Earnings Call Transcript - JRSH Q3 2020

Operator, Operator

Good day ladies and gentlemen and welcome to the Jerash Fiscal Third Quarter 2020 Results Call. After the presentation, there will be a question-and-answer session. At this time, it's my pleasure to turn the floor over to Mr. Matt Kreps. Sir the floor is yours.

Matt Kreps, CEO

Thank you and good morning everyone. Welcome to the Jerash Holdings fiscal third quarter 2020 results conference call. With me today is Gilbert Lee, our Chief Financial Officer. 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 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, targets, growth, seek, 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 detailed in the forward-looking statements. Those risks and uncertainties are detailed in Jerash's public filings with the U.S. Securities and Exchange Commission. 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 those 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 will now turn the call over to Gilbert. Please go ahead.

Gilbert Lee, CFO

Thank you, Matt. Hello everyone. I'm pleased to join all of you today for my first results call as CFO of Jerash Holdings. Our strong fiscal third quarter results demonstrate the continued progress Jerash is making on key initiatives to drive second half production volumes, increase total capacity year-round, grow revenue, manage gross margin, and increase net income. Let's dig into the specifics of the financials and business performance for a few minutes. Revenue in the third quarter of fiscal 2020 which ended December 31st, 2019 was $25.4 million. That is an increase of 36% from last year's third quarter which was also a high-growth quarter for the company. The current year third quarter included just over $3 million of production from our second quarter that the customer requested to ship in October rather than September. This is an important trend for the company in our second half production volumes as higher utilization is better absorbing our fixed costs and driving improved profitability. You may recall that Jerash made several investments last year in the second half to open new production programs with existing customers and add new customers. These efforts did have a short-term impact to gross margin which we indicated was an investment in our future success within the ROI from those investments this year, in revenue, gross margin, and net income gains. Speaking of gross margin, we've recorded 19.3% for the quarter compared with 17.1% in the prior year quarter. I should note that second half product mix is naturally less margin-favorable than first half being warmer season clothing and exercise wear versus higher cost and more complex outerwear products, but we have been able to increase our margin performance through a combination of volume and efficiency. Our gains in margin were partially offset by our continued ramping of the Paramount facility as we have previously discussed. This ramp-up process has progressed very well and we expect this addition to potentially be profit-accretive in the fiscal fourth. Notably, we have shipped more than 7 million pieces in the first 9 months of the fiscal year with another 2 million-plus pieces scheduled in the final quarter this year. This keeps Jerash on target to exceed 8 million pieces this fiscal year which reflects our target with Paramount operating at full capacity. This already represented a 23% increase in capacity against the 6.5 million pieces produced last year and we believe we can further scale our production at the existing facilities. Working down the remainder of the P&L sheet, SG&A expense in the third quarter was $2.6 million down from $3.1 million in the second quarter. SG&A included additional costs to onboard and train additions to our workforce for the new facility. We have also expanded our Asia-based team for sales and marketing activities to continue generating new customer orders for our factories based in Jordan. Operating income in the third quarter was $2.3 million compared with $1 million in the prior year quarter. Taking all of this into account, GAAP net income was $2.1 million or $0.18 per diluted share for the quarter based on approximately 11.5 million diluted shares outstanding. Through nine months we are tracking very well to our objectives with revenue at $78.6 million gross margin holding at 21.3% and diluted net income of $0.63 per share up from $0.47 this time last year. Now turning to the balance sheet, we believe we remain well capitalized to fund our growth plans and self-fund our growing working capital needs. We also continue to pay a quarterly dividend of $0.05 per share which equates to an annual dividend of $0.20 per share. Cash and restricted cash at December 31 stood at $27.8 million. Inventory was $14.1 million and AR was $10 million. We continue to expect the business to generate substantial cash flow from operations on an annualized basis. We also have untapped lines of credit available for up to an aggregate of $26 million. Year-to-date we have begun to invest in additional expansion for the future including $2.2 million we have invested into the purchase of the Paramount manufacturing asset and more recently land property to further expand our production facilities and worker dormitories as part of our multi-year facilities expansion plan. As you can see Jerash has reported strong sales growth and profitability in the first 9 months of fiscal 2020. We believe the third quarter performance keeps us on track for a record second half as we discussed on the last update call. I want to take a few moments to comment on other areas of the business as well, especially progress on new customer accounts. Our customer VF Corp. and in particular the North Face brand continues to increase orders each year with Jerash. They are a top global brand and excellent customer. We believe they have been growing the production with Jerash at a rate higher than the market growth the past several years reflective of Jerash's important role in the global manufacturing and supply chain. That is not a position we take lightly and we work every single day to ensure they receive the quality and timely delivery that has earned us this position. However, we also recognize the importance of growing our business with other customers' logos. These include DICK'S Sporting Goods, New Balance, G-III and other well-known brands which we have previously stated are expected to add meaningful revenue. Those orders reflect a large portion of overall revenue in the third quarter as we scale with those new accounts. We expect that these new customers and more diversified orders will help minimize our quarter-to-quarter volatility and maximize our plant efficiency. Additionally, I want to note that, while we are posting strong growth this fiscal year, our first half was still capacity constrained. Fiscal 2021 beginning in April will be the first year that we have the full benefit of the Paramount capacity on a full year basis, affording us additional growth opportunity on the top line. That capacity is being focused and giving us a clear indication to continued buying and building additional capacity for future years to support the increasing customer opportunities, we are seeing, as more and more global brands recognize, Jordan as a high-quality tariff-advantaged manufacturing source. I want to point out that, we have seen some reduction in average gross margin as we have expanded volume, but that expansion is also driving increased net income for our shareholders, which we see as a fair trade. Gross margin has historically been an important metric for Jerash and will continue to be so in the future. However, we're implementing a number of processes to help us better balance the exchange between higher average gross margin and higher total net income. Going forward, we will continue to manage gross margin closely. We'll also make opportunistic decisions where we believe an incremental utilization of our production facility is positive to net income and beneficial to our investors. Finally, I want to note that for fiscal 2020, we have adjusted our revenue outlook slightly, which anticipates continued revenue growth through both expanding business with existing customers and the addition of new customers. Total revenues for fiscal 2020 are projected to be approximately $95 million, representing about 12% organic growth over fiscal 2019. The change primarily reflects some adjustments to customers' shipping schedules in our FOB orders, moving them into April rather than March. With that, I just want to reiterate our excitement for the remainder of the year as we continue to grow this business for both the current fiscal year and even more so for fiscal 2021 as our new capacity and customer relationships continue to mature.

