Q4 2022 Jerash Holdings (US) Inc Earnings Call
Speaker 1: The.
Speaker 2: And welcome to dres Holdings. Fiscal 2022: fourth quarter and full year conference call.
Speaker 2: All participants will be in listen-only mode.
Speaker 2: After today's presentation, there will be an opportunity to ask questions.
Speaker 2: To ask the question, you may press star than one on your touch Stone phone.
Speaker 2: To withdraw your question. Please press star, then two.
Speaker 2: I would now like to turn the conference over to Roger panddell.
Speaker 2: Please go ahead.
Speaker 3: Thank you, operator. Good morning everyone and welcome to girash Holdings. Fiscal 2022 fourth quarter and full year conference call.
Speaker 3: I'm Roger pondell with pondo wilkinson to rash Holdings' Investor Relations firm.
Speaker 3: It will be my pleasure momentarily to introduce the company's Chairman and Chief Executive Officer. Sam choroy is Chief Financial Officer Gilbert Lee and Eric Tang, who leads the company's operations in Jordan.
Speaker 3: 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 1900 and ninety-fivesuch forward-looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the risk factor 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 at.
Speaker 3: Dot SEC, Dot GOV, along with other company filings made with the SEC from time to time.
Speaker 3: Actual results could differ materially from these forward-looking statements.
Speaker 3: gerash Holdings undertakes no obligation to update any forward-looking statements except as required by law, and with that it is my pleasure to turn the call over to Sam choroy Sam.
Speaker 4: Thank you Roger, and hello everyone.
Speaker 4: Our fiscal 2022 fourth quarter and full year. Sales demonstrated dish underlying foundational strings.
Speaker 4: And the attractiveness of these manufacturing capabilities to good o band.
Speaker 4: And while our top lines was upshortply.
Speaker 4: Gross profit for the fourth quarter was impacted by product mix.
Speaker 4: That includes fewer than expected checkhis orders.
Speaker 4: As U's retailers face the strings of a weaker economic environment due to inflation.
Speaker 4: On a positive sidewe were able to quickly shipif manufacturing to produce other premium brand spoorts raise items.
Speaker 4: Such as tens and POS, although these items carry lower margins.
Speaker 4: jeash is in the fortunate position of having strong customer relationships.
Speaker 4: Along with the ability to attract new customers even during the current macroeconomic environment.
Speaker 4: Our operations in Jordan over unique benefits of free trade agreements with the us and duu.
Speaker 4: Combined without liidity of producing highly complex apparels, the company is positioned as an attractive algunive manufacturing partner outside of Asia for verlobal apparel brands.
Speaker 4: I'm happy to report that we have received orders from our first european-base high-end terrio brand.
Speaker 4: Other new customers are in the pipeline as we continue to focus on diversifying and expanding our customer BES.
Speaker 4: We are taking conservative approach with respect to our guidance.
Speaker 4: And Gilbert will discuss those details momentarily.
Speaker 4: ' from a growth and top nine perspective?
Speaker 4: Our business outlook remains strong.
Speaker 4: Accordingly, we are continuing to explore plans to increase capacity.
Speaker 4: In April we started extension in one of our existing factories to approximately one point three million pieces to our capacity.
Speaker 4: This extension is exuspected to be completed at the end of 2020 -two.
Speaker 4: We also have room for in house renovation in other premises that could increase the negworkate of two million pieces in preparation of continuous growth in customer demands.
Speaker 4: I'm Now turning to call over to erittank, who is space in Jordan, and then guubber Lee. We will cover our financial results, Eric.
Speaker 5: Thank you, fam. Hello everyone.
Speaker 5: Other volumes continue to be strong in the fiscal fourth qarter and into the new fiscal year from our current top global brand customers.
Speaker 5: Our manufacturing capacity is completely through December 2020 -two.
Speaker 5: Further we have received production inquiries from several new premium brand customers.
Speaker 5: Which will allow us to further diversify our customer base.
