Earnings Call Transcript - JRSH Q4 2021

Operator, Operator

Greetings. Welcome to Jerash Holdings' Fiscal 2021 Fourth Quarter and Full-Year Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. At this time, I will now turn the conference over to Roger Pondel with PondelWilkinson. Mr. Pondel, you may now begin.

Roger Pondel, Investor Relations

Thanks very much, Operator, and good morning everyone, and welcome to the Jerash Holdings fiscal 2021 fourth quarter and full-year conference call. I'm Roger Pondel with PondelWilkinson. We are Jerash Holdings' new Investor Relations firm. We are very happy to be aboard and look forward to meeting with you and speaking with you over the coming months. It will be my pleasure momentarily to introduce the company's Chairman and Chief Executive Officer, Sam Choi; its 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 you 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 factor 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 along with other company's filings made with the SEC from time to time. Actual results could differ materially from any forward-looking statements and Jerash Holdings undertakes no obligation to update any forward-looking statements except as required by law. And with that, it is my pleasure to turn the call over to CEO, Sam Choi. Sam?

Sam Choi, CEO

Thank you, Roger, and hello to everyone. Our fiscal 2021 fourth quarter results demonstrated excellent progress in our recovery from the COVID-19 pandemic. As we noted in our third quarter earnings call, we expected to see at least a 38% increase in fourth quarter revenue, based on orders connected in the period. As you can see in today's press release, we exceeded this rate of growth, with actual fourth quarter revenues increasing nearly 65% year-over-year. Our mix of products improved substantially as well, leading to gross margins in the high teens in the fourth quarter. As a result of our strong fourth quarter performance, we achieved a full recovery from last year's second half with full-year revenue of $90 million, exceeding our $85 million target for the year. Moreover, our robust momentum is continuing thus far into fiscal 2022 with orders for the first nine months of the year, leading to a revenue forecast in that period that would exceed our prior record. This would keep us on track to achieve guidance of $100 million and $102 million in revenue in fiscal 2022. We continue to advance plans to increase capacity in our existing facilities and secure additional capacity to meet our customers' needs, both by building new facilities and possibly through leases and acquisitions. We'll keep you apprised of that progress. As previously announced, we also anticipate starting construction later this year of an additional facility on a parcel that we purchased in 2019. I'll now turn the call over to Eric Tang, who is based in Jordan, and then to Gilbert Lee, who is based in New York, who will cover our financial results. Eric?

Eric Tang, Operations Lead

Okay. Thank you, Sam, and hello, everyone. I'm leading the operation in Jordan. Our factories in Jordan are extremely busy, and we continue to add capacity as quickly as we can in order to meet the demand of our buyers. As Sam noted, order volumes are up substantially, and customers have returned to more typical ordering patterns. Our revenue has continued to be more evenly distributed throughout the year, which as we have mentioned before, is one of our long-term goals. As anticipated, our product mix improved in the fourth quarter, leading to orders of higher average selling prices and margins than we saw earlier in the fiscal year. As we told you last quarter, some shipments for major brand customers were shifted into the fourth quarter, which lifted both revenue and gross margin in the period compared to last year. And as Sam noted earlier, this momentum is continuing into fiscal 2022. Capacity is completely booked through the end of January, based on orders from our four largest global brand customers alone. Bookings remain heavily weighted towards jackets and other outerwear products that have the highest average selling prices and margins. While we continue to plan for adding future capacity to keep up with demand, we also recently announced the construction of high-quality living space while expanding our multinational workforce, as well as plans to start construction later this year on our fifth manufacturing plant with additional housing capacity. We plan to construct a state-of-the-art ecologically-friendly building with the highest safety and cover designs that have positioned us for growth and further our ESG growth. With that, I will turn the call to Gilbert Lee to discuss our financial results and fiscal 2022 outlook. Gilbert?