Operator, Operator

Thank you. The floor is now open for questions. And we'll go first to Mark Argento with Lake Street.

Mark Argento, Analyst

Hey, Gilbert. Just a couple of quick questions. In terms of the gross margin nice expansion that's picked up on a year-over-year basis. The seasonality factor, what do you think is a good run rate for Q3 going forward? Is that kind of 2019-2020 level sustainable? Or how do you think about gross margins kind of quarter-in quarter-out?

Gilbert Lee, CFO

Well, there are going to be fluctuations in gross margins depending on the customer shipments and FOB customer's, which is shipping out of Jordan into the U.S. versus local orders. So it is really hard to predict the quarterly margin. But we tend to focus more on the full year average gross margin and we anticipate that to be more than 20% going forward. So during the quarter, sometimes it will get down a little bit, 19% and whatever. But overall, from a full year standpoint, we will manage it to maintain it to be above 20%.

Mark Argento, Analyst

How big of a delta is it between FOB and local in terms of kind of gross margin impact?

Gilbert Lee, CFO

Well, this also depends on different customers. Our biggest customer, VF Corp., which primarily is North Face, definitely gives us the best gross margin. Some of the new customers that we are acquiring, we will at the beginning have a little bit of a lower margin, but not that much lower. However, it will be a few percentage points lower than the normal gross margin.

