Earnings Call Transcript - JRSH Q4 2023

Operator, Operator

Greeting. Welcome to the Jerash Holdings Fiscal 2023 Fourth Quarter and Full Year Financial Results Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Roger Pondel, Investor Relations for Jerash Holdings.

Roger Pondel, Investor Relations

Thank you, Holly, and good morning, everyone. Welcome to Jerash Holdings Fiscal 2023 Fourth Quarter and Year-End 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 CEO, Sam Choi; Chief Financial Officer, Gilbert Lee; and Eric Tang, who leads the company's operations in Jordan and is calling in from Indonesia. 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 and Form 10-Q as filed with the Securities and Exchange Commission and 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 of course, as required by law. And with that, it is my pleasure to turn the call over to Sam Choi. Sam?

Sam Choi, CEO

Thank you, Roger, and hello, everyone. The retail sector is facing challenging times following the pandemic. Persistently rising interest rates, the inflationary impact, and other factors are impacting consumer spending. Apparel brands have not been immune to today's environment, which translates to smaller orders and a shift in the product mix toward lower margin growth that has affected our fourth-quarter results. Fourth quarter revenue was negatively impacted by approximately $3 million of orders that were deferred by customers to the current first fiscal quarter. Nevertheless, during this period, we are continuing to focus on our initiatives to diversify Jerash's customer base, both through our own marketing activities and through our recently signed joint venture with Busana Apparel Group. In March, we announced the Busana agreement to form a joint venture, which is progressing well in its formative stages. We have received positive feedback from Busana's customers with expressions of keen interest in geographically diversifying production from Asia to Jordan to take advantage of agreements with the U.S. and other countries. In fact, discussions have already begun for costing and pricing with three potential joint venture customers, and we anticipate initial orders for this joint venture to start as early as the second half of the current fiscal year. Also, on the positive front, our fiscal 2023 initiative of diversifying Jerash's customer base is paying off, having gained an additional new group of brand customers. We are making good progress in ramping up production for Timberland. As we move into our new fiscal year, we are continuing to produce high-margin products for our new European-based apparel brand. I will now turn the call over to Eric Tang to talk about our operations and then to Gilbert, who will discuss the financial results.

Eric Tang, Operations Lead

Thank you, Sam. Hello, everyone. The fiscal year and final quarter were both busy and challenging as we endured and responded to changing market conditions while also planning for what we believe will be a productive future. Orders are still coming from our large global brand customers, but the product mix has changed from higher margin growth such as jackets to lower-margin items. In part, the mix shift reflects the inflationary environment and changes in consumer spending patterns. We were able to keep our facility running at full capacity by adding supplementary production for other customers, many of which are local. As I mentioned in my last call, we are maintaining active communication and outstanding relationships with all our customers who appreciate Jerash's responsive service, and we are working closely with them to anticipate their needs going forward. In fact, production for our newly global brand customer, Timberland, part of the PL operation brand, has now grown to be meaningful. Production demand from another long-term customer, G-III, has also increased, which further diversifies our customer and product mix. Longer term, as external market conditions improve, we believe we will be in an excellent position for growth. In that regard, we are cautiously moving forward with plans to develop land we currently own to add more capacity, in part to accommodate anticipated new business from our Busana joint venture. Positively, we continue to receive inquiries from other premium brands as global trends remain focused on diversifying supply chains away from Asia, especially China. We are actively aware that in addition to adding new customers and expanding our existing ones, it is critical to maintain tight cost control. We are also continuing our program of identifying new and cost-effective sourcing of fiber and other materials from new partners in the Middle East and North Africa, which will benefit Jerash and our customers. I will now turn the call over to Gilbert to discuss our financial results and fiscal 2024 outlook. Gilbert, please.

