Earnings Call Transcript - JRSH Q1 2024

Roger Pondel, Investor Relations

Thank you, Holly, and good morning, everyone. Welcome to Jerash Holdings Fiscal 2024 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 in Jordan. Before I turn the call over to Sam, I want to remind our 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 Factors section of the company's most recent Form 10-K as filed with the Securities and Exchange Commission, copies of which are available on the SEC's website at www.sec.gov, 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?

Sam Choi, Chairman and CEO

Thank you, Roger, and hello, everyone. Our first quarter demonstrated resiliency in a challenging retail environment. Revenue was up slightly, although as expected, profitability was impacted principally by a product mix shift to lower-margin items. Although inflationary pressures and rising interest rates are still having an impact on consumer spending, retail market trends are showing signs of improvement. We are starting to receive new inquiries from global brands, including test runs and sample orders. On the new customer front, Timberland has grown to be a significant global brand for Jerash. Besides Timberland, we are now working on confirming the first batch of orders for Vans branded apparel, also a part of VF Corporation brands. Initial orders are scheduled to be received in mid-August with finished garments to be shipped in the third quarter. Our newly added European-based high-end apparel brand continues to progress well. Orders received thus far this fiscal year have significantly increased. We are optimistic that over time, these new global brands will grow in importance for Jerash. Additionally, on the positive front, initial marketing by our joint venture partner, Busana Apparel Group, to its global brand customers is being well received. Jerash has begun working on pricing and sample development for more than 10 additional brands. We anticipate meaningful orders for the joint venture to begin during the fourth quarter of the current fiscal year. One of our corporate initiatives has been to explore vertical integration, and I'm happy to report some good news on this front. We have been in discussion with NTX, one of the global leaders in sustainable textile dyeing solutions to form a joint venture that will provide Jerash with vertical integration manufacturing capability. Our plan is to bring about a new area of sustainable and innovative textile dyeing process in Jordan with our proprietary technology that, according to the presentation and information from NTX, could result in more than 80% water usage reduction and 50% carbon footprint reduction from traditional textile dyeing processes. The proposed joint venture is expected to benefit our customers through shortening fabric sourcing lead times and will further reduce our dependency on suppliers in Southeast and Eastern Asia. The joint venture further demonstrates Jerash's commitment to sustainability and social responsibility. I'll now turn the call over to Eric Tang to talk about our operations and also to Gilbert who will then discuss financial results.

Eric Tang, Operations Lead

Thank you, Sam. Hello, everyone. This was a busy first quarter. As we continue to plan for what we believe will be a positive and productive future in response to evolving market conditions, the spending patterns at the customer level are still geared toward lower-margin items. However, as Sam mentioned, retail trends seem to be improving, and some of our global brand customers are inquiring about additional styles for future orders. VF Corporation continues to be our major customer, and order volume from North Face is increasing. Moreover, another brand from VF Corporation, Timberland, increased significantly, and we will soon be producing for Vans, which is another VF brand. Production demand from G-III and Skechers have also been increasing. Our European-based high-end apparel brand is placing more orders as well, which further diversifies our customer and product mix. We are excited about starting production for our joint venture customer. Test runs are underway for an array of potential global brand customers, which in turn is fulfilling our corporate initiatives of expanding our customer base and diversifying our product mix. Jerash is in a good position to attract premium brands; our leadership position in Jordan offers unique, meaningful benefits to customers. Our plans for vertical integration in sustainable textile solutions will provide Jerash with a distinct competitive advantage. I will now turn the call over to Gilbert to discuss our financial results and the fiscal 2024 outlook. Gilbert, please.

