Earnings Call Transcript - JRSH Q2 2024

Roger Pondel, Investor Relations

Thanks so much, operator, and good morning again, everyone. Welcome to Jerash Holdings Fiscal '24 Second 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's my pleasure to turn this call over to Sam Choi. Sam?

Sam Choi, CEO

Thank you, Roger, and hello, everyone. Our second quarter performance again demonstrated Jerash's ability to attract new customers and our resiliency in the challenging apparel environment. Retail market conditions for our group of brands in the U.S. and Europe have been slow to recover, which in return is impacting our business compared with the prior year. Customers' orders have generally shifted towards lower-priced items, which carry lower margins. Nevertheless, our revenue and gross margin remain significantly stable on a sequential basis. During the quarter, good progress was made with our Busana joint venture partner. Thus far, five joint venture premium brand customers have committed to placing orders. Marketing to additional prospective customers is ongoing and feedback is encouraging. Current projections from the joint venture for the next 12 months call for about $8 million to $9 million in new orders, starting in a meaningful way in our fiscal fourth quarter. On the Jerash customer front, Timberland has significantly increased its order and has become the second largest brand for Jerash. We are also producing our first trial orders for Vans apparel, another VF Corp brand, and are confident that order flow from Vans will increase significantly next fiscal year. Additionally, business from our first European-based high-end apparel brand continues to expand, and we are projecting a doubling of orders in the second half of fiscal 2024. Furthermore, we are excited about the opportunity created by our recently established joint venture with Newtech Textile, a textile innovation and solution company. This venture is expected to enable Jerash to leverage the latest technology to offer customers a new array of sustainable and innovative textile products. The proprietary textile dyeing process technology is expected to reduce water usage by approximately 90%, energy consumption by approximately 65%, and carbon footprint by over 50% in comparison with traditional processes. To achieve this, we plan to build a state-of-the-art fabric facility in Jordan, with construction set to begin in 2024, positioning Jerash as a leader in ESG textile manufacturing, consistent with our longstanding commitment to sustainability and responsible growth. Lastly, I want to give an update regarding the Middle East, which is on everyone's mind. Since the turmoil began, we have been closely monitoring the situation and keeping our customers informed. Early production is ongoing as usual. There have been no changes with customers' orders or commitments, and both ports Jerash uses for import and export are functioning normally. I will now turn the call over to Eric to talk about our operations, and Gilbert will then discuss financial results.

Eric Tang, Operations Lead

Thank you, Sam. Hello, everyone. Activities in Jordan continue to progress at a steady pace. We are excited about both of our joint ventures. Our Busana partnership is well underway and bearing fruit. Marketing efforts continue to accelerate, and we believe the partnership is forging and well-positioned for growth ahead. Now we are very busy forming plans with our new textile joint venture partner. At this juncture, we are actively identifying potential sites in the nearby industrial zone on which to build our new textile complex. Jerash is conferring with the Jordanian government for possible support and collaboration on this project, which will foster new employment in high-tech-related jobs. The spending patterns at the consumer level are still geared toward lower-margin items, which has impacted order mix as well as volume from our customers. However, we are maintaining and growing our strong relationships with existing customers and moving forward with Jerash's initiatives to diversify and add to our customer base. Jerash is a trusted manufacturing partner for VF Corp, which owns multiple global brands. We have been producing apparel for its North Face brand for more than 8 years. Starting last fiscal year, we began producing apparel for Timberland, another VF brand, and the order volume has increased significantly, becoming our second largest brand now. We look forward to working closely with other VF brands such as Vans. Our first European-based high-end apparel brand is also progressing very well, and order volume is anticipated to double for the second half of fiscal 2024. Additionally, we are receiving inquiries from other high-profile global brands, both from the U.S. and Europe with new garment sampling and costing underway. To amplify Sam's comment regarding the Middle East situation, we use both the Aqaba and Haifa ports for import and export. Thankfully, so far, both ports are operating as usual. That said, in the event of any potential impact on the ports, we have a contingency plan in place that has been approved by our major customers for temporarily relocating production if and as necessary to alternate regions. Our leadership position in Jordan provides unique and tangible benefits to customers around the globe. The initiatives and plans we have in place, including vertical integration, sustainable textile solutions, and focus on the environment position Jerash with a distinct competitive advantage, making us an attractive partner for premium apparel brands. I will now turn the call over to Gilbert to discuss our financial results and the fiscal 2024 outlook.

