Earnings Call Transcript - JRSH Q2 2021

Operator, Operator

Greetings and welcome to the Jerash Second Quarter Fiscal 2021 Results Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. I will now turn the conference over to your host, Matt Kreps. You may begin.

Matt Kreps, Host

Thank you, Shoumali. Good morning and welcome to the Jerash Holdings fiscal second quarter 2021 results conference call. Joining me today are Sam Choi, our Chief Executive Officer; Gilbert Lee, our Chief Financial Officer; and Eric Tang, who oversees our Operations in Jordan. Our results press release was issued earlier today and is available in the Investor Relations section of our website at www.jerashholdings.com. You can also find a link in the top navigation introducing some of our new PPE products and a video showcasing production in our factories, with that list continuing to grow. Today's call is being recorded and will be available for playback. All participants will be in a listen-only mode. Before we begin, a quick reminder about forward-looking statements made during this call. Statements made by Jerash management that are not historical facts are considered forward-looking statements and are subject to risks and uncertainties. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for these statements. Terms like believe, expect, anticipate, estimate, and others indicate forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ significantly from those stated. These risks and uncertainties are detailed in Jerash's public filings with the U.S. Securities and Exchange Commission. Participants are cautioned not to place undue reliance on these forward-looking statements, which reflect management's belief only as of today. The company has no obligation to publicly release the results of any revision to those forward-looking statements that may occur due to events or circumstances after today or due to unforeseen events. Now, I will turn the call over to Sam Choi. Please go ahead.

Sam Choi, CEO

Thank you, Matt, and hello to everyone joining us on the call today. Our September quarter shows a strong recovery from the COVID-19 disruptions that occurred in Jordan during spring and early summer. For Jerash, we took a conservative stance of great caution, but the impacts are much less than we anticipated. Many of our customers have prioritized their production in Jerash, in Jordan over other countries around the world. While we did see some cancellations in the fiscal first half due to COVID impacts, which reduced revenue year-over-year, that is no longer the case. Now any capacity available for the rest of the year from orders being canceled has been snapped up by our newer customers, helping us not only position for a strong second half at least equal to last year's second half but also make faster progress towards further diversifying our revenue base. Revenue in the September quarter increased rapidly to $27.1 million, up 45% from the previous quarter. Gross margins increased to 22% and net income increased to $2.6 million, or $0.23 per share. I'm pleased to say that we have increased our factory capacity estimates, reflecting both higher productivity and changes in product mix that allow us to generate more volume. We are fully booked to capacity into the summer of 2021, and customers are still seeking additional capacity with us. To address this increased demand above our internal capacity, we are contracting with additional factory resources and actively looking for prospective factory acquisitions. We are excited for the rest of the year as we continue to work on our growth plans and expand with both existing and new global brand customers. More and more brands are recognizing the high quality and favorable economics of manufacturing in Jordan, and Jerash is leading the way. With that, I will turn the call over to Eric to discuss our factory operation in Jordan, then Gilbert can cover some financial data.

Eric Tang, Operations Lead

Thank you, Sam. Hello everyone. As Sam has just mentioned, our factories in Jordan are very busy, and we are actively looking for additional capacity. We believe the strong return of the customer orders reflects several factors: Firstly, shoppers have adapted to the COVID-19 pandemic and our customers are seeing increased sales of their products. Our core products of outerwear, athletic wear, and casual wear are in high demand for work-from-home style. Secondly, the new customers we won during the past year, such as New Balance, American Eagle, G-III, and some others, are all placing increased orders as they continue to grow their production activity with Jerash. In fact, they are taking any capacity released by our largest customer, helping us diversify our revenue base more quickly. Thirdly, our largest customer is indicating order sizes for coming production cycles that give us increased confidence in growth for next year just by this customer returning to normal while keeping the gains we made with other customers this year. Fourthly, we have strongly diversified our products since the IPO, making investments to start new programs that added several categories of garments and more fully utilize our production capabilities. While we saw some deferrals early in our fiscal year, in fact more than 85% of our customer orders have now been reinstated as our customers realize the high demand for the products. Those canceled orders account for most of our first half difference year-over-year. Any excess capacity that opened up now is quickly being booked as customers are competing for our capacity. We expect second half revenue to be at least on par with the prior year, although timing of shipments will weigh revenue more toward the fourth quarter this fiscal year as opposed to the pandemic effect, which is causing shipping containers and some supplies to arrive later this year. So this is really a timing issue only. On the PPE market where we are producing both disposable and reusable products, our efforts are progressing very quickly. We shipped good quantities of masks and gowns to multiple customers in the quarter and continue to expand our sales reach as we work with a growing list of prospective customers and tenders. Today, our mask and gown products have been well received, and we remain excited about this business. And with that, I will turn the call over to Gilbert for financials and outlook.

