Earnings Call Transcript - JRSH Q1 2021

Operator, Operator

Greetings, and welcome to Jerash First Quarter Fiscal 2021 Results Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. I'd like to remind you that this conference is being recorded. It is now my pleasure to introduce Matt Kreps, Managing Director at Darrow Associates, Investor Relations. Mr. Kreps, you may begin.

Matt Kreps, Managing Director, Investor Relations

Thanks, Karen. Good morning and welcome everyone to the Jerash Holdings fiscal first quarter 2021 results conference call. With me today is Gilbert Lee, our Chief Financial Officer; and Eric Tang, who leads our operations in Jordan. Our results press release issued earlier today is available on the Investor Relations section of our website at www.jerashholdings.com. You can also see a link titled Face Mask Production in the top-level navigation at the site, which introduces some of our new PPE products, including a video of the production of these products in our factories in Jordan. Today's call is being recorded and will be available for playback. All participants will be in a listen-only mode. The operator will provide a detailed reminder of the Q&A instructions once management has completed their prepared remarks today. But before we begin, a quick reminder about forward-looking statements made during the course of this call. Statements made by Jerash management during the course of this conference call that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. The words believe, expect, anticipate, estimate, will, guidance, outlook, indicate, suggest, forecast, target, growth, peak, goal, and other similar statements of expectation identify forward-looking statements. Forward-looking statements are subject to certain risks, uncertainties, and important factors that could cause actual results to differ materially from those reflected in the forward-looking statements. These risks and uncertainties are detailed in Jerash's public filings with the U.S. Securities and Exchange Commission, including our most recently filed Form 10-Q and Form 10-K. Participants on this call are cautioned not to place undue reliance on these forward-looking statements, which reflect management's belief only as of the date hereof. The company undertakes no obligation to publicly release the results of any revision to its forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. And with that, I would now like to turn the call over to Eric Tang. Please go ahead.

Eric Tang, Operations Lead

Gilbert, are you going to continue?

Gilbert Lee, CFO

No, Eric. You'll start first.

Eric Tang, Operations Lead

So hello, everyone. I'm pleased to join all of you today for this call. So the fiscal quarter for Jerash ended June 30 and included the most challenging point of the global COVID-19 pandemic for the U.S., our largest end market. Like many, we began the quarter with a high degree of uncertainty regarding exactly how this would impact our revenue activities and for how long. Well, the good news is that the response to this situation for Jerash is far better than we anticipated. Revenue, in fact, has declined just about 17% over the year. This is in large part due to two factors. The first factor is our efforts in winning new business last year pay off now with a large increase in orders from new customers in the first quarter, which accounted for about 16% of our total revenue. This included customers like New Balance and DICK'S Sporting Goods, plus increased activity on new orders from G-III. The second factor is we were able to confirm a larger part of our orders with existing customers, particularly our largest customer, VF North Corporation, the North Face brand. Our business with North Face was down in the quarter about 35% over the year, and this will be disclosed in our 10-Q filing, but it is expected to narrow significantly in the coming quarters based on the current progress of order confirmation. So we believe this is due to these two factors. First, Jerash's factory is well-known for its highly reliable manufacturing for quality and on-time delivery. Secondly, the financial benefit of a duty-free import from our factories in Jordan is a tremendous cost-saving at a time when our customers are looking to reduce costs. This reason is very attractive. This is the reason why many buyers are looking for duty-free country production. The North Face is a great brand with great products and a great customer for Jerash. As with all our customers, we have worked closely to adjust orders and delivery timing, including pushing back some models where necessary. This has shifted some orders not just into the second quarter but also into our third quarter. Our factory's ability not only to work closely with our customers to maximize our business opportunity but also to remain profitable through this pandemic illustrates the strength of our team and dedication to doing whatever is needed to get the job done. I want to sincerely thank the Jerash team for their hard work and dedication through this time, and I know that we are all looking forward to getting the rest of the business back to normal very soon. So that provides a good bridge to our outlook as well. Our second quarter ended September 30 was a record quarter last year at $30.6 million. Right now, our factories are booked to a similar ratio as before with a decline of about 80%. However, we have a few orders that may accelerate and reduce this distance, and we continue to work closely with customers to manage delivery timelines. Either way, we will have good sequential growth over the first quarter and also expect to grow gross margin as we continue to increase volume through the factory. So I'm going to pass to Gilbert. But before that, I want to update you on the current situation in Jordan. Jordan acted very fast and decisively early in the pandemic to issue curfews and shelter-in-place orders. As you know, this affected the last two weeks of our March quarter, but it also enabled Jordan to do a very effective job containing COVID and return to manufacturing in our facility more quickly using our dormitory workforce who could be effectively quarantined and kept safe. We also implemented a number of additional cleaning regimens and workplace protocols to better protect the safety of our workers, and we continue to do so. We are also making significant strides to enter the PPE market and commenced the first shipment to customers with more orders coming in. In short, while Gilbert will address that in more detail. Please, Gilbert.