Gilbert Kwong-Yiu Lee, CFO

Thank you, Eric. Revenue for our fiscal 2023 fourth quarter amounted to $23.8 million, which was down about 23% from $30.9 million for the same period last year. The decrease primarily reflected lower sales from two major U.S. customers based on the changed economic environment and brisk consumer spending versus last year. Revenue was also negatively impacted by shipments of approximately $3 million of contracted orders being deferred by customers to the current first fiscal quarter. Gross profit was $2.5 million in the fiscal 2023 fourth quarter compared with $4.7 million in the same period last year. The gross margin was 10.3% compared with 15.1% a year ago, driven principally by a lower proportion of U.S. orders and the broader product mix shift. Operating expenses for the fiscal 2023 fourth quarter totaled $4.3 million, slightly decreased from last year, primarily because of smaller stock-based compensation expenses. SG&A expenses were slightly lower due to the decline in sales and were partially offset by increased travel costs for migrant workers. Operating loss for the most recent fourth quarter was $1.8 million compared with operating income of $126,000 for the same period last year. Total other expenses were $86,000 in the fiscal 2023 fourth quarter compared with total other income of $148,000 in the last year's fourth quarter, and interest expenses were $268,000 versus $63,000 a year ago. Jerash sustained a net loss of $2 million or $0.16 per share for the fiscal 2023 fourth quarter compared with a net loss of $131,000 or $0.01 per share in the same period last year. The company's balance sheet and cash position remains strong with $19.4 million of cash and net working capital of $42.8 million as of March 31, 2023. Inventory at fiscal 2023 year-end was $32.7 million and we had about $2.2 million in accounts receivable. Net cash provided by operating activities was $10.8 million for the fiscal year-end March 31, 2023, compared with $9 million in the prior year. Based on the volatility of the external environment, we are taking a conservative approach to guidance and are projecting revenue for fiscal 2024 first quarter and the full year to be maintained at a similar level as in fiscal 2023, with a gross margin goal for the full fiscal 2024 to be around 15% to 16%. Our outlook is subject to the final product mix of shipments as well as order flow from the new customers introduced through our joint venture with Busana. As of the end of our fiscal fourth quarter, 239,500 shares had been repurchased at market rates at a total price of $1.2 million excluding broker commissions under the share repurchase program authorized by the Board in June 2022. The program expired on March 31, 2023. Lastly, on May 23, 2023, our Board of Directors approved a quarterly dividend of $0.05 per share payable on June 9, 2023, to stockholders of record as of June 2, 2023. Despite the current retail environment, we are still receiving inquiries from new customers, which we are hopeful will convert into new business, and we look forward to an influx of new customers through our joint venture. At the same time, as Eric mentioned, we are closely monitoring and balancing our costs with long-term growth planning for the near future.

Operator, Operator

Your first question for today is coming from Mike Baker at D.A. Davidson.

Michael Baker, Analyst

Okay. A couple of questions. First, I'm just curious about why the deferral of $3 million? I mean, it doesn't sound like that's an economic issue if they're taking the product, so why did your customer decide to push it out 3 months?

Gilbert Kwong-Yiu Lee, CFO

Well, I believe it was just a timing issue. A lot of times at the end of the month or at the end of the quarter, things can change. Even though the orders may be scheduled to ship out by the end of the month, sometimes due to the freight forwarders' scheduling, some containers may not make the cutoff. So it happens often, and we just need to do a better job in forecasting.

Eric Tang, Operations Lead

Because my connection is not very good as I'm in Indonesia.

Gilbert Kwong-Yiu Lee, CFO

Okay. So the question was about why there was a $3 million deferral of shipment at the end of last quarter. And I said it's mostly due to timing and the freight forwarder's scheduling of the shipments.

Eric Tang, Operations Lead

Yes. Actually, I would like to explain because when we were doing our forecast, even as late as February, we still included one order of 400,000 pieces to Costco. This will generate a couple of million in revenue by the end of the last quarter. But at the last moment, during the first week of the last quarter, we were informed by Costco that their inventory level is still high, and they would like to defer this shipment to the next quarter or two months later. That's why we are keeping this ready garment in our warehouse for Costco. This is the primary reason.

Gilbert Kwong-Yiu Lee, CFO

Thanks, Eric.

Michael Baker, Analyst

That makes sense. If I could ask another couple of bigger picture questions. One, it sounds like there's a lot of promising things going on in terms of new customers and what you already have signed up that are ramping or potentially new customers that are showing interest, plus what's going on with the joint venture. So all that sounds good, yet the revenues are declining. So I guess, can you just reconcile that? Is that just a timing issue? Can you sort of square that with the idea that you have all this new demand, yet it's not translating into sales? When can we expect that potential to show up in actual revenues on the P&L?

