Earnings Call Transcript - JRSH Q3 2025

Operator, Operator

Good morning. Welcome to Jerash Holdings Fiscal 2025 Third Quarter Financial Results. Please note, this conference is being recorded. I will now turn the conference over to your host, Roger Pondel, Investor Relations, Jerash Holdings. The floor is yours.

Roger Pondel, Investor Relations

Thank you, Jenny. Good morning, everyone, and welcome to Jerash Holdings Fiscal 2025 Third Quarter Conference Call. I'm Roger Pondel with PondelWilkinson, Jerash Holdings Investor Relations firm. On the call today from the company are Chairman and Chief Executive Officer, Sam Choi; Chief Financial Officer, Gilbert Lee; Eric Tang, who leads the company's operations in Jordan; and Ringo Ng, Head of Marketing. Before I turn the call over to Sam, I want to mention or 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 Jerash's most recent Form 10-K 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 these forward-looking statements, and Jerash Holdings undertakes no obligation to update any forward-looking statements, except of course, as required by law. And with that, it's my pleasure to turn the call over to Sam Choi. Sam?

Sam Choi, Chairman and CEO

Thank you, Roger. Our business is continuing to gain traction with increasing inquiries from new and existing customers that are looking to add manufacturing partners in tariff-free countries, such as Jordan. Our fiscal third quarter revenue increased by nearly 30%, yet results were lower than originally anticipated. Sales were impacted by congestion at Israel's Haifa Port due to further geopolitical turmoil in the region, which caused long delays in shipments. We estimated that close to 6 million in finished goods were not shipped until early in the fiscal fourth quarter. Nevertheless, we are pleased to report that export trade rules since late January have markedly improved. And ocean containers are being shipped in a more timely manner. We are hopeful that stability in our operating environment will continue, and we are eager to resume our focus on growth. On the new business front, we are encouraged by growing interest from international apparel companies, including well-recognized brands in Europe and the Persian Gulf region. This supports Jerash's goal of diversifying our customer base and expanding our product mix. Our optimism further reflects new possibilities in today's environment. Based on the competitive advantage for companies doing business in Jordan, combined with Jerash's long history and reputation for quality built over the past 20-plus years in the industry, we believe we are in an excellent position to capture greater opportunities in the years ahead. To support anticipated growth, we recently started expanding two of our existing manufacturing facilities with expectations of being completed by June of this year. Through these expansions, we increased our processing capacity by 15%. Separately, we are actively working with the Jordanian government to expand our existing facilities in Al-Hasa, which by the end of this calendar year, could add an additional 5% to 10% of production capacity. We also are assessing long-term larger-scale expansion plans. Eric Tang, who is in charge of our operations in Jordan, will share more about that shortly. And I will now turn the call over to him. Eric?

Eric Tang, Operations Head

Thank you, Sam. Jordan remains secure and stable as a country, but the broader geopolitical situation in the region has impacted our business since October 2023, especially with regard to both import and export shipping logistics. During the past quarter, we again experienced export shipping delays of up to 4 weeks at the Haifa Port. By late January, however, the port congestion has much improved. And today, conditions are essentially back to normal, and ocean containers are being shipped without undue delay. I am also happy to report that our factories are fully booked through August this year, and orders from our global brand customers are increasing steadily. We are receiving a growing number of new business inquiries in part because of the tariff-free advantage of exporting to the U.S., EU, and other countries from Jordan. As Sam mentioned, we are hearing from both existing customers as well as prospects from international apparel companies. Currently, we are working on sample orders and pricing for several well-known brands in Europe and the Persian Gulf region, along with leading manufacturers in Asia. This is all positive news. But as a reminder, securing large orders from high-profile global brands takes time. We are confident that Jerash's history and reputation for developing and producing quality garments will ensure trust among new customers and position us as a reliable and responsible manufacturing partner. Now I'd like to provide a few details on our expansion plans to accommodate the growth that we see ahead. In addition to the current expansion underway at two of our existing primary manufacturing facilities, that would add 15% of production capacity by midyear, we are working closely with the Jordanian Ministry of Labor to finalize a land grant adjacent to our existing facility in Al-Hasa. This operation began as a joint venture project between Jerash and Jordan's Ministry of Labor in 2018 to create employment opportunities for women in remote areas, where unemployment rates were as high as 70%. We are planning to enlarge the facility in Al-Hasa to double its size and increase local hiring of women from 450 to 800. According to our current trend, upon completion of this project by the end of 2025, production capacity is expected to increase by another 5% to 10%. We also are assessing longer-term, larger-scale expansion plans to construct manufacturing, warehousing, and housing facilities on land that we purchased several years ago. At this point, we have commenced engineering site studies to review various options. With that, I will now turn the call over to Gilbert to discuss our financial results.

