Jerash Holdings (US) (NASDAQ:JRSH) Q1 2021 Earnings Call

0:01 Greetings and welcome to JAROSH First Quarter Fiscal 2021 Results Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. I'd like to remind you that this conference is being recorded. It is now my pleasure to introduce Matt Kreps, Managing Director at Darrow Associates Investor Relations. Mr. Kreps, you may begin.

0:24 Thanks, Karen. Good morning and welcome everyone to the Juresh Holdings Fiscal First Quarter 2021 Results Conference Call. With me today is Gilbert Lee, our Chief Financial Officer, and Eric Tang, who leads our operations in Jordan. Our results press release issued earlier today is available in the investor relations section of our website at www.juresholdings.com. You can also see a link titled Face Mask Production in the top level navigation of the site and that introduces some of our new PPE products, including a video of production of these products in our factories in Jordan. Today's call is being recorded and will be available for playback. All participants will be in a listen-only mode.

1:10 If you need assistance from Taryn, please signal a conference specialist by pressing the star key followed by zero. The operator will provide a detailed reminder of the Q&A instructions once management has completed their prepared remarks today. But before we begin, a quick reminder about forward-looking statements made during the course of this call. Statements made by Juresh 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 and 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, target, 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 reflected in the forward-looking statements.

2:11 These risks and uncertainties are detailed in DRASH's public filings with the U.S. Securities and Exchange Commission, including our most recently filed Form 10-Q and Form 10-K. 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 its 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 would now like to turn the call over to Eric Tang. Please go ahead.

2:58 Gilbert, are you going to continue?

3:01 No, Eric, you start first.

3:06 So, hello everyone. Okay, I'm pleased to join all of you today for this call. So, the fiscal quarter for Gerrard ended June 30. and included the most challenging point of the global COVID-19 pandemic for the U.S., our largest end market. Like many, we began the quarter with a high degree of uncertainty exactly how this would impact our revenue activities and for how long. Well, the good news is that, okay, the reply to this question for Gerard is far better than we anticipated. Okay, revenue, in fact, is declined Just about 70% over the year. This is in large partly due to the two factors. The first factor is our efforts and winning new business last year pay off now with a large increase in orders with new customers in the first quarter, which accounted for about 16% of our total revenue.

4:15 And this included customers as the New Balance and Dick's Exporting Groups plus increased activity on new orders from G3. Second factor is we were able to confirm a larger part of our orders with existing customers and particularly our largest customer, VF North Corporation, the North Face brand. Our business with North Face was down in the quarter about 35% over the year and it will be disclosed in our 10Q filing. but it is expected to move narrow significantly in the coming quarters based on the current progress of all the confirmations. So we believe this is due to these two factors.

5:02 First, Gerard, our factory, is well known for its highly reliable manufacturing for quality and on-time delivery. Secondly, the financial benefit of a duty-free import from our factories in Jordan It's a tremendous cost saving at the time when our customers are looking to reduce cost. This reason is very attractive. This is the reason why many buyers are looking for duty-free country production. The North Face is a great brand with great products and a great customer for Jiraj. As with all our customers, we have worked closely to adjust orders and delivery timing including pushing back some orders where necessary.

5:48 This has shifted some orders not just into the second auction but also into our third quarter. Our back-stream ability is not only to work closely with our customers to maximize our business opportunity but also to remain profitable through this pandemic illustrates the strength of our team and dedication to doing whatever is needed to get the job done. I want to thank very much for the garage team for the hard work and dedication through this time and I know that we are all looking forward to get a better business to normal very soon. So that provides a good bridge to our outlook as well.

6:33 Our second quarter ended September 30, was a record quarter last year at $30.6 million. Right now, our factories are booked to a similar ratio as before, with a decline of about 80%. However, we have a few orders that may accelerate and reduce this distance, and we continue to work closely with customers to manage delivery timelines. Either way, we will have good sequencer growth over the first quarter and also expect to grow across margin as we continue to increase volume through the factory. So I'm going to pass to Gilbert, but before that I want to update you on the current situation in Jordan. Jordan acted very fast and decisively early in the pandemic to issue perfumes and shelter in place order. As you know, this affected the last two weeks of our March quarter, but it was also enabled Jordan to do a very effective job containing correct and return to manufacturing in our facility more quickly using our dormitory workforce who could be effectively quarantined and kept safe. We also implemented a number of additional cleaning regiments and workplace protocols to better protect the safety of our workers, and we continue to do so.