Gilbert Kwong-Yiu Lee, CFO

Well, Mike, I think very early on this fiscal year, we mentioned that this year is going to be tough. The global economy has been affected by inflation and the fear of recession. Now, we don't know whether we are actually in a recession, but there's a general fear. So people have stopped purchasing, especially high-priced products. They are still buying, but they are focusing more on less expensive products. This trend translates into our business as well. We knew this year would be difficult. However, we also knew that we are onboarding quite a few new customers, such as HUGO BOSS and Timberland. Timberland was already on board, but we're seeing tremendous growth with them. The volumes are reaching millions of pieces. G-III has also doubled their volume with us. We see a lot of positive developments. However, many garment manufacturers in Jordan or elsewhere, like Southeast Asia, are experiencing declines of 30% to 40% in volume. We have always maintained the strategy that more business will come; the growth is coming, especially with our joint venture with Busana. However, onboarding new customers takes time, at least a year based on our experience with Timberland and HUGO BOSS. It requires getting sample approval, cost checks, factory certifications, and all that. A lot of good things are happening, but we know that it will take at least 6 months to a year to realize a real impact. We do not want to reduce our capacity. On the contrary, we are looking to expand our capacity, even spending several million in fiscal 2024 to expand our facilities to allow for additional lines. We want to maintain our workforce because we know it will be difficult to bring them back once the business returns. Thus, we are looking at 2024 with the knowledge that we can maintain sales at similar levels, but growth won't come until later in the year as we get the business from both the Busana joint venture and the new customers we are onboarding. Does that make sense?

Eric Tang, Operations Lead

I would like to add some information to explain our business outlook for 2024. Gilbert's comments are absolutely accurate. In 2024, we have been doing a lot of business with The North Face, but they are also reducing some of their orders due to changing consumer spending patterns in the U.S. Therefore, we need to maintain capacity because Jerash is a good factory, and we don't want to lose that capacity for future growth. Although The North Face business has been reduced, we expect Timberland business to increase significantly. In the 2023 fiscal year, we had about 600,000 pieces. Timberland has confirmed orders for 2024 totaling over 1.3 million, which is 2 to 3 times more than before. Additionally, one reputable German brand has tripled its business with Jerash for high-end jackets. The volume could increase from 2.5 million to 7 million or 8 million. Our joint venture with Busana Group is also promising. I am confident we will secure good business with Busana. Currently, there are over 11 brands interested in giving business to Jerash, and we are actively doing costing exercises for them. Some customers are already discussing final prices, with expected orders possibly beginning in the first quarter.

Michael Baker, Analyst

Thank you. That's great insight on trends. With all that, one more question. Where are you with capacity utilization? I think you said you're still running at full capacity. Do you need to build more capacity? Do you need to invest capital expenditures to build the capacity for all that demand that's coming?

Eric Tang, Operations Lead

Actually, we don't need to increase our capital expenditures. This is in line with Busana's assessment. About 40% of Jerash's orders in 2023, as mentioned in the earnings script, are being done through subcontracting, many of which are local. We're earning some revenue to break even. If we fulfill 40% of capacity through contracts with Busana, we expect significant business. Thus, they see our current utilization as not needing much additional capital expenditures. However, we are already preparing and planning to expand our capacity. This past fiscal year, we have expanded one building to allow for more production lines. So if we find our capacity needs to grow, we will be ready. We also have another piece of land that we are preparing to build on as soon as business from Busana comes in, which may take a year or more. When that time comes, we will need additional capital to finance it, and we are already exploring bank financing options related to Busana, who will likely contribute as per the joint venture agreement.

Gilbert Kwong-Yiu Lee, CFO

Right. We are looking at capacity expansion based on our future needs. As I mentioned, we expanded one building already this past fiscal year for additional production lines. If necessary, we have that capacity. Furthermore, we have land prepared for future expansion based on the joint venture with Busana, which might take time to realize but is crucial for our growth.

Operator, Operator

Your next question for today is coming from Mark Argento at Lake Street.

Mark Argento, Analyst

A lot of my questions have already been asked or covered in your commentary, but I just wanted to better understand the $3 million worth of revenue that got pushed out. Was that higher margin revenue that got pushed out? I think the last quarter, you guys mentioned that you thought you’d be in that mid-teens range on a gross margin basis. Just wanted to reconcile that a little bit.

Gilbert Kwong-Yiu Lee, CFO

Well, like Eric said, the $3 million order that was pushed out was Costco orders, and we do that Costco business with an importer, so the margin on that order is not great. Throughout the latter half of fiscal 2023, we have taken on a lot of subcontracting and lower-margin orders to fully utilize our capacity.

Eric Tang, Operations Lead

Also regarding the $3 million value, this represents about 400,000 pieces. Just before this earnings call, our merchandising team reached out to them to clarify how they will proceed with this quantity. They mentioned that next month, they will send a final inspection team for the first 100,000 pieces, but they may not ship all at once. They will likely split the shipment.