Speaker 5: As Sam mentioned, we recently have received orders from geraf's first european-bed high-end apparel brand, to produce jacs and other outer wearears for a sportsweare division.
Speaker 5: Production from our new-list facility that we acqured and took over in August last year has now fully transitioned to manufacture products for our own customers.
Speaker 5: We continuously train our employees and enhan efficiency from this facility.
Speaker 5: To further expand our capacity for new customer order and new production categories.
Speaker 5: Construction of a new dormitory for our multinnational workforce is progressing on schedule.
Speaker 5: And it is expected to be completed by September 2020 -two.
Speaker 5: The high quality liven space will comfort signs and the highest safety measures will help position us for growth and further our ESG goals.
Speaker 5: Please take a look at geras holding website to see updated videos for the dormitory and recent factory expansion.
Speaker 6: loly.
Speaker 5: We applyed that giras was featured by the world Bank frrot this week for world refugee day on June twentieth.
Speaker 5: Highlighting the company's ongoing efforts.
Speaker 5: To employ theing workers as its factories and providing transportation for dis works.
Speaker 5: This recognition serves as a prime example for the private business sector to help refugee settle into a new hosting country.
Speaker 6: With that, I will turn the call to Gilbert to discuss our financial results and the fiscal 2023 hourlook, gilber triase.
Speaker 7: Thank you, Eric.
Speaker 8: Fiscal 2022 was a record performing year for girurash, achieving revenue of $143.4 million.
Speaker 8: Up 59% from fiscal 2021.
Speaker 8: Net income jummed: 91% to seven point nine million, or 67 cents per share, from $4.1 million, or 37 cents per share in fiscal 2021.
Speaker 8: Revenue for our fiscal 2022 fourth quarter rose 30% to 30 point nine million dollars from 23.8 million in the same period last year.
Speaker 8: The increase was primarily due to higher shipments.
Speaker 8: To our current customers.
Speaker 8: Which we were able to accommodate due to increased capacity from our new risk factory.
Speaker 8: Gross margin was lower by 445 basis points to 15% in the fiscal 2022 fourth quarter, compared with 20% in the same period last year.
Speaker 8: Gross margin was mainly impacted by fewer and expected jjected orders, which carry much higher margin.
Speaker 8: To a less extent margins were impacted by higher material and ocean freight costs during late 2021 and early 2020. -, two.
Speaker 8: But the good news is, the ocean freight costs are now coming down, since Shanghai reopened earlier this month.
Speaker 8: Operating expenses total $4.4 million in the fiscal 2022 fourth quarter, compared with three point five million in the same period last year.
Speaker 8: The increase was primarily due to increased headcount and shipments.
Speaker 8: An increase in stock-based compensation and recruitment for new migrant workers, as well as higher shipping costs.
Speaker 8: Operating income for our most recent fourth quarter was $275 thousand, compared with one point in one million in the same period last year.
Speaker 8: Income tax expense was 405 thousand due to higher provision for annualized consolidated global income.
Speaker 8: Net loss for the fiscal 2022 fourth quarter was 13 thousand or one cent per share, after $312 thousand of stock-based compensation expenses.
Speaker 8: Compared with net income of 681 thousand or six cents per share a year ago.
Speaker 8: durashes's balance sheet and cash position remains strong, with cash of $25 million in net working capital of 56 million at the end of March 2020 -two.
Speaker 8: Inventory was 28 million and the counts receivable amounted to eleven million.
Speaker 8: Net cash provided by operating activities was approximately $9 million in fiscal 2022, compare with net cash used of one point five million in fiscal 2021.
Speaker 8: The net change reflects working capital activity.
Speaker 8: Primarily due to increase in net income and inventory and decrease in accounts recevable.
Speaker 8: In terms of our fiscal 2023 first quarter outlook, we're rejecting revenue to be in the range of 33 million to thirty-five million.
Speaker 8: Accordingly, we are expecting gross margin returning to the fiscal 2021 levels at around 17% to 18% for the next few quarters.