Gilbert Lee, CFO

Thank you, Eric. Hello, everyone. I'm pleased to join all of you today to discuss our financial results, which were much stronger than expected for the fiscal first quarter ended June 30. Our results demonstrate the benefit of our new customer development initiatives as well as the resiliency of our business, due to its important economic advantages to our customers' cost of goods and overall profitability. Let's cover some of the details from our financials and business performance for a few minutes. Revenue in the first quarter of fiscal 2021 was $18.7 million, and about 16% of our revenue in the first quarter was related to new customers won last year. These new customers continue to increase order volumes with Jerash. This helps to further our goal of diversifying our customer base and we are very excited to continue building relationships with new logos. Revenue from legacy customers was down year-over-year, mainly due to the impact of the COVID pandemic, but reflected a higher number of orders reinstated as customers prioritize Jerash for their production. In total, revenue was down approximately 17% year-over-year, but far less than what we are seeing across the industry. Our customers have also seen good success in their efforts to shift to online sales and to reopen brick-and-mortar stores in markets affected by COVID-driven closures, a trend that appears to be generally increasing as we continue to move ahead. We are pleased to see this continued positive progress and that our customers are finding success in reaching their end customers, which helps drive greater demand for our factories and increase production orders. Turning to gross margins, gross margin declined due to lower factory volumes to 16.3% compared with 20% in the prior year quarter. Gross margin also reflected changes in product mix and customer mix due to the pandemic and the increased volume from new customers. Operating expenses continued to decline in the quarter to $1.9 million, a decrease of 27.9% as compared with $2.6 million in the previous first quarter. The decline in OpEx reflects cost-saving programs we implemented as well as a reduction in startup costs for Paramount that were incurred last year. As a result, net income was $0.07 per share. We recently announced the continuation of our dividend payment of $0.05 per share to our common stock shareholders. We continue to evaluate the dividend each quarter and continue to generate positive cash flows from operations to fund both our strategic objectives and dividend needs. Our balance sheet remained very strong with cash and restricted cash at June 30 of $18.5 million versus $26.9 million at March 31. Our cash flow in the June quarter actually improved by $2.5 million compared with the same quarter in the prior year. Due to seasonality, we generally use more cash in the fiscal first quarter building inventory and increasing receivables. Inventory was $18.1 million, which includes goods produced but deferred for shipment until the later part of fiscal 2021. Accounts receivable increased to $15.9 million due to the later weighting of shipments in the quarter and extended payment terms granted to some of our customers. Approximately 81% of the June receivables have been collected up to today. Perhaps the best measure of our overall balance sheet improvement is working capital that increased $600,000 sequentially to $48.7 million at June 30 compared with $48.1 million as of March 31, 2020. 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. We expect Jerash's performance to remain solid in the coming quarters as we continue to work closely with our customers. Based on orders to date for the quarter ending September 30, we expect revenue of about $25 million or 34% sequential growth over the fiscal first quarter. This could be increased by shipments scheduled late in the quarter or additional PPE activity, but we believe it is prudent to remain conservative in the current environment. I want to talk about a few other aspects of our business as well, most importantly, our entry into the PPE market. Last quarter, we announced that Jerash produced some PPE supplies at the request of the Jordanian government. We subsequently produced and shipped masks to a new U.S. customer, and we are growing this aspect of our business to include other PPE supplies like surgical gowns and other products. We're expanding our sales opportunity through qualification to ship to the EU and the U.S. and partnering with factories that have existing certifications and capabilities to accelerate this opportunity. These new categories present good opportunities for Jerash, and we continue to build on our capabilities. To facilitate the expansion of our addressable market and our PPE market development efforts, Jerash incorporated a new entity, Jerash The First Medical Supplies Manufacturing Company Limited, which has received temporary approval from Jordan’s Food and Drug Administration for the manufacturing and export of products including non-surgical masks and gowns. We have already produced and shipped some of the subcontracting orders of surgical masks and medical gowns for customers in Jordan, the Middle East, and Europe beginning in July 2020. Jerash intends to pursue additional certifications and partnerships for this subsidiary and is presently engaged in efforts to do so including with the U.S. FDA. We are also continuing to work hard on increasing orders with both new and existing customers, particularly in helping our customers lower the cost of goods compared with less favorable manufacturing areas such as China, where costs are actually higher than Jordan and import tariffs could reach the low 30% range on higher dollar products, while Jerash could export to the U.S. with zero tariffs. We're also expanding our geographical production capability for shipments to other regions like Asia Pacific and Europe, particularly for customers like VF and New Balance, who have a multi-regional sales network. This initiative is achieved by working with overseas subcontracting partners in locations such as Indonesia and Cambodia, who have the certifications required by customers. Finally, we are actively looking for acquisitions and partnerships to expand our business and put our capital to work. This includes both garments and PPE acquisition candidates, but we remain careful and diligent regarding both pricing and risks in the current environment. Upon finding the right candidate for strategic actions, we look forward to moving ahead. We now welcome your questions.