Gilbert Lee, CFO

Thank you, Eric. Hello everyone. The second quarter ended September 30 was a good quarter, with revenue rising sequentially, gross margin improving back to our targeted range, efficient OpEx, and solid net income. Our results continue to demonstrate the benefits of new customer wins as well as the high demand from our long-term customers who are increasingly moving production out of China in favor of higher quality and more cost-effective locations such as Jordan. We're even seeing customers booking our capacity to take over production done in other low-cost markets such as Haiti, where they just can't get the quality of work we offer. Let's cover some of the details from our financials and business performance for a few minutes. Revenue in the second quarter of fiscal 2021 was $27.1 million. We had guided for revenue of $25 million, leading to a strong beat over guidance. Revenue was only down 12% from the prior year, primarily due to COVID-related shipping changes. Our factories are again operating at full capacity, and customers continue to seek increased volumes with Jerash. We're diversifying customer relationships by growing new business faster than we grow business with historic clients and we're using the pandemic as an opportunity to more quickly ramp new customer orders in our capacity allocations whenever we have a deferral or push out from a legacy customer. In fact, for the September quarter, the North Face was 74% of sales versus 87% last year. North Face will still be our number one customer, though we are seeing any capacity they release being snapped up by other customers helping us accelerate our progress on this key metric. Turning to gross margins. Gross margin improved to 22% from the first quarter's 16% and was down slightly from 24% a year ago. The sequential increase was the benefit of more fully utilizing our factory overhead across the higher order volumes and the absence of shutdown costs incurred early in the first quarter due to COVID lockdowns in Jordan. The decline year-over-year reflected our efforts to further diversify our production and fully load the factories by adding new categories, most of which have lower average gross margin than our jacket products that dominated first half production in prior years. However, we believe that the growth opportunities and year-round maximization of our factories can drive overall improvement in net income and continue to work towards that target. Operating expenses were $2.9 million, down from $3.1 million a year ago, even though we have increased our workforce by several hundred employees and added the Paramount and Al-Hasa sewing workshop to our operating base. Bringing all of this to the bottom line, net income for the September quarter was $2.6 million or $0.23 per share. Through the first half, we have now generated $0.30 per share in net income and declared $0.10 per share in dividends. We expect to be profitable in the second half as well and to maintain our dividend policy, which is reviewed periodically by the Board for potential increases. Our balance sheets remain very strong with cash and restricted cash at September 30 at $28 million, up from $19 million a quarter ago. We converted inventory back to cash per our typical seasonal trends. We self-funded our working capital needs, which were $51 million at September 30 out of our cash reserves and have the option to deploy our bank facility should it be needed or should we find a suitable acquisition with which to expand our production capacity. Inventory was $10 million and includes goods produced, but deferred for shipment until the late part of fiscal 2021. Accounts receivable increased to $20 million due to a seasonally typical large number of shipments in the quarter. Receivables collection continues to be strong with no customer issues. We 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, which does not include the opportunity for additional asset-based lending should they be optimal. Turning to our outlook. We expect full-year sales to be approximately $85 million down slightly year-over-year from a record $93 million last year. The difference is entirely orders impacted by COVID-19 in the first half, as we are expecting a second half at least equivalent to the prior year. This could be increased by additional shipments that deliver early 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. First, we began shipping PPE to a few customers last quarter, including a U.S. customer, and we see this as a sustainable business. We are focusing on the selection of PPE supplies such as surgical gowns, disposable masks, and reusable masks. These new categories are good opportunities for Jerash, and we continue to expand our capabilities and sales in this product category. Second, we are diversifying our geographical production capability to enhance our competitiveness in Asia Pacific and Europe, particularly, for customers like VF and New Balance who have multiple regional sales networks. This effort includes working with overseas subcontracting partners in locations such as Indonesia and Cambodia, who have existing certifications required by these customers. They can collaborate with Jerash to meet our exacting standards on behalf of these important customers. We believe this effort will generate additional revenue in the second half and set us up for further growth next year. Finally, we continue to look 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 on both pricing and risks in the current environment. Upon finding the right candidate for strategic actions, we look forward to moving ahead.