Speaker 9: As I mentioned.
Speaker 9: We're taking a conservative approach to our guidance for the full year.
Speaker 9: Given the inflationary environment that is affecting the? U's retail marketts and consumer cost sentiment.
Speaker 9: Along with a product makes shift pointing towards apparel items.
Speaker 9: That typically carry lower marginswhile customer orders remains strong. We're anticipating that revenue growth will be marginal for the full fiscal 2020 -three.
Speaker 8: We will continue to closely monitor developments over the next few months and plan to provide an update on our next call.
Speaker 9: Our Board Director has approved a regular quarterly dividend of five cents per share to our common stockholders on June third, 20: 22 to stockholders of record as of May twenty-seven and.
Speaker 8: In addition, reflecting its confidence in the company's long-term performance.
Speaker 8: Our Board has authorized a share repurchase program of up to to $3 million.
Speaker 9: The program will be in effect through the end of the company's current fiscal year. Launch thirty-first 2020 -three.
Speaker 9: With that, we will now open up to call for questions.
Speaker 8: Operator may we have the first question please?
Speaker 2: Fairly to mind you to the audience. If you would like to join the queue at this time, you may press a Star one to enter the queue. Once again, it LL be Star one if you'd like to ask the question at this time. And the first question that's coming from Mike they, Mike Baker from da davisson. Mike, your line is live. Please go ahead.
Speaker 10: Okay thanks, guys. So a couple of questions on the well, I guess I'll ask on the margins and new customers. So can you talk about percent of sales from new customers and 1, what that should look like in 2023 and how that impacts your gross marg? I guess what I'm trying to get out is gross margin pressure more about the mix away from jackets and towards pants or in other approul items, or is there also an impact from taking on more new customers, which to think is probably positive for the longer term? But But as I understand that new customers come on at lower gross margins.
Speaker 8: You're absolutely right. Might is actually both. We're taking on new customers.
Speaker 8: But of course the percentage or the mix of new customers is not going to be big for this coming fiscal year anyway. We're putting new customers takes a while to get there- into the ordering stream.
Speaker 8: We do have first orders from our European bed premium brand customer that we just successfully.
Speaker 9: Brought them on board, plus a few other global brain customers.
Speaker 8: But those are not going to be significant comparing to our existing customers.
Speaker 9: So even though yes, the margins are going to be lower at the beginning and gradually we will improve on the margins for these new customers once we get to learn how to make their products and get up to steel on the efficiencies and pricing and so on. But the other impact is also coming from the mix of the products.
Speaker 8: A lot of our existing customers, especially VF and new balance. They place a lot of orders in fiscal 2022, and especially VF because of the North Face.
Speaker 9: Most of their orders are on outerwear and on jackets, So that grew exponentially in 2022 comparing to 2021. that's how we achieve a 59% growth in sales and a significant amount in terms of gross margin.
Speaker 9: But that kind ofcooled down, especially in the last fiscal quarter, the fourth quarter of 2020 -two.
Speaker 8: So we had to switch our gear and field up the capacity with lower margin products with lower emmargin customers.
Speaker 9: Namely customers who are more local in nature in Jordan and also customers who are in the mass merchandising area, such as Costco and Walmart.
Speaker 9: And so that we anticipate to continue, because the outlook in the upcoming year is kind of.
Speaker 9: Uncertain, So we don't know whether or or when the recession will hit and how it will affect the ordering.
Speaker 9: Behavior of of our customers, such as we F and new balance.
Speaker 8: So we will lower their participation or their.
Speaker 9: mikes in our projection and put more, because we can always fill up our capacity oil not not without effort. We can always find customers, But at a lower margin. So that's why we're projecting a lower margin and we experience a lower margin in the fourth quarter and we're just kind of extending that out.
Speaker 9: In the fiscal 2000 and twenty-threewe. Yes okay, that makes sense. one of the question, if I could at the midpoint: your first quarter sales guidance, I think, is up 4, 15%. You said full year up marginally. Does marginally mean to meet. That means up less than 15% which I guess implies slower growth for the next three quarters after the first quarter. Is that the right interpretation and I guess why?