Operator, Operator

Ladies and gentlemen, the floor is now open for questions. We'll take our first question from Mark Argento with Lake Street Capital. Please go ahead.

Mark Argento, Analyst

Hi. Good morning, guys. Just a few quick ones. Can you estimate right now what kind of percentage of capacity you're running at? And do you anticipate being back at full capacity utilization in Q2, Q3? Maybe walk us through that a little bit.

Gilbert Lee, CFO

Hey, Mark. How are you? Thank you for the question. About what percentage of capacity our factories are running at, maybe Eric could better answer this question because he actually runs the operations.

Eric Tang, Operations Lead

Okay. According to our order status currently, starting today until the end of December, we are fully booked. That means, Jerash is running at 100% of its capacity, and we are also a little bit overbooked by about 10%. I'm trying to find some subcontractors to manufacture the orders for the over-booked percentage.

Mark Argento, Analyst

Okay. And just a follow-up there. So, is it a mix thing when you have some of your outerwear? It looks like that order book from those customers has maybe been a little bit impeded, and then you have PPE ramping up? So, has there been a mix shift within the capacity utilization?

Gilbert Lee, CFO

Well, there's definitely a lot of changes going on within our manufacturing factories. We're spending some of the capacities on making PPE products. That was why we started up a new facility and a new subsidiary basically dedicating to just that. We're also using some of our existing capacity in Jordan to make PPE products. And also for new customers, some of them are for outerwear, but some of them are also for other product mixes such as T-shirts and sporting pants and polo shirts. So there are some changes going on. It's hard to say how many million pieces that we are producing compared to our existing capacity.

Mark Argento, Analyst

In the longer-term, I know the business model is still being developed. But on the PPE product lines, do you anticipate the margin profile to be similar to the overall business, better or worse? What are your thoughts on what that product line could look like from a margin perspective?

Gilbert Lee, CFO

Well, we anticipate the PPE products to have at least the gross margin that we have been experiencing with the garment and apparel products, and that's our goal if not getting a better margin, because we do have raw material as well as manufacturing cost advantages doing it in Jordan. However, at this point, we are still developing this particular product line and business model. So it is hard for us to estimate what kind of margin we're going to get. It has to depend on where the products are shipped to, to what type of customers, if it is shipped to Europe or the Middle East compared to shipping to the United States, where we are trying to develop direct customer relationships. But sometimes we might have to sell to some middlemen or distributors. So it all depends on what volumes are sent to what customers. Generally, we want first to cover our factory profitability and then we will look at whether we are being competitive in whatever markets that we are competing in. But we are very confident that because of our competitive advantage producing those products in Jordan, we feel that we should have a very profitable business.

Eric Tang, Operations Lead

Gilbert, can I add something?

Gilbert Lee, CFO

Sure, of course.