Gilbert Lee, CFO

Thank you, Eric, and good morning, everyone. Our fiscal 2021 fourth quarter revenue rose substantially to $24 million from $14 million in the same period last year, which is an increase of nearly 65%. As Sam noted, revenue exceeded the guidance we previously provided. Growth was driven by the highest shipments in the quarter, as well as a shift in the timing of certain shipments from the third quarter into the fourth that was related to the COVID-19 pandemic. And as you may recall, our revenue in the fourth quarter of last year was negatively impacted by the pandemic due to a full national shutdown in March 2020. Gross margin exceeded our guidance as well, coming in at 19.6% in the fiscal 2021 fourth quarter compared with 8.7% in the same period last year. Gross margin enhancement in the quarter reflects an improved mix of products with higher sales of jackets and other outerwear products. Gross margin in last year's fourth quarter also was negatively impacted by the pandemic. Operating expenses totaled $3.5 million in the fiscal 2021 fourth quarter compared with $2 million in the same period last year. The increase primarily reflected headcount additions, catch-up repair, and maintenance work on the facilities and dormitories to support growth in the new fiscal year. Higher logistics costs that stem from the pandemic and a one-time company-wide bonus, basically getting the company ready for returning to more normalized operations. Operating income was $1.2 million in the fiscal 2021 fourth quarter, compared with an operating loss of $735,000 in the same period last year. Comprehensive income attributable to Jerash common stockholders was $656,000 or $0.06 per share in the fourth quarter, compared with a net loss of $740,000 or $0.07 per share in the same period last year. For the full 2021 fiscal year, revenue totaled $90 million, which exceeded our outlook. Gross margin in fiscal 2021 was down 160 basis points to 17.7%, again, primarily due to pandemic effects. Fiscal 2021 included higher proportions of local orders that typically carry lower margins. We also experienced a loss in productivity because of the April 2020 national shutdown. Operating expenses were $11 million in fiscal 2021 slightly higher year-over-year. Operating income for the year was $5 million, compared with $8 million in fiscal 2020. Comprehensive income attributable to Jerash common stockholders was $4 million, or $0.37 per share in fiscal 2021 compared with $6 million or $0.57 per share in fiscal 2020. During fiscal 2021, we paid dividends of $0.20 per share to our common stockholders. Our balance sheet remains strong with cash and restricted cash of $23 million and net working capital of $15 million at March 31, 2021. Inventory was $25 million and accounts receivable was $12 million. Receivable collections remain excellent and consistent with no customer issues. Net cash used in operating activities was $1 million in fiscal 2021 compared with net cash provided by operating activities of $7 million in the same period last year. The net change reflects working capital activity. We continue to expect the business to generate cash from operating activities on an annualized basis. We also have untapped lines of credit available for up to an aggregate amount of $26 million. In terms of our fiscal 2022 outlook, we expect revenue to be in the range of $100 million to $102 million for the year. Demand continues to indicate that we could produce revenue at or near record levels in the first three quarters of the year with orders heavily weighted towards high-margin jackets and outerwear products. We expect this trend to support gross margins in the high teens for the full fiscal year. Our fiscal 2021 fourth quarter results represent a strong finish to a challenging year. Customer ordering patterns are returning to a more typical level with a higher average selling price and margin profile. Our facilities are fully booked through January of 2022. And we continue to work on adding more capacity. This robust momentum is leading to what we believe will be a record year for the company. We look forward to keeping you apprised of our progress as the year unfolds. And with that, we'll now open up the call for questions.

Operator, Operator

Thank you. At this time, we'll be conducting a question-and-answer session. Our first question is coming from the line of Mark Argento with Lake Street Capital. Please proceed with your questions.

Mark Argento, Analyst

Hey, everyone. Congratulations on a strong end to the year and a solid recovery post-pandemic. I have a few questions regarding the guidance for 2022, specifically the $100 million to $102 million in revenue. Does this assume the facilities are operating at full capacity or about 90%? Could you discuss the potential for exceeding that revenue number based on capacity utilization?

Sam Choi, CEO

Well, we have fully booked through the first three quarters of the year. And it is almost at 100% capacity. And we're adding additional capacity as we speak, by adding additional production lines in our existing facilities. However, that will only give us just a certain amount of additional capacity. But at the same time, we're looking and considering additional spaces, and additional facilities to add capacity. So, this projection or guidance really is looking at pretty much our limit, unless we have additional acquisitions or lease additional space in Jordan.

Mark Argento, Analyst

And the additional capacity that you're talking about bringing online, when can you see a material increase in capacity? Is that early 2023 fiscal '23, a year from now, or how long does it take to spin up additional capacity?

Sam Choi, CEO

Well, we're building a new facility, and that construction will start towards the end of this year. Right now, we're finalizing the engineering designs and the architecture of that particular building. So, that particular project will not provide new capacity until maybe a year and a half or two years after we start. So, we're actively looking for existing facilities that we can either lease or purchase in Jordan, so that we can immediately get additional capacity to satisfy the growing demand.