Gilbert Kwong-Yiu Lee, CFO

Thank you, Eric. Revenue for our fiscal 2024 first quarter amounted to $34.7 million, up 3.9% from $33.4 million for the same period last year, reflecting an increase in shipments to some of the company's major U.S. customers. Gross profit was $5.6 million for the fiscal 2024 first quarter compared with $6.6 million in the same quarter last year. The gross margin was 16.0% compared with 19.8% a year ago, primarily reflecting a shift in product mix. Operating expenses for the fiscal 2024 first quarter increased slightly to $4.5 million from $4.3 million last year. Operating income totaled $1.1 million in the most recent first quarter versus $2.3 million a year ago. Total other expenses were $299,000 for the most recent first quarter compared with $28,000 in the same quarter last year. The increase was primarily due to higher interest expenses incurred from participating in supply chain financing programs of certain customers. Interest expenses were $389,000 in the fiscal '24 first quarter compared with $88,000 a year ago. The effective tax rate amounted to 38% for the fiscal 2024 first quarter compared with 25% last year. The increase primarily resulted from a higher corporate income tax rate in Jordan, along with a higher proportion of the operating losses of a Hong Kong subsidiary and our U.S. holding company. In the fiscal 2024 first quarter, net income was $495,000 or $0.04 per share compared with $1.7 million or $0.14 per share in the same period last year. Jerash's balance sheet and cash position remained strong with $20.1 million of cash and restricted cash and net working capital of $41.5 million as of June 30, 2023. Inventory was $23.8 million and accounts receivable was $6.4 million. Net cash provided by operating activities was approximately $25,000 for the quarter ended June 30 compared with net cash used in operating activities of $473,000 for the same period last year. Even though we are starting to see some indications of improvement in retail market trends, we are taking a conservative approach to guidance and projecting revenue for fiscal 2024 full year to be maintained at a similar level as in fiscal 2023, with gross margin goal for the full fiscal 2024 to be around 15% to 16%. Our outlook is subject to final product mix of shipments as well as order flow from the new customers introduced through our joint venture with Busana. Lastly, on August 4, 2023, our Board of Directors approved a quarterly dividend of $0.05 per share payable on August 23 to stockholders of record as of August 16. Our new joint venture development is off to a great start as we look forward to working with a new and diverse range of global customers and products. We're cautiously moving forward with plans to add additional capacity on our property to accommodate future growth.

Mark Argento, Analyst

Just had a few specific ones. One regarding the potential joint venture with the vertical integration partner. Can you talk a little bit more about what specifically that capability gives you, what competitive advantage? And how quickly if you guys decided to move forward, could you actually implement something like that?

Gilbert Kwong-Yiu Lee, CFO

Sam, do you want to take that question? Or do you want me to answer it?

Sam Choi, Chairman and CEO

Okay. Yes, maybe I should try to talk about the vertical integration joint venture. In fact, our joint partner NTX has been in the industry for almost 20 years, and they have been in separate joint ventures in China, Vietnam, Cambodia, and also Thailand. Their expertise is mainly in the dyeing, or waterless dyeing of fabric, which is quite innovative. The waterless dyeing process can save up to 80% or 90% of water usage compared with the traditional dyeing process. Additionally, carbon footprint emissions will be much lower. So it is an ESG project. For Jerash, we will establish a factory for the joint venture, a separate manufacturing mill in Jordan. We will mainly supply the fabric, particularly polyester fabric, to Jerash. We believe that with this vertical integration, the gross margin will be significantly enhanced because that will include the gross margin of the fabric. We also anticipate that EBITDA will also be significantly enhanced. We have just signed the MOU, and we will have a joint venture agreement very soon. By then, we will provide some indication on the financial impact on Jerash. Yes, that is the basic idea on this vertical integration joint venture.

Gilbert Kwong-Yiu Lee, CFO

Yes. Thank you, Sam. I would like to add that this is an ESG initiative, and everyone is very excited about this, including the Jordanian government. This is probably one of the first fabric mills that is going to be built and established in Jordan because, as we know, Jordan has very little supply of water. Historically, water has been a major issue for establishing fabric mills. The Jordanian government is going to be very supportive with incentives, including land support, tax abatement, and financing entities such as the World Bank are also very interested in this project and want to support us. I think this will not only provide us with better earnings and greater profitability growth in sales, but it will also project Jerash as a socially responsible company focused on sustainability. It involves new, innovative, and proven technology. Everyone is very excited about it, and we believe that with this joint venture and vertical setup, we will be able to attract more global customers and brands that are also focused on ESG.

Mark Argento, Analyst

That's very exciting. Just one quick follow-up. In terms of timing, how quickly if you move to a joint venture would you get going? Assuming you have to build out a facility, is this a calendar year for 2025, 2026? How quickly could you see something like this come online?

Gilbert Kwong-Yiu Lee, CFO

Oh, it is going to be very quick. Actually, we are already drafting the joint venture agreement as we speak. Both sides want to finalize the JV as soon as possible. We have also been in discussions with financing entities. It's just a matter of who we want to work with to secure the financing. NTX will contribute to their proportion of the joint venture, and Jerash will have the majority of the holding in the joint venture company, which will be consolidated within our company. We have already looked at sites, and the government is on board. Once we sign the joint venture, things will move quite quickly.

Sam Choi, Chairman and CEO

Tentatively, we expect the production of the separate mill to commence in June 2024, which means about 10 months later.

Mark Argento, Analyst

Aggressive timeline, but very exciting. Just one follow-up or a quick one regarding the operating business. Obviously, you just reported your Q4 back in May. So we got an update then. It seems like just the tone of the call suggests that things may be improving a little bit in terms of the end market. Can you characterize what's changed in the last couple of months, if anything?