Eric Tang, Operations Lead

I want to answer Mark's question. Now, Jerash has just started a few months for the PPE product. We are handling the PPE products in different categories. For very large numbers of supply, usually we are invited to participate with another company in a tender. Usually, this is a government tender. Over the past two months, Jerash has participated in tenders for the Saudi Arabia market and also the Jordan market. For this kind of tender, which involves big quantities, on average, in order to make the price competitive we have to be around 10% gross profit. But for tailor-made orders for some customers, just like the washable face masks we are doing for a particular brand, our profit margin can go up to 20%. This is the difference.

Gilbert Lee, CFO

Thanks, Eric, for clarifying that.

Mark Argento, Analyst

Okay. Thanks.

Operator, Operator

We'll take our next question from Howard Halpern with Taglich Brothers. Please go ahead.

Howard Halpern, Analyst

Good morning, gentlemen. I am a little bit new to the story. So I'd like you to provide a little perspective on how the sales process has changed over the past two quarters compared to prior years?

Gilbert Lee, CFO

Hi, Howard. Welcome. Your question is how the sales process changed over the last two quarters?

Howard Halpern, Analyst

Yeah, with probably less contact with customers and more, is the process being longer, maybe a little more complicated? How has it evolved, I guess, in the COVID environment?

Gilbert Lee, CFO

Well, definitely because we cannot travel to meet customers, which Eric used to do quite a bit in the past by coming to the United States to meet with our existing or new customers, but because of the travel ban, those meetings cannot be done. However, our Hong Kong sales and marketing teams, including the merchandisers, constantly maintain direct contact with buyers in Hong Kong. They develop the orders, the development of samples, merchandising, and all the negotiation and purchasing. So I don't think it really impacts us that much, other than not being able to visit customers. I hope that it will change or get back to normal very soon.

Howard Halpern, Analyst

Okay. Do you have a general idea, this is on the PPE side. Do you have a general feel of what the market size or market potential is for the PPE market if you just take the Middle East and then Europe? I know the U.S. is quite large, but if you could just give us a sense of the market potential there.

Gilbert Lee, CFO

I don't have the Middle East and Europe market size, but based on some reports I've read about the global PPE market, particularly in the health care sector, it is about $16 billion globally. The U.S. market is a little smaller, around one billion dollars. Overall, Europe and Asia are probably the majority of the global market.

Howard Halpern, Analyst

Okay. And the process to get qualifications—should that only take a couple of months? Or it's hard to say when you'll get general qualifications or certifications and approvals to sell into certain markets?

Gilbert Lee, CFO

For Europe and the Middle East, we already have the approval to sell. Europe is basically the CE Mark. We are in the process of getting the CE Mark, and we anticipate approval within two months. However, we are already producing and shipping to a large customer in France through a relationship we have with another company that has already received CE approval. So that part is already ongoing. For the Jordan market, we already have the Jordan FDA approval, so we are able to sell in the Middle East. For the United States, we have registered our facility with the U.S. FDA. So that is already done. However, certain types of more protective PPE used in surgeries and in medical facilities like hospitals require a higher level of approval, which is called the 510(k) notification. We are in the process of getting that from the U.S. FDA, and this will require some time, probably a few months up to half a year.

Howard Halpern, Analyst

Okay. And one final question for me: in Jordan, what type of production potential or increase do you have? I mean do you have room to increase your capacity within Jordan, build another factory, or expand the current factory?

Gilbert Lee, CFO

Yes. We're constantly looking at that, but let me ask Eric to answer that question more specifically.

Eric Tang, Operations Lead

Yes. Okay. In Jordan, we have five factories, including one the so-called satellite factory that we have recently set up. Our four main factories are already fully booked. And for the new factory, we call it Jerash number five factory, which we consider a satellite factory. We have a capacity for 1,000 workers. Currently, we have only around 300 workers working inside the factory. So when orders increase, we still have the capacity to grow for another 400 machines, meaning we can also grow at least 10% to 15% of our global order.

Howard Halpern, Analyst

Okay. Keep up the great work, guys. Thanks.

Gilbert Lee, CFO

Thank you, Howard.

Howard Halpern, Analyst

Thank you very much.

Operator, Operator

We'll take our next question from Katy Hallberg with D.A. Davidson. Please go ahead.