Operator, Operator

Our first question is from Mark Argento with Lake Street Capital. Please go ahead with your question.

Mark Argento, Analyst

Hey, guys. Good morning. Nice to see the business bouncing back here pretty nicely, especially going into the second half. Just a couple of quick questions. I know you're back at effectively at full capacity. When you think about the type of product you guys are manufacturing, balancing capacity utilization with kind of gross margins or average gross profit per piece maybe talk about how you're thinking through that in terms of new business and keeping some additional supply or should – I should say capacity available to land some newer potentially higher-margin business going forward.

Gilbert Lee, CFO

Sam, do you want to answer that or Eric?

Sam Choi, CEO

Maybe, Eric you try to answer that first. Yes?

Eric Tang, Operations Lead

Okay. So, Mark, how are you? Long time no see.

Mark Argento, Analyst

Yep.

Eric Tang, Operations Lead

Okay. So I think okay – we okay. Now, Jerash is moving towards – I mean to other kinds of manufacturing, like what we have already mentioned as the PPE products. Because before that okay most of the U.S. medical buyers are buying from China. But now, I think they are looking to make purchases in other countries. So Jordan, I'm expecting, will be one of their good options because we are also selling to the U.S. on a duty-free basis. We are now converting one of our factories, which we call Jerash number five, to produce 100% PPE products in this factory. In this factory, we are producing washable face masks, disposable one-time face masks, medical gowns, and also a couple of different sizes for different customers. Now this factory is in full operation, and we have full orders to continue. So looking forward, we are expecting more orders to be coming in 2021. No matter in what area or number of workers, we are planning to expand also in 2021 to meet our demand from the medical company in Europe and also in the U.S.

Mark Argento, Analyst

And when you're thinking about these new customers and onboarding them, when you think about the gross margin per piece, one part of the model that fluctuates quite a bit is that gross margin line. So historically, the winter wear jackets, or some of the higher-priced units ended up being the biggest gross margin generators per piece. On the flip side, if you're filling capacity with, say, t-shirts or something with a lower dollar value gross profit profile. I'm just trying to better understand, should we be thinking about a target gross margin kind of in the mid to low 20s going forward? Or – that's really what I'm trying to get at.

Eric Tang, Operations Lead

Okay. So let me answer you like this. For the PPE product, if we are not going to participate in the form of a tender, if it is a confirmed order with a particular customer, what we are doing now, for some of the orders meant for the face masks and for the medical gown, we are maintaining around 15% to the 20% gross profit margin at least. Sometimes it is as high as 20% or even more than 20%. However, for a very big order, which we have to participate in some kind of tender, like in the Middle East market, the Ministry of Health in Jordan or the Ministry of Health in Saudi Arabia also invited Jerash to participate in its tender. We then face severe competition from other suppliers, especially in Vietnam, Turkey, and China. In that case, we have to lower our profit margin to maybe 8% to 10% to have a better chance to be awarded the tender. So those are the two ways we are dealing with this kind of business.

Mark Argento, Analyst

Got it.

Gilbert Lee, CFO

I think Mark is more worried about the garments business because he is considering that jackets likely have a margin of around 20% to 25%. However, with t-shirts, polos, and other smaller items, the average selling prices and margins are lower, even though the volumes are higher. So, Mark is probably trying to determine what kind of margin we can expect. While PPE is a growing segment of our business, the majority of our sales still come from garment manufacturing.

Eric Tang, Operations Lead

Actually, okay for the garment manufacturing, most of our capacity is producing outerwear jackets and athletic jackets, these kinds of things. For the other products, we are manufacturing, which is garment-related, we are also producing T-shirts and pants. For the T-shirts, we normally will not produce them unless there is enough demand. Usually, we produce T-shirts during the low season, which we take on a contract manufacturing basis to fill up the capacity when we don't have enough FOB orders. But for the pants, which we now get a big number from our new customer New Balance, our average gross profit is still on the 16% to 18% for the pants. This is another category of garment-related products.

Mark Argento, Analyst

Great. Thanks, guys. That’s all. I'll hop back in the queue.

Eric Tang, Operations Lead

Okay. Thanks. Thanks, Mark.

Operator, Operator

And our next question is from Kenneth Fink, a Private Investor. Please proceed with your question.

