Earnings Call Transcript - JRSH Q1 2022

Operator, Operator

Greetings and welcome to Jerash Holdings' Financial Results for Fiscal 2022 First Quarter Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Roger Pondel, Investor Relations for Jerash Holdings. Thank you, sir, you may begin.

Roger Pondel, Investor Relations

Thank you, operator, and good morning everyone. Welcome to the Jerash Holdings fiscal 2022 first quarter conference call. I'm Roger Pondel with PondelWilkinson, Jerash Holdings' Investor Relations firm. It will be my pleasure momentarily to introduce the company's Chairman and Chief Executive Officer, Sam Choi; its Chief Financial Officer, Gilbert Lee; and Eric Tang, who leads the company's operations directly from Jordan. Before I turn the call over to Sam, I want to remind all 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 factor section of the company's most recent Form 10-K and Form 10-Q as filed with the Securities and Exchange Commission, copies of which are available on the SEC's website along with other company 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 as required by law. And with that, it is my pleasure to turn the call over to Sam Choi. Sam?

Choi Lin Hung, CEO

Thank you, Roger, and hello everyone. Our fiscal 2022 first quarter results demonstrate excellent progress. Revenue was at a record level for the first quarter. We're tracking robust shipments to our largest customers as a result of strong demand amid the reopening of the U.S. economy. Gross profit also represents a record for the first quarter, primarily due to higher revenue and gross margin performance. Our gross margin continued to run in the high teens, reflecting increased shipment volumes and an improved product mix in the first quarter. Our robust momentum is continuing further into fiscal 2022 with orders for the first nine months of the year that we believe will lead to a revenue run rate for the year that would exceed our prior record. As a result, we have increased our revenue outlook for the full year, which Gilbert will discuss shortly. We continued to advance plans to increase capacity in our existing facilities and secure additional capacity to meet our customers' demands both by building new facilities and through leases and acquisitions. We recently announced the signing of definitive agreements to acquire both the operator of about 71,000 square feet manufacturing facility in Amman, Jordan and relay the physical premises. We expect to close this acquisition soon. Eric will provide more details in a moment. I will now turn the call over to Eric Tang, who is based in Jordan, and then to Gilbert Lee, who will cover our financial results. Eric.

Eric Tang, Operations Lead

Thank you, Sam, hello everyone. Our factories in Georgia are extremely busy, and we continue to add capacity as quickly as we can. All the volumes are up substantively, and customers have returned to more typical ordering patterns. As anticipated, our product mix improved in the first quarter, leading to orders of higher average selling prices and margins that we saw in the last fiscal year. Moreover, this positive momentum is continuing. Capacity is completely booked through the end of January 2022 based on orders from our four largest global brand customers alone. Bookings remained heavily weighted towards jacket and other outerwear products that have higher average selling prices and margins. As Sam mentioned, we recently signed agreements to expand our manufacturing capacity in Jordan. This particular acquisition is in two stages. First, we signed an agreement to acquire the operating company of a 71,000 square foot apparel manufacturing plant. Under the terms of the first agreement, Jerash assumes the manufacturing licenses and existing physical operations, including all machinery, equipment, 500 workers and employees, and the dormitory. We have taken over production at the new facility as of August 1st, and we have begun manufacturing products for our customers. However, because the seller has yet to complete production for its primary orders, we are allowing them to temporarily maintain one production line, which has in turn delayed the formal closing of the first part of the acquisition until September. Second, we signed a separate agreement to acquire the land at the building that housed the apparel manufacturing operations. We expect this part of the deal to close in November 2021. The new facility is expected to enable Jerash to produce approximately 2.5 million to 3.5 million additional garments per year, adding approximately 20% to our current annual capacity. In addition, the facility gives us the ability to scale up even further. Customers are already placing orders that are expected to fully book the new factory through January 2022. As mentioned last quarter, we began the construction of high-quality living space for our expanding multi-national workforce with the highest safety and comfort designs that will help position us for growth and further our ESG goals. Finally, we recently announced plans to double worker capacity at our facility in Al Hasa as part of a special humanitarian project with the Jordanian government that began in 2018. We are very proud of our progress on this project despite the unprecedented disruption caused by the pandemic. The facility currently employs 300 people, and we plan to increase this to 600 by the end of 2021. With that, I will turn the call over to Gilbert Lee to discuss our financial results and fiscal 2022 outlook. Gilbert, please.