8:04 We are also making shift steps to enter the PPE market and commence first shipment to customers and more orders coming in. Okay, in the short while, Gilbert will address that in more detail. Please, Gilbert.

8:22 Thank you, Eric. Hello everyone. I'm pleased to join all of you today to discuss our financial results which were much stronger than expected for the fiscal first quarter ended June 30th. Our results demonstrate the benefit of our new customer development initiatives as well as the resiliency of our business due to its important economic advantage to our customers cost of goods and overall profitability. Let's cover some of the details from our financials and business performance for a few minutes. Revenue in the first quarter of fiscal 2021 was $18.7 million, and about 16% of our revenue in the first quarter was related to new customers won in last year.

9:14 These new customers continue to increase order volumes with Jirash. This helps to further our goal of diversifying our customer base, and we are very excited to continue building relationships with new logos. Revenue from legacy customers was down year over year, mainly due to the impact of the COVID pandemic, but reflected a higher number of orders reinstated as customers prioritized giraffes for their production. In total, revenue was down approximately 17% year over year, but far less than what we are seeing across the industry. Our customers have also seen good success in their efforts to shift to online sales and to reopen brick and mortar stores in markets affected by COVID-driven closures, a trend that appears to be generally increasing as we continue to move ahead.

10:18 We are pleased to see this continued positive progress and that our customers are finding success in reaching their end customers which helps drive greater demand for our factories and increase production orders. Turning to gross margins, gross margin declined due to lower factory volumes to 16.3% compared with 20% in the prior year quarter. Gross margins also reflected changes in product mix and customer mix due to the pandemic and the increased volume from new customers. Operating expenses continue to decline in the quarter to $1.9 million, a decrease of 27.9% as compared with $2.6 million in the previous first quarter.

11:11 The decline in OPEX reflects We recently announced continuation of our dividend payment of a $0.05 per share to our common stock shareholders. We continue to evaluate the dividend each quarter and continue to generate and others. Our balance sheets remain very strong with cash and restricted cash at June 30th of $18.5 million versus $26.9 million at March 31st.

12:06 Our cash flow in the June quarter actually improved by $2.5 million compared with the same quarter in prior year. Due to seasonality, we generally use more cash in the fiscal first quarter building inventory and increasing receivables. Inventory was $18.1 million, which includes goods produced but deferred for shipment until later part of fiscal 2021. Accounts receivables increased to $15.9 million due to the later weighting of shipments in the quarter and extended payment terms granted to some of our customers. Approximately 81% of the June receivables have been collected up to today.

12:57 Perhaps the best measure of our overall balance sheet improvement is working capital. increased $600,000 sequentially to $48.7 million at June 30th, compared with $48.1 million as of March 31st, 2020. We continue to expect the business to generate cash flow from operations on an annualized basis. We also have untapped lines of credit available for up to an aggregate of $26 million. We expect Jirasha's performance to remain solid in the coming quarters as we continue to work closely with our customers.

13:42 Based on orders to date for the quarter ending September 30th, we expect revenue of about $25 million or 34% sequential growth over the fiscal first quarter. This could be increased by shipments scheduled late in the quarter or additional PPE activity. but we believe it is prudent to remain conservative in the current environment. I want to talk about a few other aspects of our business as well. Most importantly, our entry into the PPE market. Last quarter, we announced that Jirash produced some PPE supplies at the request of the Jordanian government. We subsequently produced and shipped masks to a new U.S. customer. and we are growing this aspect of our business to include other PPE supplies like surgical gowns and other products.

14:39 We're expanding our sales opportunity through qualification to ship to the EU and the US and partnering with factories that have existing certifications and capabilities to accelerate this opportunity. These new categories are good opportunities for Jerash. and we continue to build on our capabilities. To facilitate this expansion of our addressable market and our PPE market development efforts, Juras incorporated a new entity, Juras the First Medical Supplies Manufacturing Company Limited, which has received temporary approval from Jordan Food and Drug Administration for the manufacturing and export of products including non-surgical masks and gowns.

