Jerash Holdings (US), Inc. (NASDAQ:JRSH) Q3 2023 Earnings Call Transcript

Jerash Holdings (US), Inc. (NASDAQ:JRSH) Q3 2023 Earnings Call Transcript February 13, 2023

Operator: Greetings. Welcome to Jerash Holdings’ fiscal 2023 third quarter financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Roger Pondel, Investor Relations for Jerash Holdings. You may begin.

Roger Pondel: Thank you Operator, and good morning everyone. Welcome to Jerash Holdings’ fiscal 2023 third 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, his 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 and Form 10-Q 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 those forward-looking statements and Jerash Holdings undertakes no obligation to update any forward-looking statements except as required by law. With that, it’s my pleasure to turn the call over to Sam Choi. Sam?

Sam Choi: Thank you Roger, and hello everyone. Our fiscal third quarter performance demonstrated the company’s ability to navigate through continued challenging market conditions sector. Although orders received from our major global brand customers continued to be smaller compared with last fiscal year, our team in Jordan was able to keep our facilities running at full capacity by adding supplementary production for other customers. Accordingly, we achieved record third quarter revenue. Nevertheless, we continue to see fiscal 2023 as a transitional and opportunistic year for Jerash while we made progress on our initiatives to diversify our customer base and product mix. Since the last conference call, we have successful begun to ramp up production on orders from Timberland and Skechers, which are newer group of brand customers.

Photo by @felipepelaquim on Unsplash

Additionally, test runs for our previously announced first European-based high end apparel brand were well received with initial shipments to begin at the end of March. Our plans to form a joint venture with Busana Apparel Group are proceeding well. We anticipate launching the venture early in our new fiscal year, giving Jerash additional opportunities to serve Busana’s group of brand customers that have expressed interest in shifting their production from Southeast Asia to Jordan, which has longstanding duty-free agreements with the U.S., EU and other countries. Additionally, we are gaining visibility into the athleisure wear and technical clothing segments. is well known for its high quality woven apparel production in technical garments, active sportswear and formal wear.

Before I turn the call over to Eric, who is based in Jordan, I want to say that our thoughts and prayers go out to all of the families that were impacted by the recent devastating Turkey/Syria earthquakes. I will now turn the call over to Eric Tang to talk about our operations, and Gilbert will then discuss the quarter’s financial results.

Eric Tang: Thank you Sam. Hello everyone. As Sam mentioned, with the challenging retail environment, orders placed by our top global brand customers have been smaller while retailers continue to work through economic and inflation recovery. We expect these trends to continue for several more months. During this time, we are actively communicating and maintaining excellent relationships to better understand our customers’ needs going forward as market conditions improve. Fortunately, we continue to receive inquiries from other premium brands as global brand trends remain to diversify supply chains away from Asia, especially China. On the new customer front, we introduced and shipped initial orders for Timberland and Skechers in the third quarter and are scheduling additional production for both.

In the current quarter, we recently began production for our first European-based high end apparel brand with initial shipments to start soon. Please keep in mind that new customer inquiries and test runs for premium brands typically take several months. Also, initial new customer orders are in relatively small quantities with generally lower margins to start. During this time frame, we are able to maintain our full staff and our facilities fully booked by adding supplementary production of products for buyers other than our major customers in the U.S. We are also expanding the capacity at some of our factories to gear up for our joint venture with Busana that Sam mentioned earlier. Lastly, please note that our sourcing of fabric and other materials from new partners in the Middle East and North Africa is continuing and is not expected to be impacted by the earthquakes.

With that, I will turn the call to Gilbert to discuss our financial results and the fiscal 2023 outlook. Gilbert, please?

Gilbert Lee: Thank you Eric. Revenue for our fiscal 2023 third quarter increased 17% to a record $43 million from $36.8 million in the same period last year. The increase was mainly due to supplementary sales to customers outside of the U.S. with lower margin products. The gross margin was 13.5% in the fiscal 2023 third quarter compared with 18.8% in the same quarter last year. The decrease was primarily driven by the lower proportion of export orders to two major customers in the U.S. that typically generate higher margins. Operating expenses totaled $4.5 million in the fiscal 2023 third quarter, mainly from SG&A, compared with essentially the same amount in last year’s third quarter, including SG&A expenses of $4.2 million and stock-based compensation expenses of $319,000.