Gilbert Lee, CFO

Thank you, Eric, and good morning everyone. Our fiscal 2022 first quarter revenue rose significantly to $30 million from $19 million in the same period last year, an increase of nearly 60%. The increase was primarily due to higher shipments to our largest customers in the quarter. The highest sales volume reflects stronger demand as the U.S. economy continues to recover from the pandemic. Gross margin expanded 250 basis points to 18.8% in the fiscal 2022 first quarter compared with 16.3% in the same period last year. Gross margin expansion in the quarter reflected the higher proportion of export orders, which typically carry higher profit margins, as well as increased production and sales volumes. Operating expenses totaled $3.3 million in the fiscal 2022 first quarter compared with $1.9 million in the same period last year. The increase primarily reflects high-tech additions to support our growth, higher shipping costs that were in proportion with increased sales volumes, and expenses related to COVID-19 precautions and the recruitment of new migrant workers. Operating income was $2.3 million in the fiscal 2022 first quarter compared with $1.2 million in the same period last year. Comprehensive income attributable to Jerash’s common stockholders was $2.0 million or $0.17 per share in the first quarter compared with approximately $813,000 or $0.07 per share in the same period last year. Our balance sheet remains strong with cash and restricted cash up $9 million and net working capital of $51 million at June 30, 2021. Inventory was $31 million, and accounts receivable was $20 million. Net cash used in operating activities was $11 million in the fiscal 2022 first quarter compared with $8 million in the same period last year. The net change was primarily due to working capital activity. Inventories increased in the first quarter, primarily reflecting seasonal activity and strong demand. Accounts receivable also increased in the first quarter due to strong demand, particularly in June. To date, we have collected more than 80% of receivables at the end of June. We continue to expect the business to generate cash from operating activities on an ongoing basis. We also have been granted supply chain financing programs by our major customers and an untapped $3 million line of credit available. In terms of our fiscal 2022 outlook, we are increasing our revenue guidance to be in the range of $115 million to $120 million, as strong demand continues at our capacity expense. We also anticipate revenue in the fiscal 2022 second quarter to exceed $40 million. Orders continue to be heavily weighted towards high-margin jackets and other outerwear products. We expect this pattern to support gross margins in the high teens for the full fiscal 2022 year. I would also like to point out that operating expenses are expected to be higher in fiscal 2022, reflecting our growth and the pandemic’s impact on last year's first half. We also anticipate stock-based compensation to be at a higher level for the rest of fiscal 2022 compared with the same period last year. While customer orders remain strong, it is important to note that potential risk from the delta variant of COVID-19 could constrain our ability to add the workers needed to run our factories at full capacity. To a certain extent, we already have reflected this risk in our updated outlook. We'll continue to monitor pandemic developments over the next few months and give you an update on the next quarter's earnings call. Our fiscal 2022 first quarter results represent a strong start to the year. This robust momentum is leading to what we believe will be a record year for the company. We look forward to keeping you apprised of our progress as the year unfolds. Lastly, our Board of Directors approved a regular quarterly dividend of $0.05 per share to our common shareholders payable on August 24, 2021, to stockholders of record as of August 17, 2021. And with that, we will now open up the call for questions. Operator, may we have the first question please.

Operator, Operator

Thank you. Our first question comes from the line of Mark Argento with Lake Street Capital. Please proceed with your question.

Mark Argento, Analyst

Good morning, everyone. Great quarter. I wanted to dive deeper into the guidance, which appears very strong. I had expected that the capacity expansion of over 20% from the acquisition might take longer to materialize. Can you share what insights give you the confidence to provide such strong guidance regarding the onboarding of this additional capacity? Additionally, could you discuss your overall order book? Do you currently have more orders than capacity, and is there potential for leasing extra space? Thank you.

Choi Lin Hung, CEO

Thank you, Mark. First of all, I think we are trying to be conservative because there are still a lot of uncertainties all over the world with the pandemic still going on in various parts of Asia in particular with the delta variant. We're currently facing some challenges in bringing in additional migrant workers from Asia, even though we're working very closely with the Jordanian government and we see some very promising opportunities. However, we don't want to over-expand ourselves. We do have orders from our major customers that far exceed the projection, but we just want to make sure that we have the ability to produce and ship throughout this fiscal year. But we are confident in our capacity and our ability that we will be able to fulfill this $120 million in revenue.

Mark Argento, Analyst

In terms of the mix of that incremental revenue, is it going to be more outerwear, maybe give us a little bit of an idea of how you think about the mix, is it going to look mostly the same, just another incremental $15 million to $20 million in revenue or is it going to change materially?