Gilbert Kwong-Yiu Lee, CFO

Eric, maybe you can answer this regarding the market turning around or order flows coming from key customers and also potential new customers?

Eric Tang, Operations Lead

Yes. Hopefully, recently, we've had meetings with several brands who are major customers of Jerash. All of them noted that while the market is still weak, it is improving. They also mentioned that inventory levels have decreased to a certain extent, and they expect to place additional orders soon. We are forecasting that some of our major customers will be placing more orders with Jerash. According to our forecast from the first two customers, which are VF and New Balance, the order projections for the whole year are already slightly more than last year. They told us that it will continue to improve, possibly after another one or two quarters.

Gilbert Kwong-Yiu Lee, CFO

Yes. We are seeing some positive signs in the global retail market, and customers are starting to feel less cautious. However, they are still exercising caution because, if you recall, right after the pandemic, every customer over-ordered, leading to significant inventory issues last year. They do not want to make the same mistake again. Moreover, logistics challenges are behind us. They are not as worried about receiving sufficient products in their retail stores. While they are optimistic, they remain cautiously optimistic about the future. Therefore, we are seeing signs of improvement but will still take a cautious stance over the next 12 months. We expect that starting from the fourth quarter of our fiscal year, which is the first quarter of the calendar year 2024, we should also see some orders being produced for our joint venture with Busana.

Sam Choi, Chairman and CEO

In fact, based on sample developments for fiscal 2025, we believe that fiscal 2024 will be our toughest year. However, for fiscal 2025, based on customer inquiries, product development, and new customers—including the joint venture with Busana—we believe fiscal 2025 will be a good year compared to the past.

Matthew Hayes, Analyst

This is Matthew Hayes on for Michael Baker, D.A. Davidson. There was an article in the Wall Street Journal a couple of days ago citing the difficulty of apparel manufacturers retaining young workers in countries like China, India, and Vietnam, causing upward wage pressures on labor. I was wondering if you are seeing a similar development happen in Jordan. Do you still see the $4.2 million level as a quarterly run rate on the SG&A line?

Gilbert Kwong-Yiu Lee, CFO

Yes. Eric, what are you seeing in Jordan?

Eric Tang, Operations Lead

Yes. I agree with what you said because a large portion of our operating expenses falls into the salaries of both migrant and local workers, as we currently have a workforce of 5,200. The basic salary, as announced by the government, will remain the same and will not increase until another fiscal year. Therefore, I believe our operating expenses will remain stable moving forward. I am confident that our operating expenses will not change significantly compared to the previous fiscal year.

Matthew Hayes, Analyst

Okay. That's helpful. My other question pertains to your tax rate. It came in at 38% this quarter, and I believe I thought that it had to do with the loss of one of your Hong Kong subsidiaries. Can you unpack that for us to help us think about the future tax rate? Is 38% going to be the new normal or is this a one-time occurrence? Any insights would be appreciated.

Gilbert Kwong-Yiu Lee, CFO

To explain simply, we pay most of our taxes to the Jordanian government because our operations are in Jordan, and our income primarily comes from there. Our Hong Kong subsidiary, Treasure Success, handles sales, marketing, administrative tasks, shipping, and auditing. While we do have some income related to sample development in the subsidiary, we do not incur significant taxes but have considerable overhead and losses in Hong Kong, as well as in the U.S. headquarters. We cannot offset the taxes we pay in Jordan against our losses in Hong Kong and the U.S. As the proportion of income compares unfavorably with the losses, the effective tax rate increases. As we aim for consolidated net income or income before tax to return to the normal level, which means profitability in Jordan increases, the average effective tax rate for the consolidated enterprise will decrease. We are also exploring strategies to shift some income to our subsidiaries, so we can offset some of the losses. We plan to collaborate with our tax consultants on ways to lower the effective tax rate.

Matthew Hayes, Analyst

Do you anticipate making more money in Jordan in proportion to the corporate losses incurred in Hong Kong and the U.S. over the next three to four quarters? How do you see that proportion evolving?

Gilbert Kwong-Yiu Lee, CFO

In fiscal 2024, we won't see much improvement in this situation. However, we will seek ways to reduce operating expenses while trying to increase revenue and profits in Jordan, and controlling expenses in other subsidiaries like the U.S. and Hong Kong. Thus, it may decline slightly, but as we continue to increase revenue, the ratio of income and losses will still be unbalanced.

Sam Choi, Chairman and CEO

Thank you, everyone, for joining us today and for your continued support of Jerash. We look forward to speaking with you next quarter and reporting on our business progress. Thank you.

Gilbert Kwong-Yiu Lee, CFO

Thank you. Bye-bye.

Operator, Operator

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