Earnings Call Transcript - JRSH Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for joining us for this Jerash Fiscal Year 2020 Results Conference Call. As a reminder, all participants are in a listen-only mode. But later you will have the opportunity to ask questions. To get started with opening remarks and introductions, I am pleased to turn the floor to Matt Kreps with Darrow Associates Investor Relations. Welcome, Matt.

Matt Kreps, Investor Relations

Thank you, Jim. Good morning and welcome to the Jerash Holdings fiscal fourth quarter and full year 2020 results conference call. Joining me today are Sam Choi, our Chairman and Chief Executive Officer; Gilbert Lee, our Chief Financial Officer; and Eric Tang, who leads our operations in Jordan. Our press release with the results issued earlier today, along with an updated investor slide deck, can be found on our website www.jerashholdings.com. This call is being recorded and will be available for playback. All participants will be in a listen-only mode. The operator will provide detailed instructions for the Q&A session after management has finished their prepared remarks. Before we start, I want to remind you about the forward-looking statements made during this call. Any statements from Jerash management that are not historical facts should be considered forward-looking and may be subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for these forward-looking statements. Terms like believe, expect, anticipate, estimate, will, guidance, outlook, indicate, suggest, forecast, target, growth, seek, goal, and similar expressions signify forward-looking statements. These statements are subject to risks and uncertainties that could lead to actual outcomes differing significantly from those presented. More information about these risks and uncertainties can be found in filings with the U.S. Securities and Exchange Commission. Participants are advised not to rely heavily on these forward-looking statements as they reflect management’s beliefs only at this moment. The company does not commit to publicly update any revisions to these statements that might arise from events or circumstances occurring after this date or to address unanticipated events. I will now hand over the call to Sam. Please go ahead.

Sam Choi, CEO

Hi. Thank you, Matt. Hello, everyone. I'm pleased to join all of you today for this call. Fiscal 2020 turned out to be a very strong year of growth for Jerash, with sales growing 9.5% to a record $93 million. Our takeaway this year was to diversify our customer base, with more than 7% of our revenue from new customers, who are expected to further grow their business with Jerash in fiscal 2021. We also invested in additional capacity during fiscal 2020 acquiring the Paramount manufacturing asset for approximately $1 million. We estimate this increases our annual production capacity by more than 23% or 1.5 million pieces, which has been almost fully booked with new orders since we started this facility with our print workers. I'm very proud of our team's hard work and dedication to that process. We also opened a sewing workshop in Al-Hasa in Jordan through an exciting partnership with the Jordanian government. Jerash is a socially-oriented company dedicated to not only profitability for our stockholders, but also creating quality employment for people in Jordan, both permanent citizens and a group of workforce that comes to Jordan on multi-year work contracts. The Al-Hasa project was designed to create local jobs for Jordanian women in an underserved rural area. This female-focused workshop is up and running with quick success. One of their first projects was sewing custom North Face garments sold in Europe to celebrate International Women's Day. These projects are particularly exciting to Jerash because they encompass good business and also good social responsibility. Fiscal 2020 was not without its challenges, though, including the global COVID-19 pandemic that closed our facility in the last two weeks of the fourth quarter. The pandemic will have an impact on our fiscal 2021 but a number of orders we served at the start of the pandemic have been reinstated, a good sign for Jerash. In fact, Jordan has proven to be a success story in this COVID response, and our factories are now 100% back to work with a number of additional considerations to protect our workers as well. Before passing the call to Gilbert, I want to acknowledge the recent addition to our Board of Directors. Bill Korn has joined our Board as an Independent Director and Chair of our Audit Committee after Sean Socha stepped down. I want to thank Sean for his service since our IPO and wish him well. Bill is a Harvard MBA and currently the CFO of MTBC, Inc., a fast-growing NASDAQ listed company based in New Jersey, close to where our U.S. office is located. Bill has helped with more than 15 acquisitions since MTBC’s 2014 IPO. It’s an area where his knowledge and experience can be helpful to our future. MTBC also has very loyal long-term customers and uses a global workforce at facilities based in Pakistan to offer its customers economic advantages, much as direct long-term customers seek the benefits of our high-quality, lower-cost workforce in Jordan. We believe his experience and specific knowledge of this area is key to our future plans and will serve our stockholders well. With that, I turn the call over to Gilbert.