Gilbert Kwong-Yiu Lee, CFO

Thank you, Eric. Revenue for our fiscal 2025 third quarter increased 28.6% to $35.4 million from $27.5 million for the same quarter last year. The quarter's revenue reflected an increase in shipments to Jerash's major U.S. customers. As Sam mentioned, due to congestion at Israel's Haifa Port, which caused the delays in shipments, revenue for the quarter was impacted by approximately $6 million. We estimated $3.8 million of finished apparel was kept at the port, along with incurring more than $100,000 of port storage fees. Additionally, we held back another $2 million of finished product in our warehouse for the same reason. Gross profit for the fiscal 2025 third quarter increased 20.6% to $5.4 million from $4.5 million in the same quarter last year. Gross margin was 15.2% in the fiscal 2025 third quarter compared with 16.2% in the same quarter last year. The decrease was primarily driven by higher logistics costs arising from the geopolitical turmoil in the Middle East region. Operating expenses for the fiscal 2025 third quarter totaled $4.7 million compared with $4.1 million in the same period last year. SG&A expenses were $4.2 million in its fiscal third quarter compared with $3.8 million in the same quarter last year. The increase was primarily due to higher export logistics costs. Stock-based compensation expenses for the fiscal 2025 third quarter were $474,000 compared with $243,000 for the same quarter last year. Operating income increased 88.3% to $708,000 in the fiscal 2025 third quarter from $376,000 in the same quarter last year. Total other expenses were $252,000 in the fiscal 2025 third quarter compared with $105,000 in the same quarter a year ago. The increase was primarily due to higher interest expenses from supply chain financing programs provided by the two major customers. Income tax expenses for the fiscal 2025 third quarter were approximately $450,000 compared with $39,000 for the same period in fiscal 2024. The increase was mainly due to a prior year tax provision adjustment of approximately $274,000. The effective tax rate amounted to 98.6% for the fiscal 2025 third quarter compared with 14.2% for the same period in fiscal 2024. Net income was $6,000 in the fiscal 2025 third quarter or zero per share versus $232,000 or $0.02 per diluted share in the same quarter last year. As of December 31, 2024, Jerash had $14.8 million in cash and restricted cash and net working capital was $34.8 million, inventory was $19.1 million and $7.2 million in accounts receivable. Net cash used by operating activities was approximately $581,000 for the nine months ended December 31, 2024, compared with net cash provided by operating activities of $7.9 million for the same period last year. As Sam and Eric mentioned, we are optimistic about Jerash's growing business, and our factories are fully booked through August. Revenue for the fiscal 2025 fourth quarter is expected to increase by 50% to 53% from the prior year quarter. Revenue for the fiscal 2026 first quarter is expected to be in line with the fiscal 2025 first quarter, which was a record and included $3 million to $4 million in delayed shipments from the fiscal 2024 fourth quarter. Our gross margin goal for the fiscal 2025 fourth quarter is expected to be approximately 15% to 16%, subject to logistics and shipping charges and product mix. On February 5, 2025, Jerash's Board of Directors approved a regular quarterly dividend of $0.05 per share on its common stock payable on February 25, 2025, to stockholders of record as of February 18, 2025.

Operator, Operator

Your first question is coming from Mark Argento of Lake Street.

Mark Argento, Analyst

A quick question: Given all the talk about tariffs recently with the new administration, has that benefited or increased the number of conversations you're having? It sounds like it has, but maybe you could help quantify that? And then maybe talk a little bit about the timing of the new capacity coming on and how quickly you can see that impact the business.

Gilbert Kwong-Yiu Lee, CFO

Well, as we said, we are already fully booked through the end of August for this fiscal year. New orders are still in the pipeline, and we anticipate that the growth opportunities that we have in this fourth quarter as well as the fiscal 2026 are all going to be limited by how fast we can grow our capacity. We are already expanding our internal capacity at the existing facilities, and that will add 10% to 15% after we expand the facility, adding more lines, and we anticipate that to be finished by the end of June. So, which is very quick. The other project that we are working on is to expand our satellite factory in Al-Hasa, which will increase the number of workers from 450 people to 800 people. Even though that is a smaller facility, the overall increase in capacity is we are looking at maybe 5% to 10% when comparing to the overall capacity. So those two are very realistic. The longer-term increase will come from that piece of land that we have had for over 5 years now. We are doing engineering studies looking at different options on how to build and what kind of cost. Once that is done and we make a decision, we will be able to quantify the increase in capacity and its timing. But as of now, because of the tariff situation getting really heated up, we anticipate more brands and buyers are looking for production and manufacturing facilities in tariff-free countries. It has already started maybe 4 to 5 years ago, and now it is just getting more urgent. That's a great opportunity for us.