Katy Hallberg, Analyst

Hi, guys. Thank you so much for some of the clarity on the PPE. I was a little bit more curious about what the order book looks like for the winter. I mean, are you guys getting a lot of orders for outerwear and especially compared to last year? Thank you.

Gilbert Lee, CFO

Thank you, Katy. Our outerwear business is primarily with VF or the North Face. What I know is VF is constantly working with our merchandisers in Hong Kong to update their orders and delivery times. So far, we have received reinstatements of at least 80% of their original orders for this coming year, which would be the winter season. However, we also have new customers that we are developing for outerwear. Eric, can you provide more details?

Eric Tang, Operations Lead

Yes. According to our biggest customer, the North Face, for spring orders up from now until February, I think we have nearly the same number of quantities as last year, maybe it's only less than 5% difference. For New Balance, we have received more orders than expected because New Balance is our new customer. Last week their sourcing team told us they are shifting most of their orders from another country, Haiti, to Jordan with Jerash starting next month because Haiti had recent on-time performance and quality issues. So we are expecting that the New Balance order will be larger than last year. This year we have also started with a new customer, and we have already received three purchase orders from this new customer called American Eagle, totaling 16,000 pieces. I expect more orders will come in the later half of the year. Additionally, Jerash is picking up more orders in the PPE sector, and month by month, I think the volume of our demand for PPE manufacturing will increase. This is the latest situation regarding our capacity.

Gilbert Lee, CFO

Thank you. Does that answer your question, Katy?

Katy Hallberg, Analyst

Yes. That definitely gives me a lot more clarity. Thank you so much. And then, I guess just in general, how long are you guys expecting to produce PPE? I mean is this something that you intend to permanently keep within your offering, or is this more of a shorter time horizon like two to three years?

Gilbert Lee, CFO

This is going to be a long-term strategic development. We are definitely entering this particular market. That's why we started a new facility and a new entity just to dedicate to this business.

Katy Hallberg, Analyst

Okay, wonderful. Thank you so much.

Eric Tang, Operations Lead

Thank you.

Operator, Operator

We'll take our next question from Brian Cobsic, Private Investor. Please go ahead.

Unidentified Analyst, Private Investor

Hey guys. I know you are in a highly competitive industry over there. I just wanted to get an idea of what the competition looks like over in Jordan. Are they producing PPE? And are they ramping things back up, or are they slowing down and you're picking up what they're not able to produce?

Gilbert Lee, CFO

Thank you, Brian. Yes. We are in a competitive industry, but we are much better off than our competitors in Jordan. I heard that a number of factories are actually shutting down or losing business and just cannot survive. So, maybe Eric you can give some updated information about what's going on in Jordan.

Eric Tang, Operations Lead

Okay. Because of the COVID virus, a lot of factories that primarily export to the U.S. market, due to the JOFTA Free Trade Agreement between the U.S. and Jordan, are facing significant reductions in orders. Since February, when COVID-19 spreads in the U.S., many buyers have greatly reduced their orders, and this has led to some factories facing cancellations of orders from 80% down to 30%. Due to this, several factories have already shut down in Jordan. However, Jerash has explained before, while our major buyers are also facing a reduction in orders, it is only around 20%. We have also been able to catch up with new customers that replace some of the capacity lost by current customers, and the emergence of our PPE products which are in high demand helps compensate for weakened capacity overall, resulting from cuts by our regional brand buyers.

Unidentified Analyst, Private Investor

Thanks.

Gilbert Lee, CFO

Okay. Thank you.

Operator, Operator

That will conclude our question-and-answer session for today. I'll now turn the floor back over to Mr. Kreps for closing remarks.

Matt Kreps, Managing Director, Investor Relations

Thank you, Karen, and thank you everyone for participating in today's call. Jerash is off to a strong start in fiscal 2021, and our outlook anticipates sequential improvement in both revenue and gross margin. Jerash will be conducting multiple outreach and conference events in the coming months, including the LD Virtual Conference event on September 3, which anyone can join to listen to our presentation. We will also be hosting one-on-one meetings with the management team for investors participating in that event. If you have additional questions or would like to arrange a meeting at an upcoming conference event, please contact me directly using the contact information at the bottom of our press release. Thank you for your participation. Stay safe and have a great day.

Operator, Operator

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