Gilbert Kwong-Yiu Lee, CFO

Thank you, Eric. Revenue for our fiscal 2024 second quarter amounted to $33.4 million, compared with $37.8 million for the same period last year. The decrease was primarily due to fewer shipments being delivered to some of the major customers in the U.S., partially offset by shipments to other new geographical locations, including Hong Kong and Germany. Gross profit was $5.4 million for the fiscal 2024 second quarter compared with $6.9 million in the same quarter last year. The gross margin was 16.1%, compared with 18.3% a year ago, principally driven by a shift in customer mix with lower profit margin orders. Operating expenses for the fiscal 2024 second quarter increased slightly to $4.5 million from $4.3 million last year. Operating income totaled $888,000 in the recent second quarter versus $2.6 million in the same period last year. Total other expenses were $167,000 in the fiscal year 2024 second quarter compared with $106,000 in the same quarter last year. The increase was primarily due to higher interest expenses arising from participating in supply chain financing programs of certain customers, partially offset by income from fixed deposits in banks. Net income was $369,000 or $0.03 per share in the fiscal year 2024 second quarter compared with $1.8 million or $0.14 per diluted share in the same period last year. Jerash's balance sheet and cash position remains strong, with $22.8 million of cash and restricted cash and net working capital of $40.5 million as of September 30, 2023. Inventory was $18.7 million and accounts receivable was $5.2 million. Net cash provided by operating activities was approximately $8.2 million for the six months ended September 30, 2023, compared with $9.6 million for the same period last year. As Sam mentioned earlier, retail market conditions have not yet fully recovered. Therefore, we are taking a conservative approach to guide our revenue for fiscal 2024 to be down about 3% to 5% from last fiscal year. Our gross margin goal for the current full fiscal year is expected to be approximately 15% to 16%. Our outlook is subject to the final product mix of shipments as well as order flow from new customers through our joint venture with Busana. Lastly, on November 3, 2023, our Board of Directors approved a quarterly dividend of $0.05 per share, payable on November 28 to stockholders of record as of November 14.

Michael Baker, Analyst

Just I'm going to ask two questions. First, maybe it's obvious, but what are you hearing from your big customers in the U.S. as it relates to consumer spending, holiday outlook, those kinds of things? Is that what is really causing the results to come in a little bit less than expected? Is it weakness in U.S. consumer spending? Or is there something else to consider?

Gilbert Kwong-Yiu Lee, CFO

Well, thanks, Mike. Yes, I think it is mainly because of the slow recovery of the consumer market that the spending is still not back to the same level as before. So our existing customers' orders are shifting more toward lower-margin products instead of the high-dollar value, high-margin products such as the North Face jackets. Eric, do you have anything to add to this? You've been talking to the customers more.

Eric Tang, Operations Lead

Yes, I totally agree with what you have mentioned. I talk to many brands. You are right because the spending power in the U.S. still has not recovered much and is still very weak. People are trying not to spend too much on luxury brands or products like our North Face jackets or other kinds of high-value jackets. So all the pricing to us is slightly less than before. But we have a very big demand for low-cost T-shirts and low-cost jackets from some other brands, which are also very popular in the U.S. So that's why we can still occupy all our current capacity and run on a full-time basis. This is the situation.

Michael Baker, Analyst

Okay. That makes sense. I have another question about the new joint venture for the textile situation. Can you talk about the construction timeline and costs? I assume you meant calendar 2024 for the construction start. What are your expected funding sources for the capital expenditures related to that joint venture?

Gilbert Kwong-Yiu Lee, CFO

Well, the joint venture is a 51%-49% joint venture, with Jerash owning 51%. Therefore, any funding will be in that proportion to the joint venture company. Yes, you are right, 2024 refers to the calendar year. I think we have almost finalized the site for where we're going to build. We have been discussing funding opportunities with a number of financing parties. At this point, we cannot disclose who they are yet because nothing has been finalized, but there will be financing parties from China, Asia, Hong Kong, and possibly from the Middle East. Part of the funding could be financed from our own operating cash flow, but that would definitely not be enough because, if I'm correct, I think the overall projection for the CapEx is about $20 million to $30 million. Am I correct, Eric?

Eric Tang, Operations Lead

Yes, you are absolutely correct. It's between $25 million to $30 million. They are very interested; the financial institutions are very interested in this project. We are discussing with them. It's not appropriate to disclose the identity of each one, but all of them are very positive about the funding of this project.