15:34 We have already produced and shipped some of the subcontracting orders of surgical masks and medical gowns for customers in Jordan, the Middle East, and Europe beginning in July 2020. JARASH intends to pursue additional certifications and partnerships for this subsidiary and is presently engaged in efforts to do so. including U.S. FDA. We are also continuing to work hard on increasing orders with both new and existing customers, particularly in helping our customers lower the cost of goods compared with less favorable manufacturing areas such as China, where costs are actually higher than Jordan and import tariffs could reach the low 30% range on higher dollar products.

16:29 while Jirash could export to the U.S. with zero tariffs. We're also expanding our geographical production capability for shipments to other regions like Asia Pacific and Europe, particularly for customers like VF and New Balance who have multi-regional sales network. The initiative is achieved by working with overseas subcontracting partners in locations such as Indonesia, and Cambodia who have the certifications required by customers. Finally, we are actively looking for acquisitions and partnerships to expand our business and put our capital to work.

17:16 This includes both garments and PPE acquisition candidates, but we remain careful and diligent on both pricing and risks in the current environment. Upon finding the right candidate for strategic actions, we look forward to moving ahead. We now welcome your questions. Ladies and gentlemen, the floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. If you're using a speakerphone, we ask that while posing your question, you pick up your handset to provide the best sound quality. Again, ladies and gentlemen, if you do have a question or comment, please press star 1 on your telephone keypad at this time. We'll take our first question from Mark Argento with Lake Street Capital. Please go ahead.

18:10 Hi. Good morning, guys. Just a few quick ones. Can you estimate right now kind of what kind of percentage of capacity you're running at, and do you anticipate back at full capacity utilization You know, in Q2, Q3, maybe, you know, walk us through that a little bit.

18:33 Hey, Mark. How are you? Thank you for the question. About what percentage of capacity our factories are running at, maybe Eric could better answer this question because he actually runs the, yep.

18:54 Okay, our, okay, according to our order status currently, okay, starting from today until to the end 31st of December, okay, we are fully booked. That means, okay, garage is running 100% of its own capacity. and we are also a little bit overbooked of about 10%. I'm trying to find some subcontractor, okay, to make, to manufacture the orders for the overbook. Okay.

19:32 And just to follow up there, so is it a mixed thing when you have, you know, you have some of your outerwear, Looks like that order book from those customers has maybe been a little bit impeded, and then you have PPE ramping up. So has there been a mixed shift within the capacity utilization?

19:57 Well, there's definitely a lot of changes going on within our manufacturing factories. Yeah, we're spending some of the capacities on making PPE products. That was why we started up a new facility, a new subsidiary, basically dedicating to do just that. We're also using some of our existing capacity in Jordan to make some PPE products. So and also for new customers, some of them are for outerwear, but some of them are also for other product mix such as T-shirts and sporting pants and polo shirts. So there are some changes going on. It's hard to say how many million pieces that we are producing Comparing to our existing capacity.

21:11 In the longer term, I know the business model is still a little bit being developed, but on the PPE product lines, do you anticipate margin profiles similar to the overall business, better or worse? What are your thoughts on what that product line could look like from a

21:37 Well, we anticipate PPE product to be at least the gross margin that we have been experiencing with the garment and apparel products. And that's our goal. It's not getting a better margin. because we do have raw material as well as manufacturing cost advantage doing it in Jordan. So but at this point, we are still developing this particular product line and this business model. So it is hard for us to estimate It has to depend on where the products are shipped to, to what type of customers.

22:42 If it is shipped to Europe or the Middle East, and comparing to shipping to the United States, where we are trying to develop direct customer relationships, but sometimes we might have to to sell to some middlemen, some distributors. So it all depends on what volume are sent to what customers. Generally, we want to first cover our factory profitability first, and then we will look at whether we are being competitive in whatever markets that we are competing in.

23:29 But we are very confident that because of our competitive advantage producing those products in Jordan, we feel that we should be a very profitable business.

23:47 Gilbert, can I add in something?

23:52 Sure, of course.