Gilbert Lee, CFO

Thank you, Sam. Hello, everyone. I'm pleased to join all of you today to discuss our financial results. Our results demonstrate continued progress on our growth initiatives, although we were impacted by the global COVID pandemic for the last two weeks of the fourth quarter. Let's cover some of the details from our financials and business performance for a few minutes. Revenue in the fourth quarter of fiscal 2020, which ended March 31st, was $14.4 million, effectively flat year-over-year. We had to defer approximately $1.6 million in shipments scheduled late in the quarter when the Country of Jordan announced a shelter-in-place order in March to arrest the spread of COVID-19. I'm pleased to say that Jordan has handled the pandemic very well and reopened using a number of well-developed measures to facilitate a return to business while continuing to protect workers and citizens. Jerash is fully reopened and using enhanced screening and hygiene measures for the continued protection of our workforce. Fourth quarter gross margins were expected to reflect the startup costs for our Al-Hasa workshop, a very exciting project, as Sam mentioned. But the pandemic also had a significant margin impact due to the loss in productivity during the two-week shutdown. As a result, gross margin was only 8.7% for the quarter. Operating expenses have declined though to $2 million for the quarter as compared with $2.8 million in the previous fourth quarter, resulting in a net loss of just $0.07 per share. For the full year, we were able to achieve most of our financial objectives even with the pandemic impact setting the stage for continued focus on operating improvements in the year ahead. Full year revenue was a record $93 million, reflective of the $1.6 million in fourth quarter orders that shifted into fiscal 2021. This was an increase of 9.5% year-over-year. Our growth included more than 7% of revenue from new customers and increased utilization of our factories during the fiscal second half, which is warmer season garment production and was previously underutilized. With the factory expansion efforts in the past year, we can now produce more than 8 million pieces per year, a 23% increase. We believe we are actually able to scale volumes above this number with our current facilities but continue to focus on capacity expansion and adding new dormitory facilities for our workforce in the near future. Gross margin for the year was 19.3% compared with 22.1% in the prior year. Approximately 110 basis points of the full year decline was due to the pandemic closures in March and the remainder due to higher production volumes in the second half at lower margins and the startup cost at our new production centers. We continue to focus on balancing margin with overall production and profitability. Operating expenses for the year were at $10.3 million, down 17% year-over-year. Operating income for the year was $7.6 million, an increase of 20% from 2019. GAAP net income for the year was $6.5 million or $0.57 per diluted share, compared with $0.45 in 2019. During the year, we paid out dividends quarterly at an annualized rate of $0.20 per share to our common stock shareholders. Our balance sheet remains very strong with cash and restricted cash on March 31st at $26.9 million. Inventory was $22.6 million and Accounts Receivable was $5.3 million. We have working capital in excess of $48 million as of March 31st. We continue to expect the business to generate cash flow from operations on an annualized basis. We also have untapped lines of credit available for up to an aggregate of $26 million. In fiscal 2020, we have begun to invest in additional expansion for the future, including $2.3 million we invested into the purchase of the Paramount manufacturing assets and more recently land properties to further expand our production facilities and worker dormitories as part of our multi-year facility expansion plan. I want to talk about a few other aspects of our business as well. We have seen some volatility around orders as customers seek to adjust to new sales patterns in response to the COVID pandemic. Initially, this caused some orders to push out, reduce volumes or even request cancellation. Since then, we have seen the reopening efforts unfold and consumers adapt to new ways of shopping while social distancing, or some areas resuming more or less normal business as the reopening has progressed. As a result, many of those orders have been reinstated. At this time, we're not yet ready to provide an outlook for 2021 until we have greater clarity on orders but remain focused on both maximizing revenue and controlling costs. To that end, we have taken a number of steps to reduce costs throughout our organization. We mentioned the addition of new customers over the course of 2020, accounting for 7.2% of revenue and helping further diversify revenue concentration. This is an ongoing effort in 2021. As a large strategic supplier to those global brands, bringing on a new customer tends to be a long process for Jerash, including sample orders and initial smaller volume orders, then securing larger orders. However, most of our customers tend to be loyal and find the value of our high-quality output and duty-free cost advantageous. We are also adding products specific to current needs. During the pandemic, at the request of the Jordanian Government, we produced some PPE supplies. Since then we have produced and shipped masks to a new U.S. customer. We are in the process of exploring the opportunity of exporting our manufactured medical PPE to the U.S. and Europe. And we should have a clearer outlook in the coming quarters. These new categories are good opportunities for Jerash, and we continue to build on our capabilities. In summary, Jerash produced a solid year of growth in both revenue and profitability for our stockholders in fiscal 2020. At $0.57 per share in GAAP EPS, we believe this is a valuable and exciting business enterprise with opportunities for further growth. While there will certainly be impacts from the pandemic this year, our well-positioned balance sheet with no debt provides ample resources to fund continued expansion of our business through both organic and strategic opportunities. We look forward to the year ahead and thank you for your continued interest in Jerash. We now welcome your questions.

Operator, Operator

We'll take our first question from Mark Argento at Lake Street.