Mark Argento, Analyst

And in terms of additional capacity, have you brought on increased capacity over the last couple of years, or has that stayed fairly static?

Sam Choi, CEO

Yes, in the latter part of 2019, I'm talking about the calendar year; we purchased our fourth factory in Jordan, which is the Paramount factory. So, that had some substantial increase in capacity for us. That's how we bought our capacity now up to 12 million pieces. And we also added a workshop in the Defense city in Jordan, which is about an hour and a half south of Amman. In that facility, we now have 300 workers, and we're making more products in that facility. And that facility also has some more room to grow.

Mark Argento, Analyst

Got it. Turning to Gilbert, regarding some of the expenses, you mentioned that gross margins are in the high teens. On the operating expense side, you indicated that it was a bit higher this quarter due to reset bonuses and preparations for growth in 2022. Do you expect that to return to levels more in line with the 2019 quarterly run rate? Could you provide some insight into your thoughts on operating expenses?

Gilbert Lee, CFO

Well, on the SG&A, we're actually anticipating slightly higher SG&A, because we have already added some accounts. So, some of the G&A costs will be higher to handle the growing demand, taking care of sales and marketing. Also, looking at higher shipments or a higher volume of shipments, the selling costs, the selling expense, include the logistics costs that we have to send finished products to the ports. Now, the overseas shipments, well both of them will be handled by our customers, so that's not part of our expenses. But we do have to ship the products to the port from our factory. So, we put in some additional costs in that. For the upcoming fiscal year, we're looking at around $12 million to $13 million for SG&A.

Mark Argento, Analyst

Got it. For the operating income, do you expect it to be similar to the approximately $6 million in operating income from 2021, which represented a 6% operating income margin, down from about 8% in 2020? Are you anticipating a recovery in 2022 regarding operating income, or is this still a year where you are mostly focused on reinvestment? What are your thoughts on that bottom line number?

Gilbert Lee, CFO

Well, margin is going to be better because of the higher proportion of jackets and outerwear. So, margin we'll see an improvement of probably about one percentage point, comparing to 2021. And SG&A, even though that has some increase, I think the operating income level would improve.

Mark Argento, Analyst

Got it, all right. And last one for me, Sam, as you're thinking about allocating capital, obviously, your balance sheet supports being able to get more aggressive on the growth side, probably played it a little conservative with the pandemic. How aggressive do you guys want to be here in terms of growing the business, given that it seems like for the most part, you have been fully booked for quite a while now, and you have been lacking capacity? What can you do to remedy that? Is there a willingness to get more aggressive on the M&A side? Obviously, you're constructing additional facilities as well, but just any thoughts there would be really helpful. Thanks.

Sam Choi, CEO

Yes, in fact, I mean besides building our own factory, I think the fastest way we'll consider is to acquire some small factory. That would immediately increase our capacity to meet the customer demand. So, that is one of the ways we will seriously consider. Yes.

Mark Argento, Analyst

Thank you.

Sam Choi, CEO

Yes.

Gilbert Lee, CFO

Thank you, Mark.

Rommel Dionisio, Analyst

Yes, good morning. Thanks for taking my question. I wonder if I could just walk through the impacts of the pandemic on labor. Are you restricted from bringing workers from other countries, Bangladesh and others into Jordan because of the pandemic? And as a result, are you hiring more domestic labor? Is that not really as much of an issue? Thanks.

Eric Tang, Operations Lead

This is Eric. Okay, let me answer this question. Okay, because I'm taking care of the operations. So, all along, we are bringing migrant workers from India, Bangladesh, these kinds of countries to Jordan. So, this is a major part of our workforce. At the beginning of the pandemic, the situation in India and Bangladesh was still under control, and we were still open for bringing workers from Bangladesh and India to come to Jordan to work, but this year, starting in April, the situation in India and Bangladesh is getting worse, nearly all the countries in the world banned the coming of workers or people from those countries. So, in Jordan, the Ministry of Labor also banned the coming of workers from these two countries. So, actually, we applied for new workers to come to work for us from these two countries in order to meet our expansion requirements. In order to solve the problem, we are already hiring more local workers, and we are particularly looking forward to hiring more experienced operators to replace those workers from Bangladesh and India, who cannot come to work in Jordan. The situation now in India and Bangladesh, I think, is improving. Starting last week, visas for Bangladeshis coming to Jordan have been reopened, I can say. So, a few days ago, we have new workers from Bangladesh coming to work in our factory again. We are still looking forward to the situation in India improving. Hopefully, maybe in July, Jordan will be opened for Indian people to come again to work.