Operating income totaled $1.3 million in the fiscal 2023 third quarter versus $2.4 million in the same period last year. Total other expenses were $111,000 in the fiscal 2023 third quarter compared with $80,000 in the same quarter last year. Interest expenses were $249,000 versus $73,000 a year ago. Net income for the most recent third quarter was $900,000 or $0.07 per diluted share versus $1.7 million or $0.13 per diluted share in the same period last year. Comprehensive income attributable to Jerash Holdings common stockholders totaled $929,000 in the fiscal 2023 third quarter versus $1.7 million last year. Jerash’s balance sheet and cash position remain strong with cash of $26.2 million and net working capital of $47.1 million at December 31, 2022.

Inventory was $26.7 million and accounts receivable amounted to $5.5 million. Net cash provided by operating activities was $9.9 million for the nine months ended December 31, 2022 compared with $14.6 million in the prior year. The net change reflects working capital activities attributable to reduced net income, increases in advances to suppliers partially offset by smaller decreases in accounts payable and accrued expenses. We continue to take a conservative approach to guidance given that the general retail markets are still recovering from inflationary pressures and weaker economic conditions. For the current fourth quarter, revenue is expected to be in the range of $26 million to $28 million compared with $30.9 million last year. We are maintaining our margin goal for the full fiscal year to be in the range of 16% to 18%.

We continue to focus on growing our customer base and pursuing other opportunities to enhance our competitive advantage and offerings. We are proud to be able to navigate through this challenging environment and that we can achieve essentially the same level of business for the full 2023 fiscal year as we did in fiscal 2022, which experienced the highest growth rate in the company’s history. Our strategy of maintaining full capacity and expanding some production space at some of our existing facilities now will allow us to be ready to accommodate anticipated growth in fiscal 2024 from newer and long term customers, as well as from our proposed joint venture. We will continue to closely monitor developments over the next few months and will provide an update on our progress on the next call.

On February 3, our board of directors approved a quarterly dividend of $0.05 per share payable February 21 to stockholders of record as of February 14, 2023. As of the end of our fiscal third quarter, approximately 156,600 shares have been repurchased at an average price of approximately $4.90 per share under the share repurchase program authorized by the board in June 2022. The program expires on March 31, 2023. With that, we will now open up the call for questions. Operator, may we have the first question, please?

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Q&A Session

Operator: At this time, we will be conducting a question and answer session. Your first question for today is coming from Mike Baker at DA Davidson.

Mike Baker: Okay, hi guys, thanks. A couple questions. Can you talk about the state of your larger customers and the inventory situation in the U.S. versus what it was three months ago? Some of the big customers, maybe not your customers but some of the big apparel sporting goods retailers in the U.S., like VF Corp, Under Armor, Columbia, the inventory is actually getting larger, growing, not decelerating as many would have expected, so is the situation better or worse than it was three months ago for your larger customers?

Sam Choi: Eric, do you want to take this?

Eric Tang: Yes. I talked to some of our major buyers, like VF Corp and New Balance. They are saying that they also have recorded some growth in the past couple of months in sales, but they are still not too optimistic about the coming several months, so they are still trying to absorb and trying to reduce the level of the inventory. That’s why despite the fact that there is growth in the sales, they are still not placing too many new orders until the inventory level is down to a level which is, they think, more safe and acceptable to them. This is the latest information I get from my buyers.

Mike Baker: Okay, thanks, so maybe as a follow-up on that, I think Gilbert had mentioned growth in 2024 – you used the word growth. Now understanding you’re not giving 2024 guidance right now, but that expresses a level of confidence that you will grow next year. Can you tell us what gives you that confidence?

Gilbert Lee: Well, right now we’re–I mean, with our existing customers like TNF and New Balance, they are being very cautious in issuing new orders for us. Normally, in a normal year, they would have already filled up our capacity in the first half of the next fiscal year by now, because we have to start planning for the winter season, for the fall season and so on. However, this year they are still being cautious and the orders are smaller than previous, so we’re still waiting on them. That’s why we’re not comfortable in providing guidance for the next fiscal year or the first half, but we are confident that with our efforts in this past fiscal year, fiscal 2023 when have some breathing room to on-board some new customers, such as the very high quality premium European brand, which we all know who they are but we cannot say, their order is already starting.

We have passed everything, they came to our factory and all the quality people have already certified us or approved our factories to start producing, so the shipments will actually begin pretty soon. Also, with our joint venture that currently–I mean, maybe we’ll talk about the joint venture later, but the good news is we are progressing very, very well and we anticipate a joint venture agreement will be signed. Last quarter, we signed the MOU, but over this past quarter we have been working with Busana in developing the joint venture agreement, and everything is basically agreed upon, we’re just making some final changes in the wording and so on, so we anticipate that will be signed very soon and then we will start working together. Busana, in fact they have already started doing the marketing.