Mark Argento, Analyst

Hey, Sam, Hey, Gilbert. Just wanted to drill down a little bit more on, when you're talking with your customers, how are they shaping up kind of the demand equation. Obviously a lot of retail has been closed for quite a while in the U.S., and I'm assuming other parts of the world as well. Are you getting any indications on what their thinking is in terms of kind of inventory levels at retail? Will that impact longer term order patterns for the rest of this year? Any thoughts there would be helpful? Thanks.

Gilbert Lee, CFO

We consistently communicate with our customers on a weekly basis due to the fluid situation. In the U.S., some states are shutting down again or pausing after reopening, making it unclear when things will return to normal. However, our strong relationships and long-term performance, including quality, delivery, and low costs, have led to our customers reinstating many of the orders they had initially deferred or canceled. While we remain cautiously optimistic, predicting what will happen in 2021 is challenging for both us and our customers. While we anticipate some decline next year, we are actively working to mitigate this and have also gained new customers. Therefore, we are hopeful that 2021 will still be a good year if things normalize within a reasonable timeframe. Sam, do you have anything to add?

Sam Choi, CEO

Yes, for the upcoming year, based on confirmed orders from our more than 10 customers and their conservative projections, we aim for at least 80% of our top-line compared to fiscal 2020. With the improving pandemic situation in the U.S. and Europe, we expect order reinstatements to boost our performance, allowing us to strive for top-line figures similar to fiscal 2020. Additionally, apart from garments, we've been producing masks and recently started making isolation gowns for Jordan and Israel. We're also pursuing FDA approval for exporting these gowns to the U.S. and Europe, which we anticipate will also contribute to our sales.

Mark Argento, Analyst

And Sam, how quickly do you think you could get approval to start shipping products, some PPE products?

Sam Choi, CEO

Okay. So Eric, can you talk about the process of particularly FDA approval?

Eric Tang, Operations Lead

Yes. We have already begun the process of obtaining various certifications for our medical products. Last month, we received temporary approval from the Jordan FDA, which allows us to export our medical products to all Gulf countries, including those in the Middle East. Additionally, we are in the process of applying for CE certification, which is necessary for exporting to European countries. According to a recent report from an independent consulting company handling our CE application, it will take about another month and a half to receive the official CE certification, enabling us to ship to Europe. For U.S. FDA approval, we just initiated our application process, which is expected to be lengthy due to the complex and strict requirements. Because of COVID-19, the U.S. FDA cannot send representatives for factory inspections in Jordan; instead, they have requested the Jordan FDA to conduct inspections on their behalf. The Jordan FDA has already visited our factory several times for various inspections. We have also sent our products to the FDA for laboratory testing and are currently awaiting the lab test results. Once all results are received, we will proceed with obtaining the U.S. FDA registration and the registration number for JRSH. If everything proceeds smoothly, we anticipate it will take approximately another two months to receive all certified approvals.

Mark Argento, Analyst

Great. Will you be manufacturing medical-grade PPE or what types of products will you produce?

Eric Tang, Operations Lead

We are currently producing surgical disposable face masks and fashionable washable face masks. Some are made for specific brands while others are tailored to meet the needs of various customers. Additionally, in our number five factory in Al-Hasa, we have begun producing blue medical gowns intended for disposable use. We also plan to develop gowns suitable for the operating room and a reinforced blue medical gown, which will be sterilized once we obtain all necessary certifications. These are the products we are currently manufacturing.

Operator, Operator

Next we'll hear from RHK Capital and Todd Felte.

Todd Felte, Analyst

Hey, guys, congratulations on a great fiscal year. Just got a question on the PPE and mask. What are the margins going to be on that business compared to your garment business?

Eric Tang, Operations Lead

Okay, this is Eric. I'm calling from Jordan. Can I answer your questions?

Todd Felte, Analyst

Sure.

Eric Tang, Operations Lead

The profit margin for our medical products varies depending on the type of product and the country we are exporting to. In the Gulf region and Middle Eastern countries, we have established market prices for items like face masks and medical gowns. To remain competitive with local suppliers in the Gulf area, our profit margins are around 10% to 15%. However, we have assessed the market prices in the EU and the U.S. If we successfully obtain CE and FDA approvals and export our products to these markets, the profit margins could increase significantly, ranging from 20% to 35%.

Operator, Operator

Next we'll hear from John Morris at Davidson.

John Morris, Analyst

Hi. Thanks. Following up on that last question, Eric, are the margins you mentioned for the Middle East and the U.S. higher than last year's margins? It seems they are significantly higher in the U.S. for PPE.

Eric Tang, Operations Lead

Yes, yes.

John Morris, Analyst

Okay. Switching topics, I just wanted to ask a question for Gilbert, probably. I need some clarification. Regarding the volatility, and as Sam mentioned, can you clarify if you are expecting 2021 to mean an 80% figure, indicating sales will be down 20% compared to last year's full year? Just a clarification on that.