Mark Argento, Analyst

I know you mentioned that the full year outlook has shifted a bit from $100 million. Could you remind us what is causing that shift? Is it just the timing of orders?

Gilbert Lee, CFO

Yes. I think the majority of it is because of the timing of the order. We also tend to be a little bit more conservative. This is basically what we have fully booked in terms of our shipments through the end of the year and might be more that could come in that hasn't been booked yet.

Mark Argento, Analyst

Got it. And then, last for me, in terms of capacity. I know, it sounds like the new capacity is coming on and you're adding orders. Any additional thoughts above and beyond existing capacity expansion into 2020 in either new plant build, another quasi acquisition or maybe something outside of Jordan? Any bigger picture thoughts in terms of continued capacity expansion. Thank you.

Gilbert Lee, CFO

I'm glad you inquired about that. We are currently in the process of developing two pieces of land we purchased, which will boost our capacity. However, this construction will take some time, approximately a year or two, to become fully operational. In the meantime, we'll enhance the capacity of Paramount, which we acquired, in the coming year. This means that in fiscal year 2021, we will benefit from the full capabilities of Paramount, allowing us to grow compared to 2020. Additionally, we will be improving efficiency in our current factories, providing us with extra capacity to attract new customers and increase sales to our existing ones. We are also actively exploring acquisition opportunities, including existing factories that have current orders or customers.

Mark Argento, Analyst

Thanks, Gilbert.

Gilbert Lee, CFO

You're welcome.

Operator, Operator

We'll take our next question from Todd Felte with RHK Capital.

Todd Felte, Analyst

Hey. Congratulations on a great quarter, first.

Gilbert Lee, CFO

Thanks, Todd.

Todd Felte, Analyst

Secondly, I noticed that the VF Corp. recently closed about 60% of their stores in China due to the coronavirus. Do you anticipate any effect on your order flow from them because of that?

Gilbert Lee, CFO

VF Corp. closed the stores in China. Our sales are primarily to the U.S. market. So the closing of the stores in China, I don't think it will affect us much. And also I have checked with our CEO and they don't believe that the issue that is going on in China will affect our operations at all.

Todd Felte, Analyst

Okay. That's great to hear. And also has there been any discussions on increasing the dividend or making any adjustments to the dividend as you improve your earnings and cash flow?

Gilbert Lee, CFO

Well that is definitely on the table. We have been talking about this but no decision has made so far yet but we are looking into that.

Todd Felte, Analyst

Okay. Thanks and congratulations again on a great quarter.

Gilbert Lee, CFO

Thank you, Todd.

Operator, Operator

We have a question coming through from John Morris with D.A. Davidson.

John Morris, Analyst

Yes, great. Thanks very much. Congratulations on a great quarter as well.

Gilbert Lee, CFO

Thank you.

John Morris, Analyst

If you could tell us again the – of the accounts that you mentioned besides VF Corp. Which of those were actually new this quarter? And just the progress of some of those new accounts if you can elaborate on that? But you mentioned a number of other names including New Balance et cetera. So we wanted to kind of get a little color there.

Gilbert Lee, CFO

New Balance – one of them was the New Balance. New Balance is new and then G-III and DICK'S Sporting Goods and Eddie Bauer was another one.

John Morris, Analyst

And are those new categories or classifications for you in terms of what you're actually producing? Or is it primarily continuing to be outerwear? Just wondering if there's any additional classifications that you're doing.

Gilbert Lee, CFO

No it's both primarily outerwear for existing customers but we also have some new categories such as polo shirts, T-shirts, sport – exercise pants and so on.

John Morris, Analyst

Great. Thank you.

Gilbert Lee, CFO

Sure. You’re welcome.

Operator, Operator

And we'll take our next question from David Schneider.