Earnings Call Transcript - JRSH Q1 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to your Jerash Fiscal First Quarter 2020 Results Call. At this time, it's my pleasure to turn the floor over to Matt Kreps. Sir, the floor is yours.

Matthew Kreps, Head of U.S. Operations

Thank you. Good morning, everyone. Welcome to the Jerash Holdings Fiscal First Quarter 2020 Results Call. With me today are Richard Shaw, Chief Financial Officer; and Karl Brenza, Head of U.S. Operations. Today's call is being recorded and will be available for playback. Before we begin, a quick reminder about forward-looking statements made during the course of this call. Statements made by Jerash management that are not historical facts are considered to be forward-looking statements subject to risks and uncertainties. These forward-looking statements are subject to factors that could cause actual results to differ materially from those reflected in the statements. And with that, I will now turn the call over to Rich Shaw, CFO of Jerash Holdings. Please go ahead, Rich.

Richard Shaw, CFO

Thank you, Matt. Hello, and thank you for joining us today. I am pleased to join all of you today to discuss our record first quarter revenue results and continued progress on key growth initiatives. Let me start with revenue, which increased 23% to a first quarter record $22.5 million in sales compared with $18.4 million in the prior year. Additionally, you may recall that last year, our first half growth was gated due to operating at maximum factory capacity, whereas this year, we are benefiting from the capacity addition of our new Paramount facility. This enables us to grow more aggressively in the first half, a much-needed development as customers continue to ask for more. First quarter gross profit declined to 20% from 25.4% in the prior year first quarter. The difference in gross margin reflects favorable customer and pricing dynamics in the prior year that boosted gross margin, whereas this year's first quarter was reduced by higher average costs associated with the startup process for the newly acquired Paramount facilities. We estimate the impact of the ramping process for this new facility was in excess of 100 basis points on gross margin but that our gross margin metrics will improve as the Paramount facility production scales through the next few quarters. This improvement will be driven by both higher piece volumes allocated to the Paramount facility and by our new employees becoming more experienced and efficient with Jerash's manufacturing process. In spite of the downward pressure on gross margins, we are very pleased with our overall progress as top line sales are growing, and we expect to see further improvement throughout the remainder of the year in order to meet our full year revenue outlook. SG&A expense in the first quarter was $2.6 million, down slightly from the fourth quarter. Operating income in the first quarter was $1.9 million compared with an operating loss of $525,000 in the prior year. Taking all this into account, GAAP net income was $0.14 per diluted share for the quarter compared with a GAAP net loss of $0.08 per share in the prior year first quarter. Turning to the balance sheet. We remain well capitalized to fund our growth plans and increased working capital needs as well as to pay our expected quarterly dividends initiated last year. Cash and restricted cash at June 30 stood at $16.9 million versus $27.8 million at March 31 with the difference reflecting shifts in working capital allocation. We also saw increased supplier advances and lower accounts payable. As we progress through the first half of fiscal 2020, we anticipate cash collection will rapidly convert working capital back to cash and provide liquidity to fund further business expansion if opportunities present. We also have untapped lines of credit available for up to an aggregate of $23 million. Jerash has reported strong sales growth and profitability to start fiscal 2020, and we look forward to further expected growth in the year ahead as we maximize production at our existing facilities and ramp up our fourth factory. We continue to anticipate sales in excess of $100 million for the full year fiscal 2020, inclusive of gains in both the first half and second half production seasons. With that, I will turn the call to Karl for a discussion of our growth strategies.

Karl Brenza, Head of U.S. Operations

Great. Thanks, Rich. So clearly, the first quarter is a good indication that our revenue growth is ramping up and provides an early indication of our expanding capacity as we continue to scale the Paramount facility through the rest of this calendar year. Operationally, we are running at full capacity out of three main facilities and look forward to further scaling our production lines to continue accepting new orders. Paramount is expected to add 1.5 million or more pieces in annual capacity, and we believe there's an opportunity to scale the facility well above this initial level as we grow our workforce and increase the experience level of our new employees. We believe the capacity in place right now will facilitate our revenue growth targeting to break the $100 million mark in fiscal 2020 versus our record of $85 million in revenue last year. We also anticipate that the satellite sewing facility being built in cooperation with the government of Jordan will open in October. We also recently announced an agreement to acquire additional land near our central facilities in Oman to build new dormitory housing as we continue to grow our capacity. Overall, this is an exciting, transformative time for Jerash. We look forward to reporting continued progress on these expansion efforts. In closing our prepared remarks, I want to reiterate that we had a strong first quarter in both revenue and GAAP profitability, and our focus going forward remains on growth in the top line, growth in the bottom line, growth in our customer base, growth in our production efficiency, and growth in our total capacity. We look forward to reporting these efforts throughout the upcoming year. We now welcome any questions that you have.

Operator, Operator

We'll take our first question from Michael Kawamoto with D.A. Davidson.

Michael Kawamoto, Analyst

Just first off, I understand you said 100 basis point headwind from Jerash 4, but what did margins look like in your legacy facilities? Were they on plan and similar to last year? Or was there some pressure there as well?