Unidentified Participant, Private Investor

Good morning everyone. Thank you for the update. I have been a private investor with a number of my friends since the IPO when the stock was released at $7. I've been following it since then and I'm curious about what can be done to boost the stock. I understand the current situation with COVID, but I have noticed that the stock hasn't moved much and I would expect it to increase. In previous years, we have seen good earnings growth and decent margins. So, I'm wondering what measures can be taken to enhance the stock's performance. It seems to me that there isn't enough stock available. Is there any discussion about increasing the float? Thank you for your insights.

Matt Kreps, Host

If there are any more questions? Gilbert, go ahead.

Gilbert Lee, CFO

Well, let me try to answer that question. We do realize that the float of our stock in the market is limited. And actually, a lot of investors or funds are trying to buy but they just can't buy enough in the open market. So, we're working on multiple ends. We're talking to some larger shareholders to see if they can give up some of their shares to sell as a block. And then, on the other hand, we have filed an S-3 shelf registration. So, we're just waiting for the right timing. And when the timing is right, we could raise some capital and put some more shares out in the market. But ultimately, I think what we're working on is focusing on growing our business and delivering good financial performance, so that people will continue to support our company and people will continue to buy our shares. When the share price goes up that will be a good timing for us to release more shares into the market. We're looking for acquisitions and once we get a good candidate, perhaps then we will need more capital and maybe raise a few million dollars, just a very small fundraising, but that will also put some more shares out in the market.

Operator, Operator

And our next question is from Rommel Dionisio with Aegis Capital. Please proceed with your question.

Rommel Dionisio, Analyst

Yes. Thanks for taking my question. Good morning.

Gilbert Lee, CFO

Good morning.

Rommel Dionisio, Analyst

You mentioned expanding your supply relationships and exploring acquisitions. I wanted to clarify if your expansion plans, particularly in Asia where some customers operate, will primarily focus there. Are you also considering opportunities in Jordan? Additionally, is there potential for increasing production capacity at your current facility in Jordan, either through adding more labor shifts or further developing the factory? Thank you.

Gilbert Lee, CFO

Hey, Rommel, this is Gilbert Lee.

Rommel Dionisio, Analyst

Yeah, hi, Gilbert.

Gilbert Lee, CFO

We have opportunities to increase our capacity in our current facilities. Eric mentioned that we could hire more employees, particularly in the satellite factory, where we still have space for additional staff. Simultaneously, we are conducting an engineering study because we have land within the industrial zone where we intend to construct dormitories and factories to further expand, although this will require more time. We are also exploring options to rent extra factories in Jordan to boost our capacity there. We have various strategies in place, and we're evaluating which approaches will be the most successful, whether that involves acquisitions or establishing new factories. Our focus isn't limited to Jordan; we are also considering other countries that have favorable agreements with the U.S. and Europe to take advantage of those opportunities. Regarding the expansion of our sales and customer relationships in the Asia Pacific and Europe, we are working with existing customers like the North Face and New Balance who sell in those regions. However, producing from Jordan to supply them doesn't make logistical sense. Therefore, we are collaborating with partners in the Asia Pacific, utilizing our relationships with companies like the North Face. We are actively subcontracting and have significantly engaged in this process during the second quarter of this year. This strategy will continue, allowing us to increase our sales in other regions without having to manufacture there. By subcontracting to factories with which we have established relationships and that meet our customers' quality standards, we can effectively manage our expansion.

Rommel Dionisio, Analyst

Great. Thank you. That's very helpful. Thanks very much.

Eric Tang, Operations Lead

Thanks.

Gilbert Lee, CFO

Thanks, Rommel.

Operator, Operator

And we have reached the end of our question-and-answer session. And I will now turn the call over to Matt Kreps for closing remarks.

Matt Kreps, Host

Thank you. And thank you all for participating in today's call. Jerash is off to a strong start in fiscal 2021, and our outlook anticipates continued performance in the second half. Jerash will be conducting multiple outreach and conference events, including several events next week. If you have additional questions or would like to arrange a meeting at one of our upcoming investor conference events, please contact me using the information at the bottom of our press release. Thank you for your participation today. And have a good day.

Sam Choi, CEO

Thank you.

Gilbert Lee, CFO

Thank you.

Eric Tang, Operations Lead

Thank you.

Operator, Operator

And this concludes today's conference. And you may disconnect your line at this time. Thank you for your participation.