Mark Argento, Analyst

Got it. That makes sense. Just another quick follow-up. In terms of if you run a test order for a customer, what's the typical conversion rate from test run to more of a full production run? Is it 50%, 45%, 75%? Maybe you could help us better understand that kind of sales cycle conversion rate.

Gilbert Kwong-Yiu Lee, CFO

I'm sorry, what conversion rate are you referring to?

Mark Argento, Analyst

New customer test to new customer full production.

Gilbert Kwong-Yiu Lee, CFO

The timing will take a long time. It's going to take at least 9 months to convert. However, I believe the conversion rate is quite high. Once we start a test order, usually, the customer will place long-term orders with us.

Sam Choi, Chairman and CEO

Yes. According to my past year's experience with Jerash, once the customer places a trial order, maybe after 6 months, they will place bulk quantity orders. We have never failed any customer for the past 10 years.

Operator, Operator

Your next question is coming from Michael Baker of D.A. Davidson.

Michael Baker, Analyst

Great. I'm just wondering, outside of the increased demand that you're seeing just because of tariffs and people wanting to get out of Asia, any comment on what you're seeing in terms of demand as it relates to the U.S. consumer and apparel inventories? It seems that apparel inventories are starting to tick up a little bit. Consumer spending has been good. What are you hearing from your customers in terms of overall apparel demand?

Gilbert Kwong-Yiu Lee, CFO

Eric, have you heard any comments from customers about the demand for apparel products overall in the market?

Eric Tang, Operations Head

Yes, I have received a lot of responses from different kinds of customers. Some of the customers say they're still trying to absorb the high level of inventories, but 60% of the customers told us that they have already absorbed most of their inventories during the past 2 years, and they are going to place new orders with Jerash. This is what I heard from the buyers.

Michael Baker, Analyst

Great. And the delayed shipments, the $6 million, when does that flow through the P&L? Does that come in the fiscal fourth quarter? Is that part of that growth plan of 50% to 53%?

Gilbert Kwong-Yiu Lee, CFO

Yes, that's part of the 50% to 53% growth. The fourth quarter, those unshipped apparel products, most of them were shipped in January already. With those delayed shipments, that's how we anticipate that growth is going to be 50% to 53%. It is still a relatively conservative estimate. We are being conservative due to uncertainties, even though the situation in the Middle East is calming down with the ceasefire. We don't know whether it is going to hold, but it seems like it's heading in the right direction. However, the fourth quarter is typically a slow quarter for us, especially in March when it is Ramadan. Last fiscal year in 2024, we spent a lot of money trying to catch up production to ship out products to our customers. We spent close to $1 million in overtime. This year, we want to control our costs. We will work with our customers to really plan our production so that we don't incur too much overtime labor cost and still meet our customers' delivery timelines. So that's why we forecast a lower fourth quarter, but it is still a healthy growth from last year.

Michael Baker, Analyst

That makes perfect sense. If I can follow up on that then, understanding that overtime issue as well as some of the costs incurred at the port, that $100,000, was that incurred in the third quarter? More importantly, how should we think about the SG&A costs going forward? Is that sort of low $4 million a good run rate?

Gilbert Kwong-Yiu Lee, CFO

Yes, the low $4 million would be a good run rate. SG&A depends on the sales volume, the sales revenue. We incur a significant amount in the first quarter because we had to air freight some shipments due to delays in production because of the raw material containers not arriving in Jordan during the Red Sea crisis. We are trying to control our costs as much as possible, but it is still higher than before. A low $4 million would be a good estimate.

Operator, Operator

Your next question is coming from Igor Novgorodtsev of Lares Capital.

Igor Novgorodtsev, Analyst

So you mentioned the situation in January now with the ceasefire and much better situation in the Middle East has remarkably improved. Could you just break it down a little bit more in detail, especially in terms of the logistics of getting things through the Red Sea? Are you getting them out to the Red Sea? And also how this improved logistics would impact your gross margin? If I recall correctly, it was as high as 19% during COVID. So maybe just not necessarily quantitative, but at least qualitative.