Richard Shaw, CFO

Great question, Michael. The legacy factories were on balance with last year. So no change. It was really Paramount that put the drag on this.

Michael Kawamoto, Analyst

Okay. And then should we begin to see year-over-year comparisons start to improve in Q2?

Richard Shaw, CFO

I'd like to say yes, Michael, but I don't know that it's going to happen that fast. I think we'll see improvement versus this quarter, but I don't know that we're going to get back to the levels we saw in the second quarter last year this quickly.

Brenza Karl, Head of U.S. Operations

Yes. I mean I'll add that, Michael, we do expect gross profit to improve on a sequential basis versus Q1. Will we get back to where we were? It may take a bit more time, but we do expect to see improvement, and we anticipate a nice, strong quarter in Q2.

Michael Kawamoto, Analyst

Yes. That's helpful. And then I guess looking at your K, it looks like VF grew faster than the overall company last year. Just curious how you're thinking about customer diversification from here and where you see them shaking out as a percentage of revenue for FY '20.

Richard Shaw, CFO

Yes. We are bringing on new customers, including Eddie Bauer, G3, and we continue to focus on customer diversification. It's tough to move the needle on bringing that 75% down but we're making progress.

Brenza Karl, Head of U.S. Operations

Yes. Overall, we are adding new customers like Eddie Bauer and Nike that we expect will lead to larger orders as the year progresses, especially as we have more capacity from Paramount.

Michael Kawamoto, Analyst

That's helpful. Is there any average timeline from tests to full orders?

Richard Shaw, CFO

It varies but can be as quickly as a couple of months when we accommodate a customer, but more traditionally, it can take 6 to 12 months.

Brenza Karl, Head of U.S. Operations

Yes, and it can certainly take longer, especially with larger customers. Does that sound right, Rich?

Richard Shaw, CFO

Yes, that's a perfect answer.

Operator, Operator

Our next question comes from Dave King with ROTH Capital Partners.

David King, Analyst

So I guess first off, did you say you expect gross profit to improve sequentially in Q2 or gross margin, or both?

Richard Shaw, CFO

Both.

Brenza Karl, Head of U.S. Operations

Yes, both.

David King, Analyst

Okay. And in terms of the 100 basis point impact, was that all inefficiencies, or were there some outsized start-up costs as well?

Richard Shaw, CFO

It's twofold. The 100 basis points refers to overhead and labor from the new facility startup, where we didn't produce enough product to absorb those costs.

Brenza Karl, Head of U.S. Operations

Yes, training 500 new employees is a big undertaking, but we are making progress.

David King, Analyst

Okay. And in terms of what was going on at the legacy facilities, any outsized test orders or rush orders in the quarter?

Richard Shaw, CFO

In the first quarter, the legacy facilities hummed along and drove the margins as we expected. The margin drag came from Paramount.

Brenza Karl, Head of U.S. Operations

We did have some test orders but they didn't impact margins significantly.

David King, Analyst

Okay. In terms of SG&A, can you break out the increase for the quarter?

Richard Shaw, CFO

The increase in SG&A is a couple of hundred thousand dollars for onboarding and recruitment, and I expect it will stabilize around $2.5 million per quarter for the balance of the year.

Brenza Karl, Head of U.S. Operations

Yes. The SG&A has grown but is now stabilized, so we expect this level going forward.

David King, Analyst

How many people do you expect to have in your Hong Kong office?

Brenza Karl, Head of U.S. Operations

There are roughly 20 to 25 people in the Hong Kong office. The acquisition of the Hong Kong office is under review by a Special Committee.

Operator, Operator

Our next question comes from Mark Argento with Lake Street Capital Markets.

Mark Argento, Analyst

Just wanted to discuss your ability to add more capacity. It seems like you have plenty of business and should be a bit more aggressive in expanding capacity.

Richard Shaw, CFO

Agreed, we can't add capacity fast enough. We are assessing options for organic expansion and looking at M&A opportunities.

Brenza Karl, Head of U.S. Operations

We are looking at local factories to expand quickly and also consider building new facilities. We want to increase capacity this year.

Mark Argento, Analyst

So the margin hit was primarily due to the scaling at the Paramount facility. Could you elaborate on other factors affecting margins?

Richard Shaw, CFO

It was more about order mix rather than product mix. The North Face jackets were similar year-over-year, but the order mix affected margins more than anything else.

Brenza Karl, Head of U.S. Operations

Indeed, we are confident margins will improve as Paramount becomes more efficient.

Operator, Operator

And there appear to be no further questions at this time, so I'll turn it back over to Karl for any closing remarks.

Brenza Karl, Head of U.S. Operations

Thank you for participating in today's call. We are excited about the first quarter revenue record and our initial factory expansion. We look forward to continuing to execute on our capacity, margin, and profitability goals to grow shareholder value. Growing shareholder value is our foremost focus, and we will conduct multiple outreach events. Thank you for your participation and have a great rest of your day.

Operator, Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.