December 31, 2022 compared with $14.6 million in the prior year. The net change reflects working capital activities attributable to reduced net income, increases in advances to suppliers partially offset by smaller decreases in accounts payable and accrued expenses. We continue to take a conservative approach to guidance given that the general retail markets are still recovering from inflationary pressures and weaker economic conditions. For the current fourth quarter, revenue is expected to be in the range of $26 million to $28 million compared with $30.9 million last year. We are maintaining our margin goal for the full fiscal year to be in the range of 16% to 18%. We continue to focus on growing our customer base and pursuing other opportunities to enhance our competitive advantage and offerings. We are proud to be able to navigate through this challenging environment and that we can achieve essentially the same level of business for the full 2023 fiscal year as we did in fiscal 2022, which experienced the highest growth rate in the company’s history. Our strategy of maintaining full capacity and expanding some production space at some of our existing facilities now will allow us to be ready to accommodate anticipated growth in fiscal 2024 from newer and long-term customers, as well as from our proposed joint venture. We will continue to closely monitor developments over the next few months and will provide an update on our progress on the next call. On February 3, our board of directors approved a quarterly dividend of $0.05 per share payable February 21 to stockholders of record as of February 14, 2023. As of the end of our fiscal third quarter, approximately 156,600 shares have been repurchased at an average price of approximately $4.90 per share under the share repurchase program authorized by the board in June 2022. The program expires on March 31, 2023. With that, we will now open up the call for questions. Operator, may we have the first question, please?

At this time, we will be conducting a question and answer session. Your first question for today is coming from Mike Baker at DA Davidson.

Okay, hi guys, thanks. A couple questions. Can you talk about the state of your larger customers and the inventory situation in the U.S. versus what it was three months ago? Some of the big customers, maybe not your customers but some of the big apparel sporting goods retailers in the U.S., like VF Corp, Under Armour, Columbia, the inventory is actually getting larger, growing, not decelerating as many would have expected, so is the situation better or worse than it was three months ago for your larger customers?

Eric, do you want to take this?

Yes. I talked to some of our major buyers, like VF Corp and New Balance. They are saying that they also have recorded some growth in the past couple of months in sales, but they are still not too optimistic about the coming several months, so they are still trying to absorb and trying to reduce the level of the inventory. That’s why despite the fact that there is growth in the sales, they are still not placing too many new orders until the inventory level is down to a level which they think is safer and more acceptable to them. This is the latest information I received from my buyers.

Okay, thanks, so maybe as a follow-up on that, I think Gilbert had mentioned growth in 2024 - you used the word growth. Now understanding you’re not giving 2024 guidance right now, but that expresses a level of confidence that you will grow next year. Can you tell us what gives you that confidence?

Well, currently our existing customers like TNF and New Balance are being very cautious about placing new orders. Typically, by this time, they would have filled our capacity for the first half of the next fiscal year as we need to start planning for the winter and fall seasons. However, this year their orders are smaller than usual, so we are still waiting on them. That's why we can't provide guidance for the next fiscal year or the first half, but we are optimistic because of our efforts in fiscal 2023. We are onboarding new customers, including a high-quality premium European brand, which we cannot name, but their orders have already started. All necessary certifications for our factory have been completed, and shipments will begin soon. Regarding our joint venture, we have made significant progress and anticipate signing the agreement soon. We signed an MOU last quarter, and we have been collaborating with Busana to finalize the joint venture agreement, which is almost complete. Busana is already initiating marketing efforts and will visit the U.S. to engage with their customers and bring orders to Jerash. We believe this joint venture will positively impact us, even if we don't experience substantial growth or if we maintain our current business level with existing customers. Therefore, while we are cautious, we remain optimistic about the next fiscal year, though I can't provide specific guidance at this moment. We expect to maintain our current business level and possibly see some growth, depending on when the new business arrives.

I have one more question related to the fourth quarter guidance you've provided. First, you mentioned a 17% increase in sales to $43 million, but your guidance suggests a decrease of 10% to 16% in fourth quarter sales. What accounts for such a significant change? Also, while I see you maintained the full-year gross margin estimate, could you clarify it further? My calculations indicate a gross margin range of 12% to 22% for the fourth quarter, so any additional detail you could provide would be appreciated.