Rommel Dionisio, Analyst

That's very helpful. I have a follow-up regarding your capacity expansion plans, particularly considering past discussions about possibly expanding in China. We're aware of recent lockdowns in some areas, but those restrictions seem to be easing. Has this situation affected your plans to increase production capacity in China, or has it not been a significant concern? Thank you.

Sam Choi, CEO

I can see so far there is no obstruction or problem in our factory in the southern part of China, in Guangdong Province, so no negative impact on our operation.

Rommel Dionisio, Analyst

Okay, that's very helpful. Thank you very much, and congratulations on the quarter.

Sam Choi, CEO

Thank you, Rommel.

Gilbert Lee, CFO

Thank you.

Barry Pasternack, Private Investor

Hi, guys, congrats on the quarter. I was wondering, it looks like the book tax rate was about 40%. Could you talk about why it was so high, and also what you expect, if you could talk about what you expect the book and cash tax rate to look like in the current fiscal year?

Sam Choi, CEO

The tax rate was influenced by adjustments related to Jordanian taxes from 2018 and 2019. Over the past two years, the tax rate in Jordan increased significantly, and the government recalibrated some additional taxes for us. In fiscal year 2021, the tax rate in Jordan rose from 11% to 14%, leading to a considerable increase in the effective tax rate this year. However, we expect this to stabilize, as this year's situation is merely a one-time adjustment.

Barry Pasternack, Private Investor

So, what would the cash and book tax rates look like for the current fiscal year? Can you comment on that?

Sam Choi, CEO

In the current fiscal year, we anticipate the cash rate to be around 16% to 17%.

Barry Pasternack, Private Investor

Okay, great. And for the apartments that are going to be constructed for employees, when is that projected to begin construction?

Sam Choi, CEO

We have already begun the construction in the month of April, at the end of April actually. And we anticipate the construction to complete in the middle of 2022.

Barry Pasternack, Private Investor

Okay, great. And last question, why was there a change in Investor Relations firms?

Sam Choi, CEO

We wanted to have a change and see if we can learn something new and just try to attract more investors, grow our company, and be more transparent to communicate with our investors and the capital market more effectively.

Barry Pasternack, Private Investor

I see. Okay, great. Thanks very much.

Sam Choi, CEO

Thank you.

Gilbert Lee, CFO

Thank you for calling.

Unidentified Analyst, Analyst

Yes. Good morning, gentlemen.

Eric Tang, Operations Lead

Good morning.

Unidentified Analyst, Analyst

And how are you? Eric, good afternoon, I guess to you.

Eric Tang, Operations Lead

Yes, good afternoon.

Unidentified Analyst, Analyst

I don't have much to say. I just want to tell you congratulations.

Eric Tang, Operations Lead

Thank you.

Unidentified Analyst, Analyst

The only thing I wanted to highlight is that it's wonderful you were able to distribute bonuses to your team, and I appreciate the transparency. Congratulations to Sam for taking charge. The investment in training, which reflects the Costco model, is significant. It's essential that everyone is engaged, valued, and well-compensated, which you all do. This commitment to training leads to greater worker retention and ensures quality control from day one instead of relying on a QC person at the end of the process. This approach is a key reason why Jerash Holdings has outperformed many others in the industry. Thank you for your hard work, especially during these challenging times we've faced over the past two years.

Sam Choi, CEO

Yes, thank you for calling.

Gilbert Lee, CFO

Thank you so much.

Eric Tang, Operations Lead

Thank you.

Sam Choi, CEO

Yes, thank you for the reminder. We definitely understand how important it is to treat our employees, treat our workers well. And that is the strength of Jerash, our operations in Jordan that we are the most sought-after manufacturer in Jordan by many of the global brands.

Operator, Operator

Thank you. At this time, I'll turn the floor back to Mr. Sam Choi for closing remarks.

Sam Choi, CEO

Okay, yes, thank you, Operator. And thanks again to everyone for joining us today, and for your support and interest in our company. We look forward to speaking with you again soon on our first quarter earnings call. Thank you very much.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.