Sam Choi, CEO

And I would say from China's viewpoint, this is a One Belt One Road project. So China will definitely support this project financially. This will not only be a One Belt One Road project but also a One Belt One Road ESG project. Therefore, we will attract some interested parties for this project.

Gilbert Kwong-Yiu Lee, CFO

Absolutely. Because of the ESG aspect, both China and the Middle East governments are very interested in supporting us.

Mark Argento, Analyst

Just a couple of quick questions. In terms of Busana, you said you anticipate seeing revenue from that partnership in Q4. You mentioned $8 million to $9 million for the next 12 months. Could you help us think through what this means for Q4? Is it a couple of million in Q4 and getting bigger from there? Is it $8 million to $9 million in Q4? A little clarity around that would be helpful.

Gilbert Kwong-Yiu Lee, CFO

Eric, do you want to take this one?

Sam Choi, CEO

Yes, perhaps I can answer this one. According to the current projection, I think a few million in the fourth quarter of fiscal 2024 will be in the orders from Busana. After that, our order volume will grow with the solicitation of orders from at least five customers derived from Busana. I think that will be very promising.

Mark Argento, Analyst

So to clarify, that $8 million to $9 million in revenue, is that for Q4 or is that for the next 12 months?

Gilbert Kwong-Yiu Lee, CFO

That was the projection for the next 12 months, starting from Q4 of fiscal 2024. In essence, we are projecting about $8 million to $9 million in additional incremental revenues from the Busana joint venture.

Mark Argento, Analyst

Okay. So $8 million to $9 million in incremental revenue in Calendar '24.

Gilbert Kwong-Yiu Lee, CFO

Right.

Mark Argento, Analyst

Got it. All right. That's helpful. And then more of a housekeeping question for you. Gilbert, I noticed the tax rate was up a little bit. I know it was up in Q1 for the first time and then in the third quarter; it was, I think, around 40%. What's going on with the tax rate there?

Gilbert Kwong-Yiu Lee, CFO

Most of our income is generated from Jordan, where we report the majority of our earnings. Our U.S. and Hong Kong operations primarily incur expenses. These expenses have been relatively stable but are slightly increasing due to growth. However, our income has significantly declined. As a result, with the consolidated earnings decreasing, the tax proportion in relation to operating income is higher. Once our income starts to increase again, the effective tax rate will decrease.

Mark Argento, Analyst

All right. Maybe I'll follow up with you offline and you can walk me through that a little bit more. And just lastly for me on capacity. With Busana coming online, are you building incremental capacity to support the Busana joint venture? Or are you using some of your existing capacity at this point? Could you discuss your order book right now?

Gilbert Kwong-Yiu Lee, CFO

I think we are pretty much fully booked through the end of the fiscal year. Depending on the order flow, there may be a couple of hundred thousand pieces in one of those months that still have capacity. But we are also looking at ways to ensure that we can fully book our capacity. If we need additional capacity, we could outsource some of the production, and this has been approved by our customers. With Busana business coming in, last year, we expanded our internal capacity internally. We believe we will be able to handle at least for the next fiscal year the increase in business. Overall, I think it will be a reversal of this year's situation. When Busana business comes in, it will also involve premium brands for department stores in the U.S. These will be products with higher ASP and higher gross margin. This year, we were able to fill some of the reduced orders from higher-end products or higher-end brands with lower gross margin products, but next year when Busana business comes in, we will be able to take the higher-margin orders and forgo some of the low-margin orders. We have already informed some of the new customers that next year we may not be able to handle all their orders. So if they want to continue doing business with us, they might have to increase the price or improve the margin. Exactly, that has been our strategy. I mean, if you compare Jerash with other manufacturing facilities and other companies in Jordan, their business is down almost 50%, some are down 60%, 70%. They have significant layoffs of their workers. Jerash, we are keeping a very conservative approach. We would rather fill up our capacity than let go of our workers because it will be very difficult to find and backfill our capacity when the business turns around. So our strategy has been to take on lower-margin and lower-profit orders rather than shutting down the factory or laying off our workers because we know the business will return very soon.

Sam Choi, CEO

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

Eric Tang, Operations Lead

Thank you.

Gilbert Kwong-Yiu Lee, CFO

Thank you.

Operator, Operator

Thank you very much, everybody. That does conclude today's conference. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.