Choi Lin Hung, CEO

Well, I think the additional revenue or the increase in the revenue is going to be highly concentrated in outerwear because that's our intention. Even though the new facility and the new workers probably need some time to be trained to manufacture our products, especially those for our premium customers. Those are rather complex products. So, we started out the new factory by producing some of the lower margin or more simple products such as T-shirts and polo shirts, just to acclimate them to our processes. Once that is done, and we anticipate that maybe after this fiscal quarter, we should be able to convert them into producing the outerwear jackets. Also, we're working on expanding our satellite facility in Al Hasa to make jackets too. So, we're hiring more people in Al Hasa and training them and converting that facility into producing some higher margin high average selling price products.

Mark Argento, Analyst

And then just last question from me, the new facility that you guys are purchasing or have purchased, is that in the same complex as your current facilities, of course Al Hasa is outside but within the Oman area there in the current campus?

Choi Lin Hung, CEO

Yes, the new facility that we purchased is in Oman. Eric, is it in the same industrial park or industrial area?

Eric Tang, Operations Lead

Yes, based on the location it is situated in the same industrial city, within walking distance from Jerash’s main factory, only around five minutes by walking.

Mark Argento, Analyst

Great. Alright, guys, appreciate it. Congrats on a strong quarter.

Choi Lin Hung, CEO

Thank you very much.

Eric Tang, Operations Lead

Thank you, Mark. And also thank you for all the long-time support of the company.

Operator, Operator

Our next question comes from the line of Rommel Dionisio with Aegis Capital. Please proceed with your question.

Rommel Dionisio, Analyst

Good morning. Thanks for taking my question. We hear so much about increased freight expenses around the world as well as raw materials, relative is a little less applicable to you. But I wonder if you could just talk about the potential impact that you're seeing in gross margins, if you're seeing any delays, especially on the shipment front? We definitely hear about challenges in the world of global freight. Thank you.

Choi Lin Hung, CEO

Thank you, Rommel. Well, there are some challenges, especially with incoming freight and shipment from Asia for our raw materials and supplies. However, because we're working with global brand customers, they are very understanding. If there is any delay from raw materials, they wouldn't penalize or complain. Most of the time, they will reflect the increase in raw material costs or inbound freight in the order prices.

Eric Tang, Operations Lead

Yes, recently we faced some problems. I cannot say a lot of problems, but there are some challenges in the incoming contingents, especially from Southeast Asian countries like Vietnam and Taiwan. They have been locked down recently, so unfortunately, some of the orders from there are also delayed. The fabric mills situated in Vietnam and Taiwan are the nominated suppliers for the brand. Once we place the order, they have the responsibility to ship to Jordan on time so that we can deliver on time. Nowadays, because of the lockdown, shipments are coming in late by one month or two months. The brand understands very well that this delay is not the responsibility of the manufacturer in Jerash but rather of the fabric mill. This understanding allows us extensions on delivery for one or two months according to the delays in containers. Some of the garments may need to reach the U.S. by the end of November due to a big Christmas sale at that time. Thus, they will ask us to air freight some of the garments to the U.S. at their cost. This is the situation.

Rommel Dionisio, Analyst

Thank you, Eric and Gilbert. Maybe just a follow-up, Gilbert. I think in the prior question, you talked about the potential challenges with the delta variant in terms of importing labor, but you obviously have a significant labor base in Jordan, domestic labor as well. I wonder if you could just refresh our memories on the availability of that. Is there plenty of local labor available in the event that you have difficulties importing workers from some of the Asian countries?

Gilbert Lee, CFO

Yeah, we're actually trying to hire more domestic labor or local workers in Jordan. We are working on importing more workers from Asian countries such as India and Bangladesh. However, we all know that those two countries are currently locked down, and we do not know how successful that effort will be. But at the same time, compared to other manufacturers in Jordan, we already have a significant advantage because we have quite a few foreign workers working for us, and we have built a good reputation and relationship with the government. They are helping us or trying as much as they can to get those qualified workers imported into Jordan. However, the pandemic is beyond anyone's control. Thus, we adopt a conservative projection because of that. Still, we are actively working to recruit local workers, including Jordanians and Syrian refugees residing in camps. We provide these workers transportation every day with buses to our facility and take them back home afterward.

Rommel Dionisio, Analyst

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

Gilbert Lee, CFO

Thank you, Rommel.

Operator, Operator

Our next question comes from Michael Woo, a Private Investor. Please proceed with your question.

Michael Woo, Private Investor

Hi, just wanted to ask a question about orders from North Face for the full year?

Gilbert Lee, CFO

Hello, Michael. Yes, we do have orders from the North Face for the whole year. The order amount really actually exceeds our capacity or our projection because they place orders that we may or may not be able to fulfill. The North Face has been working with us for six or seven years and almost every year they place orders more than we could supply them. They are very understanding. They keep increasing the demand, and we keep trying to meet it with increased capacity.