Certainly, let me explain. In the third quarter, we achieved record revenues, which was mainly due to compensating for the reduced orders from our major customers. As a result, the gross margin in the third quarter fell to 13.5% from 18.8% in the same quarter last year. While sales saw a 17% increase year-over-year for the third quarter, the significant drop in margin was due to the nature of local orders and third-party transactions. However, the fourth quarter is expected to present a different scenario. We are shifting to a higher proportion of FOB orders with North Face and New Balance while reducing lower margin orders. Consequently, we anticipate the gross margin percentage for the current fourth quarter to rise to between 16% and 18%. This should result in an overall full-year gross margin around 17%, although we expect sales in dollar terms to decline compared to last year.

Okay, understood. In the press release, though, it sales full year guidance 16% to 18% on the gross margin, but you’re saying that is also good guidance for the fourth quarter?

That’s also for the fourth quarter, exactly.

Your next question is coming from Mark Argento at Lake Street.

Yes, hi. Good morning guys. Just a follow-up on the Busana relationship. I know last quarter when you talked about it, you were still working out some of the details. It sounds like maybe you have a better understanding of the agreement. When you think about the economics of the deal, can you talk a little bit about will it be accretive to gross margins, or how will this flow through your P&L once you start booking revenue?

Well, the joint venture is going to be a separate company. It’s just a new company that we set up in Hong Kong. The company is already registered; we just need to wait until the joint venture agreement is signed. This company will be formed by two shareholders or two partners: one is Jerash Holdings and the other is Busana Apparel Group. Jerash will own 51% and Busana will own 49%. We will consolidate Busana’s revenue, gross margin, all the profits, and then 49% will go to Busana, so that’s how the sales and profit will flow to our consolidated.

That's helpful. Eric mentioned in the prepared remarks that you are expanding capacity for that relationship. Can you discuss your current production capacity and what you plan to add?

Eric?

Okay. Regarding our current capacity, we are operating at full capacity until July, and I expect to maintain that level until possibly September or October with the arrival of the Busana orders. Since all the factories are in Asia, the partnership exists because the buyers requested the orders to be moved out of Asia to a duty-free country, with Jordan being the selected location due to duty savings. Therefore, we anticipate receiving Busana orders starting sometime between July and August. Additionally, we have announced that we are already beginning our in-house expansion in Jerash One, aiming to increase our in-house capacity by four production lines by the end of July. This expansion is intended to accommodate the additional capacity for Busana, and if they have more orders, we will inject them into Jerash as needed.

So you’re taking existing facilities and adding onto those, or maybe could you just give us a little more color on how you’re adding the capacity?

Yes, the building is actually being expanded.

Yes?

For the expansion, we added an additional floor to the existing building and also expanded it horizontally. We estimate that this will increase our capacity by about 15% for that particular factory, which includes adding more machinery and hiring more staff.

And you expect that to be complete by July, or is that done already?

We are still working on it and anticipate it will be done by July. We started this in 2022, but due to market conditions, we've been taking our time and not pushing to complete it earlier. Right now, we are almost done and just finishing up, so we expect it could be put into use by July.

And just one follow-up in terms of the capital required to do the expansion, is it relatively nominal, or what are you thinking from a capex perspective?

For the capex, I think this is just slightly above $1 million, $1.1 million or $1.3 million.

Your next question for today is coming from Aaron Grey at Alliance Global Partners.

Hi, good morning, and thank you for the questions. First question for me, just in terms of the supplemental sales that you guys had with the lower margins, is that more a function for the quarter, just a way to get some revenue in due to some under-utilization given the larger clients were having smaller orders? It sounds like it’s not going to continue for the next quarter, and you guys do have full capacity from July to September, so can you just help us understand maybe that you’re going to have that full utilization, maybe why it was just maybe a one-time thing to where you went more local to get that revenue, even at the lower margin, is not going to be a potential need going forward? Thank you.

Sure, Aaron. Yes, this is just for this third quarter that there is a substantial amount of local orders and orders at the lower margin, because we want to keep running and utilizing all our capacity. First of all, we can absorb more of our fixed costs of the factories that we have, and then we also don’t want to lay off or reduce our workers because we need those workers when the business turns around, when the market turns around. Unlike other factories in Jordan, many of those have already reduced their staff or laid off people, and some smaller factories even went out of business. Everybody is suffering, even in Jordan, so we decided, and our strategy is we have to prepare for the business to come back and for even future growth, because we’re talking about a joint venture and new customers that we are onboarding, so we don’t want to cut into the bone so we want to keep everybody busy, and that’s why we went out and we brought in a lot of this supplementary business. These are people that we have done business with before and they are very happy to send us their business. Now in this current quarter, Q4 of 2023, we have a substantial amount of business with our existing customers like New Balance and The North Face, actually we are quite busy this quarter, and then we’re going to be busy in the first quarter of 2024, which is the April to June quarter, producing for these two largest customers also. The amount of the supplementary orders, or what we call the CM orders, is going to reduce; it’s not going to be as high a proportion as in this current quarter. But if we need to, to use up the capacity, we will accept these kinds of orders. It’s all the mix of the business, the mix of the orders, and that will affect the gross margin and also the top-line sales. Does that answer your question?