Gilbert Kwong-Yiu Lee, CFO

We are getting containers through the Red Sea. Before, the Red Sea was blocked, but now we are getting our importing raw material containers through the Red Sea to Jordan. We do have to pay slightly higher container shipment costs, but not as high as the first two quarters. We are doing a diligent job in controlling our costs, and that is reflected in our gross margin. On the export side, we had to pay $100,000 in the third quarter due to port storage fees because containers were stuck at the port for 4 weeks. We incurred additional costs there. But now things are getting back to normal, so the exporting part should be much improved in this quarter and the first quarter of 2026. Does that answer your question?

Igor Novgorodtsev, Analyst

Yes. And just not to push it too hard, but what would you consider your like normalized good gross margin for your busiest Q2 and Q3?

Gilbert Kwong-Yiu Lee, CFO

We anticipate that for fiscal year 2025, we will end up around 15% to 16%. Going forward, we still would try to target somewhere between 15% to 16%. The reason being, we are bringing in a lot of new customers and new products on an FOB basis. With new customers, the margin at the beginning is usually not that good due to sampling and inefficiencies while trying to learn. When the volume is low, but the styles are many, it is hard to have efficient production. Once the volume ramps up, we will be able to realize a better margin. So we anticipate that in 2026, we still want to maintain the gross margin around 15% to 16%.

Igor Novgorodtsev, Analyst

Okay. My other question is about your joint venture with Busana. How is it going? Could you tell us a little bit more details about it?

Gilbert Kwong-Yiu Lee, CFO

The Busana joint venture is still growing, but the growth is relatively flat. This has been affected by turmoil in the region over the last year. Some new buyers are cautious and send us test orders, but we finish those and they are satisfied. However, we are still waiting for them to jump into high-volume bulk orders.

Igor Novgorodtsev, Analyst

I see. That Busana makes a lot of products like traditional textile manufacturing countries such as Indonesia, Vietnam, and Bangladesh, which do have tariffs on U.S. reciprocal tariffs. Do you expect that they might consider moving some of their factories in the joint venture to Jordan? Is that a potential play?

Eric Tang, Operations Head

I can answer that question because Busana has a lot of customers dealing with different pricing and styles. They have manufacturing bases in Indonesia, Africa, and our joint venture in Jordan, and Bangladesh, where they started another joint venture 9 months ago. But that doesn’t affect Jerash because usually, the customers tailor orders with higher FOB value where buyers can enjoy more tariff savings to place orders in Jordan. For low-end products that don't need much duty savings, they will place orders in Bangladesh. We are working with them on orders from buyers like Hugo Boss and Brooks Brothers, who are high-end customers placing high FOB value orders.

Operator, Operator

Your next question is coming from Mike Distler of AMX Holdings.

Unknown Analyst, Analyst

This question is for Gilbert. No disrespect, Sam or Eric. I was just wondering if you anticipate that you would have to tap the credit markets to fund that longer-term large-scale expansion plan that you're planning with the property you already have?

Gilbert Kwong-Yiu Lee, CFO

We did consider the debt market maybe 12 months ago; we talked to the World Bank about borrowing some money. We are open to any financing opportunities. Maybe we can go to the equity market and borrow some money, but we definitely need to raise some capital to support our expansion plan, especially the larger scale expansion. Right now, we haven't really decided which way to go; it may be a combination of both.

Unknown Analyst, Analyst

Right. Sounds prudent. I suspect, and you need not comment, I suspect that the Jordanian Commissioner of Labor will be part of that plan based on the ownership responsibilities. I know that you're maintaining your dividend has been a priority since inception, and I suspect it will remain so because it provides a floor for the stock price among other reasons. So in the grand scheme of things, that really is important, but it is just figuring out the prudent way to approach the markets and the credit markets for that long-term build-out sounds like you're on the right track. So thank you very much for the update.

Gilbert Kwong-Yiu Lee, CFO

Thank you.

Operator, Operator

I will now hand back over to Sam as we have reached the end of our question-and-answer session. Over to you.

Sam Choi, Chairman and CEO

Okay. Thank you, Jenny, and thanks to all of you for joining us today and for your continued support. We look forward to speaking with you next quarter. Thank you very much.

Operator, Operator

Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

Sam Choi, Chairman and CEO

Thank you very much.

Gilbert Kwong-Yiu Lee, CFO

Thank you very much. Have a good day.