Michael Woo, Private Investor

Could you give me a rough idea? I mean last year it was around more than 15% less than fiscal 2020. So, is it fair to assume that you are recovering to the 2020 level at least or maybe even beyond?

Gilbert Lee, CFO

I'm sorry, you said last year which is fiscal 2021.

Michael Woo, Private Investor

Yes. Yeah, it declined from…

Gilbert Lee, CFO

Yes, obviously, due to the global pandemic, everybody’s sales were down. We were down 15% from the previous fiscal year, which was $93 million, and last year we were at $90 million. In the second half of last fiscal year, we fully recovered from the pandemic. In the first half, sales were down quite a bit.

Michael Woo, Private Investor

I'm asking specifically about the North Face order and not about the whole company. So in 2020 it was around $72 million. Last year it was about $56 million, so I was asking if maybe the North Face order would recover to 2020 or what you have, any idea?

Gilbert Lee, CFO

I don't have the numbers in front of me, but I can tell you, North Face orders are increasing almost every month at the request of the customer. As of today, in dollar terms, we have already confirmed orders with North Face for more than $75 million.

Michael Woo, Private Investor

That's great. Yeah, that's exactly what I want to know.

Gilbert Lee, CFO

So I think the figures are still going up, okay, as we only started two quarters into the new financial year.

Michael Woo, Private Investor

Okay, great. The second question is about New Balance. Any update on any trends from them?

Gilbert Lee, CFO

Compared to fiscal 2021, we are seeing an increase this year, with customer orders rising by about 20% compared to last year.

Operator, Operator

Our next question comes from the line of Barry Pasternack, a Private Investor. Please proceed with your question.

Barry Pasternack, Private Investor

Hey guys. Congratulations on the quarter, the guidance, and the acquisition. I was wondering about the acquisition. How much of a temporary gross margin impact should we expect this fiscal year from digesting the acquisitions or on the revenue coming from the acquisition from the factory?

Choi Lin Hung, CEO

For the new acquisition, we're talking about the facility that we just acquired in August. There are already 500 workers, and obviously, within the first six months, we need to train them and acclimate them to manufacturing our products. Previously, they were manufacturing jeans for their customers, but now we're turning them into manufacturing our kinds of garments, which are sports apparel and outerwear jackets. It will take some time for them to be trained and to get acclimated to our systems. I expect the first six months to have a somewhat negative impact on overall profitability, but we will train them on some of the less expensive, less complicated orders. Over time they will be able to produce and sustain productivity and efficiency similar to all our other factories and workers. I would say the first six months will likely cause an impact of somewhere between 50 to 100 basis points on overall gross margin.

Barry Pasternack, Private Investor

Okay, great. So at least partially offset by higher margin products being produced in the existing factories. And it shouldn't be more than like 50 basis points, I mean 50 basis points or less gross margin impact during the six months from the acquisition, would that be a fair assessment or?

Gilbert Lee, CFO

I would say it will be anywhere between 50 to 100 basis points from overall, because right now, we have 5,000 workers in total in Jordan and 500 workers in the new facility. So if we mix all the products together, I think the impact would probably not be more than 100 basis points.

Barry Pasternack, Private Investor

Okay, great. And on the four largest customers you referenced earlier, are those all existing customers from last year, or is there a new customer in there?

Gilbert Lee, CFO

Yes, they are all existing customers from last year. The New Balance and American Eagle were new customers last year.

Barry Pasternack, Private Investor

Okay. And is there also a new customer this year that you've started shipping to that is not in the top four, but has the potential to be there by next year?

Choi Lin Hung, CEO

Eric, do we have a new customer in our projections?

Eric Tang, Operations Lead

We have one new customer in our projections, and this is a very big name, Adidas. We have confirmed one trial order with Adidas, and this order is approximately 25,000 pieces.

Barry Pasternack, Private Investor

That's very small, right?

Eric Tang, Operations Lead

Yes, because this is a trial order. After that, the customer will give serious consideration to place a bulk order with Jerash next year.

Barry Pasternack, Private Investor

Okay, great. Thank you.

Gilbert Lee, CFO

Thank you.

Operator, Operator

We have no further questions at this time. Mr. Choi, I would now like to turn the floor back over to you for closing comments.

Choi Lin Hung, CEO

Okay. Thank you, operator, and thanks again to everyone for joining us today. And for your support and interest in our company. We look forward to speaking with you again on our fiscal 2022 second quarter earnings call. Thank you very much.

Operator, Operator

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

Choi Lin Hung, CEO

Thank you.

Gilbert Lee, CFO

Thank you.