Gilbert Lee, CFO

Yes, John. I mean, right now, to be honest, we really cannot have any solid basis to project what our 2021 top-line is going to be. I think Sam is kind of looking at all the existing customers, their orders and current cancellation or reinstatement of the orders that he estimates, maybe it would be down 20% from 2020. But that doesn’t include any new customers or any like PPE products that we are currently working on. So, I would say, the 20% reduction would be kind of like the worst case scenario.

John Morris, Analyst

I appreciate the context you've provided. Regarding the June quarter, I'm trying to understand if your factories were open and whether there were any sales during that time. I recognize that there would likely be a significant decrease in sales compared to the fourth quarter run rate.

Gilbert Lee, CFO

Yes, the June quarter, which is ending tomorrow, is definitely seeing a decline in sales. I don't have the specific numbers yet. We have been shipping during the June quarter, and all the factories resumed full operations, starting June 1 when local workers were allowed back to work. However, prior to that, at the beginning of May, we managed to get all the dormitory workers back. Jordan was only shut down due to restrictions on local travel in and out of the industrial zone, but most of our workers are in that zone. This allowed us to continue production even during the official shutdown. We actually began producing again at the start of May with a limited workforce. So, while the June quarter is not too bad, it has certainly been affected.

John Morris, Analyst

That's very helpful, you mentioned the cost controls in place. As you look at the year ahead, I'm curious about how you plan to manage SG&A. Can you provide some insight into whether SG&A expenses year-over-year will decrease, remain flat, or increase at a slower growth rate for the full year 2021 based on the changes you've implemented?

Gilbert Lee, CFO

Well, we have customized headcounts, especially in the area of SG&A. So, I mean even though most of our headcounts are in production and manufacturing, but we still have some layoffs in our administrative area. And I think the majority of our people who are remaining, they did have a temporary reduction in their salary. So I would think 2021 SG&A if not a reduction from 2020, it would be almost flat from 2020.

Operator, Operator

We'll take a question from David Schneider. Please go ahead, your line is open.

Unidentified Analyst, Analyst

Thank you. In your online presentation, it suggests that you're still looking for additional capacity. So is that the correct interpretation?

Gilbert Lee, CFO

Yes, David. Thank you for the question. We are definitely actively looking for additional capacity. But due to the COVID-19, we are kind of at the moment putting that on hold, just wanting to see how the top line is coming back and how the demand from our existing customer as well as new customers are putting on us. So, I mean, obviously, it doesn't make sense to build new capacity when there's no sales. But we're currently still actively looking either through building on our existing facilities, on land properties that we have purchased as well as M&A opportunities. If there are good opportunities, some companies that have already existing customers or they are in a distress mode, that it will be a good deal for us, then we definitely will consider that.

Eric Tang, Operations Lead

This is Eric. I would like to add to the questions. Due to COVID-19, some of the factories that fulfill orders for American brands have closed for various reasons. Recently, we acquired a new customer because they had placed many orders with a factory in Jordan that unfortunately closed two months ago. They are now in discussions with us about our capacity to fulfill their orders for the remainder of this year and into 2021. The customer's name is American Eagle, and we have already announced this. We have received our first order of 9,500 jackets from American Eagle, and they are still in talks with us for additional capacity for the rest of the year. This situation may present some good opportunities for Jerash, even during the COVID-19 pandemic, due to the shutdown of other facilities in Jordan.

Gilbert Lee, CFO

That’s a very good point, Eric.

Unidentified Analyst, Analyst

Okay. Yeah, I think that’s all pointing – it is all a very good indication as this virus subsides in the world, definitely wants where you can produce. Also, the second question is on the geographic distribution end markets for you. It’s overwhelmingly United States. Do you see that changing over time?

Gilbert Lee, CFO

Sam, do you want to take that?

Sam Choi, CEO

Yes, I believe there is a significant shift occurring in the relationship between the USA and China. Many manufacturers based in China are looking to move their orders to Jordan. Some of them have even approached us to secure some of our production capacity for their orders destined for the USA. Instead of continuing production in China, they are interested in relocating their operations to Jordan for exports to both the USA and Europe. We are in discussions with these companies about this transition. In the next few months, we will allocate some of our capacity to fulfill their orders.

Operator, Operator

It seems we have no further questions from our group. I will now hand it back to Mr. Matt Kreps for any final comments.

Matt Kreps, Investor Relations

Thank you, Jim. And thank you everyone participating on today's call. While 2020 produced strong revenue and profit growth, Jerash remains focused on the opportunities ahead in fiscal 2021. Jerash will be conducting multiple outreach and conference events in the coming months including the Sidoti Virtual Investor Conference tomorrow. If you have additional questions or would like to arrange a meeting at an upcoming event including our event tomorrow, please contact me using the contact information on the bottom of our press release. Thank you for your participation and have a great rest of your day.