23:54 Yes. Well, I want to answer Mark's question. Okay, now garage has just started a few months for the PPE products. Okay, we are handling the PPE products in different categories. Okay, for very big numbers of supplies, okay, usually we are invited or participate with another company, okay, in a tender. Usually it is a government tender. For the past two months, Jiraj has participated in tender for Saudi Arabia market and also the market in Jordan. For this kind of tender which involves big number of quantities, average, because in order that we make the price competitive, we have to be around 10% of our gross profit. Okay, but for tailor-made for some customer, just like the washable face mask we are doing for a particular brand, okay, our profit margin can be go up to 20%. Okay, this is the difference.

25:04 Thanks, Eric.

25:05 Great, thanks.

25:06 For clarifying that. Yes.

25:07 Thanks. We'll take our next question from Howard Halpern with Tagwood Brothers. Please go ahead.

25:16 Good morning, gentlemen. I'm a little bit new to the story, so I'd like to provide a little perspective on how has the sales process changed over the past two quarters compared to prior years?

25:38 Hi, Howard. Welcome. So, your question is how the sales process Over the last two quarters?

25:50 Yes, with probably less contact with customers and more, you know, is the process been, you know, longer, a little more complicated? How has it evolved, I guess, in the COVID environment?

26:06 Well, definitely because we cannot travel to meet customers, which Eric used to do quite a bit in the past, coming to the United States, meeting with our existing customers or new customers. But because of the travel ban, those cannot be done. However, our Hong Kong sales and marketing team, the merchandisers, they constantly are in and many more. And they will develop the orders, the development of samples and merchandising and all the negotiation and purchasing.

27:02 So, I don't think it really impacts us that much other Not having been able to just visiting customers. But I hope this will change or get back to normal. Okay.

27:23 Do you have a general, on the PPE side, do you have a general feel of what the market size or market potential is for if you just take the Mideast and then Europe, I know the U.S. is quite large, but if you could just give us a sense of the Middle East and Europe and what the potential there is.

27:49 I don't have the Middle East and Europe market size, but based on some reports that I read about the global PPE, particularly in the healthcare sector, It is about $16 billion globally. U.S. is a little bit smaller. I think U.S. is only about $1.7 billion. So I think overall, Europe, Asia is probably the majority of the global market.

28:30 And the process to get qualifications is that? Should that take a couple months or it's hard to say when you'll get general qualifications or certifications and approvals to sell into certain markets?

28:47 Well, for Europe and for the Middle East, we already have the approval to sell. Europe is basically the CE mark. and we are in the process of getting the CE and we anticipate to get the approval within two months from now. Okay. But we're also already producing and shipping to a large customer in France through a relationship that we have or a partnership that we have with another company that has already got the CE approval. So that part is already ongoing. Jordan, we already got the Jordan FDA approval, so we are able to sell in the Middle East. For United States, obviously, the U.S. FDA, we have already registered our facility with the U.S. FDA, so that is already done.

29:52 We will be able to ship to the United States, but for certain, like, More protective type of PPE that are used in surgeries, they're used in medical facilities, hospitals. Some of those require a higher level of approval, which is called the 510 notification. And we are in the process of getting that from the US FDA. And this will require some time, probably, A few months up to half a year. Okay.

30:30 Okay. And one final one for me in, you know, in Jordan, what type of production potential or increase? I mean, do you have room to increase your capacity within Jordan, build another factory or expand the current factory?

30:52 Yeah, we're constantly looking at that, but let me ask Eric to answer the question more specifically. Eric?

31:01 Yes. Okay, in Jordan, we have five factories, okay, including one, the so-called satellite factory, newly set up. So our four main factories are already fully booked. And for the new factory, we call it Juraj No. 5 Factory, which we consider it as a satellite factory. We have a capacity of 1,000 workers. Now we have only around 300 workers working inside the factory. So when orders are increasing, we still have the capacity to be able to grow for another 400 machines.

31:48 That means we can also grow at least 10% to 15% of our global order.

31:58 Okay. Well, keep up the great work, guys. Thanks.

32:03 Thank you, Howard.

32:04 Thank you very much. We'll take our next question from Katie Halper with DA Davidson. Please go ahead.

32:13 Hi, guys. Thank you so much for some of the clarity on the PPE. I was actually a little bit more curious on what the order book looks like for the winter. I mean, are you guys getting a lot of orders for outerwear and especially compared to last year? Thank you.