It does. That was actually really helpful. Then turning to the flipside of that, as you continue to ramp up some of these new ones - Timberland, Skechers, and some of the athleisure as well, as those progress and potentially advance into bigger and larger orders, can you just give us an update maybe on the timing of that and whether or not then if you are at full capacity now, for the next couple of months, and then how you potentially kind of ramp up those lines as well along with the current ones for your two largest customers, particularly in a scenario of when the business turns around and then you’re back at full with the legacy and you’ve also ramped up these new brands. Thank you.

The ramp-up of these new brands is important. We started quoting Hugo Boss almost a year ago, and I believe we are going to begin shipping the first orders for Hugo Boss in March, is that correct?

Exactly - yes, correct.

There will be a ramp-up period, and I believe that after the initial test orders, they will keep introducing new styles. Hugo Boss has been a long-time customer of Busana, which played a significant role in helping us onboard Hugo Boss. Although we first reached out to them about a year ago, Busana provided valuable assistance in the technical aspects and how to conduct business with them. Eventually, Hugo Boss will become part of the joint venture as we begin operations with Busana. In addition to Hugo Boss, Busana is collaborating with several other premium brands, which will also come on board, although it will take time for sampling, testing, and ensuring that all quality standards are met. The timing may also be challenging, as it depends on our capacity and manpower. However, by that time, we will have Busana's support, and we feel cautiously optimistic about the upcoming year.

Okay, great. Thank you very much and I’ll jump back in the queue.

Thanks.

Your next question for today is coming from Rommel Dionisio with Aegis Capital.

Good morning. Could you elaborate on your effort to acquire additional fabric from local partners in the Middle East? You've mentioned this in previous quarters, but there have been changes in gross margins due to a shift in customer mix. Does this additional sourcing from local partners positively affect the quarter, and what is your outlook for these initiatives moving forward? Thank you.

We began sourcing in the Middle East and North Africa over a year ago, starting in December when I visited Egypt and Turkey. We are now purchasing fabrics from both countries, primarily for the Timberland products. Sourcing from these regions reduces our reliance on fabric from Asia, particularly China, which faced many disruptions during the pandemic. This strategy is more long-term and essential for our Timberland business growth earlier than anticipated. It has also opened doors to other European customers. While the cost of raw materials may not differ significantly compared to China, Middle Eastern fabrics tend to be more expensive. However, we benefit from lower freight costs and significantly shorter logistics times when shipping from the Middle East. This quicker turnaround allows us to maintain lower inventory levels. Despite the drawbacks, the advantages outweigh them and provide us with greater opportunities to expand our customer base.

Okay, and just as a follow-up, I think you’ve mentioned that it’s a difficult situation for some of your competitive factories in Jordan. Is that causing any sort of impact on your labor base? Are you able to source more domestic workers within Jordan, or how is that sort of affecting your everyday operations from a labor perspective? Thanks.

Eric, do you want to take this question about sourcing local workers, maybe some opportunities?

Yes, just now it is mentioned that some small factories already closed down and some of the big factories, because of the order situation, they also reduced the number of workers, so it will become easier for Jerash to source especially the local workers who it is very easy to shift from one factory to another. For the foreign workers, of course, if the factory is shutting down, they need to finish the contract and go back to their country, but there are more chances, more opportunities for them to come to work in Jordan for Jerash.

Great, thank you very much.

Yes, that’s the reason why we want to hold on to as many of our existing workers as possible, because they are familiar with our operations and they are very experienced. It is a big cost if you want to go out and find new workers, whether they are local workers or import workers.

Okay, thank you.

Thank you.

We have reached the end of our question and answer session, and I will now turn the call over to Sam Choi for closing remarks.

Thank you, Operator. We are optimistic about Jerash’s prospects and the progress of our strategic initiatives. We look forward to speaking with you again soon and appreciate your continuing support. Thank you.

This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.