Mark Argento, Analyst

Great. And then just quickly, regarding Busana, when that business comes online, what are the targeted gross margins for those types of products? Are they higher-end type products, or what can we expect in terms of gross margins?

Eric Tang, Operations Lead

Busana is engaged in a variety of products. Unlike Jerash, which primarily focuses on jackets and polos, they produce many styles, including different types of jackets, shirts, and even ladies' dresses, which usually are sold at a higher FOB price. They are also exploring opportunities to shift some of these orders or new styles to Jerash. Recently, we started producing samples of styles that Jerash has not done before, and Busana will be sending these to end buyers to evaluate whether Jerash qualifies for production.

Gilbert Kwong-Yiu Lee, CFO

I think Mark's question was more about the expected margin for the new business through Busana. Is that correct, Mark?

Mark Argento, Analyst

Yes, I was curious about what the expectations are for the gross margin profile of the revenue and business that you might book with Busana.

Gilbert Kwong-Yiu Lee, CFO

At this point, it's still uncertain because we're in the pricing exercise with them. The products involved may include some we haven't worked on before, so we don't have a solid grasp of the costs yet. Therefore, it's difficult to say what we can expect regarding gross margins. However, it is worth noting that the strategy with Busana is to place higher-priced, higher-value items to maximize the benefits of the free trade agreement with Jordan to save on tariffs.

Eric Tang, Operations Lead

Additionally, Busana has indicated that the buyer's intent is to maximize duty savings. Rather than shifting all light cotton orders, which offer a 9% duty savings, they will focus on orders with synthetic fibers that provide over 33% savings. This shift will also lead to better pricing for the joint venture as they move the orders to Jordan.

Operator, Operator

Your next question for today is coming from Aaron Grey at Alliance Global Partners.

Aaron Grey, Analyst

A lot covering; a lot of my questions have already been answered. However, could you provide some color regarding the competitive environment and how it's changed in the past few months since we last spoke?

Gilbert Kwong-Yiu Lee, CFO

You mean in terms of the business environment in Jordan and how our competitors are performing?

Aaron Grey, Analyst

Yes, both in Jordan and China or elsewhere.

Gilbert Kwong-Yiu Lee, CFO

Okay, Eric, do you want to talk about the business environment in Jordan and what competitors are facing? Perhaps share insights from China and Southeast Asia as well?

Eric Tang, Operations Lead

Yes. There are several reasons why many buyers are moving to Jordan and exiting Southeast Asian countries, particularly China. First, in China, machine operators are earning at least $1,000 a month, while in Vietnam, it's around $500. In Jordan, about 70% of our workforce comprises migrants from countries like Bangladesh, India, and Sri Lanka, earning around $300 as a base salary, including overtime. Of course, we provide accommodation and food. Nevertheless, our costs remain competitive. Additionally, when customers shift orders from non-duty countries to Jordan, they can save up to 33% in duties.

Gilbert Kwong-Yiu Lee, CFO

Regarding our competitors in Jordan, they are paying wages comparable to ours. However, due to the economic downturn and loss of customers, some companies have begun closing down. For instance, Classic Apparel is reportedly laying off around 10,000 workers. This competitive environment is difficult for many companies, but Jerash is performing better, only seeing a slight decline of 2% to 3% in sales. We maintained our business even though we had to replace some high-margin business with lower-margin but higher-volume orders, keeping our workers occupied.

Eric Tang, Operations Lead

Indeed, apparel manufacturers globally are reducing orders due to a weak market in the U.S. and Europe, impacting production capacity significantly. For instance, Classic Apparel, once employing 30,000 workers, has seen reductions of orders by 35%, leading to layoffs. Many factories are coping with these reduced orders while trying to avoid workforce reductions. At Jerash, we opt not to do so because we remain confident that the market will improve, albeit slowly. We expect the Busana joint venture and its resulting business to fill most of our contract order capacity.

Operator, Operator

We have reached the end of the question-and-answer session. I will now turn the call over to Sam Choi, CEO, for closing remarks.

Sam Choi, CEO

Thank you, operator, and thanks to all of you for joining us today and for your continued support. Jerash has a solid foundation from the company's leading industry position, loyal customer relationships, and a strong balance sheet. Those attributes give us great confidence in the company's future and that we will get through the current period in a position of strength. We look forward to speaking with you again soon and reporting on our progress. Thank you.

Operator, Operator

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Gilbert Kwong-Yiu Lee, CFO

Thank you.

Eric Tang, Operations Lead

Thank you very much.