32:30 Thank you, Katie. Our outerwear business is primarily with VF or the North Face. And what I know is VF is constantly working with our merchandisers in Hong Kong to update their orders, update the delivery time. And so far what we have gotten is the reinstatement of at least 80% of their original order for this coming year. So that would be, I guess, the winter season.

33:23 But we also have new customers that we are developing for outerwear. Eric, can you...

33:37 Let me give some figures. Our biggest customer, which is the North Face, for the spring order up from now on until next February, I think we have almost the same number of quantities like last year. Maybe it's only less than 5% difference. Okay, and for New Balance, okay, we have more orders than, I'm expecting more orders than last year because New Balance is our New customer. Okay. And New Balance, okay, last week, okay, the sourcing team told us that they are shifting most of the orders from another country called Haiti, okay, to Jordan, to Jiraj.

34:26 It is because before Haiti is producing maybe over one million pieces a year for New Balance, but because of recent on-time performance and quality issue, they have decided to start shifting the orders We are expecting the new balance order will be more than last year. And also this year, we just started with a new customer. We have already took three purchase orders from a new customer called American Eagle. So the total number of pieces we have taken from American Eagle is 16,000 pieces. I'm expecting more orders will come in the later half of the year. and also Gerard is also taking up more orders on the PPE.

35:13 Okay, and the month by month, I think the volume of our demand for PPE manufacturing will be higher and higher. So this is the latest situation of our capacity.

35:28 Thank you. Does that answer your question, Katie?

35:33 Yeah, that definitely gives me a lot more clarity. Thank you so much. And then I guess just in general, how long are you guys expecting to produce PPE? I mean, is this something that you intend to permanently keep within your offering, or is this more kind of a shorter time horizon, like two to three years?

35:55 Now, this is going to be a long-term strategic development. definitely entering this particular market. That's why we started up a new facility, a new entity just to dedicate on this particular business.

36:22 Okay, wonderful. Thank you so much.

36:24 Thank you. We'll take our next question from Brian Kopsik, private investor. Please go ahead.

36:35 Hey, guys. I know you guys are in a highly competitive industry over there.

36:40 I just wanted to get an idea about what the competition looks like over in Jordan.

36:46 Are they producing PPE and are they kind of ramping things back up or are they slowing down and you're picking up what they're not able to pick up?

36:57 Thanks.

36:59 Thank you, Brian.

37:00 Yeah. We are in a competitive industry. But we are much better off than our competitors in Jordan. I heard that there are a number of factories that are actually shutting down or losing business, that just cannot survive. So maybe, Eric, you can give some updated information about what's going on in Jordan.

37:25 Okay, because of the coronavirus, okay, a lot of, because most of the factories are manufacturing Okay, it's exporting to nearly 100% to the U.S. market because of the FTA free trade agreement between U.S. and Jordan. So, okay, starting in February, okay, when the COVID-19 is spreading in the U.S., okay, many of the buyers have reduced the order significantly, okay. So, and this is the reason that some of the factories are facing a cancellation of orders from even 80% down to 30%. So for some factories who cannot be able to catch up with supplement orders to fill up their capacity, they are closing down. Currently at least five to six factories are already shut down in Jordan.

38:23 This is the latest situation. But Juraj, as we explained before, our major buyers, also we have the facing reduction orders, but it's only around less than 30%. And we have been able also to catch up with new customers, and that replaced some of the capacity being cut down by current customers. And also with the emergence Thank you. Thank you. That will conclude our question and answer session for today.

39:23 We'll now turn the floor back over to Mr. Kreps for closing remarks.

39:28 Thank you, Taryn, and thank you, everyone, for participating in today's call. JARESH is off to a strong start in fiscal 2021, and our outlook anticipates sequential improvement in both revenue and gross margin. JARESH will be conducting multiple outreach and conference events in the coming months, including the LDE virtual conference event on September 3rd, which anyone can join to listen to our presentation and we'll be hosting one-on-one meetings with the management team for investors participating in that event. If you have additional questions or would like to arrange a meeting at an upcoming conference event, please contact me directly using the contact information at the bottom of our press release. Thank you for your participation. Stay safe and have a great day. Ladies and gentlemen, this does conclude today's teleconference.

40:13 We thank you for your participation. You may disconnect your lines at this time and have a great day.