Speaker 8: Well for the first fiscal quarter Q1 we're projecting a growth of.
Speaker 9: I guess 15%.
Speaker 11: Yeah 34 mililles only from 16% Yeah.
Speaker 9: Right and then I think.
Speaker 8: Q2. Q2 last year was first exceptionally high, So we don't see much growth in Q2 and we are already at full capacity.
Speaker 9: Then Q3. We also anticipate Q3 will be strong.
Speaker 8: So that will have a pretty significant growth comparing to Q3 of 2000 and twenty-twobut we after that it will be reallyly difficult to see on Q4.
Speaker 9: So I think overall we're looking at a full year growth.
Speaker 9: At o 14 15%.
Speaker 9: Just from this point of mealokay understood. Okay thanks, I'll what one more, if I could. You talked about some margin pressure from ocean freight, material costs et cetera. What's your ability to pass that through to your customers to through price increases or or have them absorb those costs?
Speaker 9: Well for new orders. We normally could pass it on.
Speaker 8: As soon as we, as long as, refind out that the raw material cost when we source the fabrics and the other materials that we've, we know the pricing, that the raw material costs are coming up, then we can. Then we can negotiate to to increase our prices to our customers.
Speaker 8: butfor orders. They are already in the system if we experience a certain change of prices or raw material cost, and those in R those are.
Speaker 8: Almost impossible to get the customers to because they already committed or we are committed to the price.
Speaker 8: So it would be a mix fact. Sometimes we can, we can T get the customers to absorb the increased price, and sometimes we have to eat it.
Speaker 10: understo it. Okay, I'll pass it on the soilelse. Thank youthank you.
Speaker 2: And your next question is coming from Mark Argento, from Lake Street. Mark your linesed of live. Please go ahead.
Speaker 12: Guys just quick question on capacity. Maybe can you just remind us what capacity you're out right now in terms of the number of pieces. And then I think Sam, in your opening remarks you mentioned that you're undertaking expansion. If you could in a particular facility. Can you just talk about what you have today specifically in terms of peiece capacity, what you think you can expand that too, because really it sounds like.
Speaker 13: thismix from quarter-end quarter out moves around, but really the gainating factor to growth here is the ability to source additional capacity. So just wanted to drill by on that a little bit.
Speaker 8: Well yes, Mark at the end of our last fiscal year, which is March thirty-first.
Speaker 8: We estimated our capacity for our annual capacity.
Speaker 8: Was about 14 million pieces and we started extension of our one of our existing facattories.
Speaker 8: And that will add well well, a little bit less than 10%, which is one point three million pieces, to our capacity. Then we also have plans to also add production lines.
Speaker 8: To our other factories, and that would give us another two million pieces.
Speaker 8: So altogethermaybe by the end of this fiscal, this fiscal year, we will have another three point three million pieces.
Speaker 8: Which is about twenty-percent of our increase in our current capacity.
Speaker 14: Great and then. So fiscal year just completed. Is that the 14 million pieces? Is that what you said? Or is that a year ago? Yes no, that' the fiscal year that we just and it and then and then the the business you acquired. You're kind of weaning off some of their existing customers and then bring dush customers out and it sounds like that's fully complete.
Speaker 12: What was a capacity get of that facility and how much? How much additional ute will cause yoururash capacity do you gain here this year by havingident fully under manufacturing for your customers?
Speaker 8: Okay that's the M K facury that we purchased last year and we brought online in August .
Speaker 8: Eric, can you give an update on the capacity of that facatury?
Speaker 6: Yeah when we took up the mta fac for the last October . Okay, at that time the current the capacity, total capacity for whole year, is around, free from free five thousand pieces.
Speaker 6: Ok after we took up the factory immediately. Ok, we took up some expansion measures and we already another 100 workers- OK, from overseas- and created another two production lines. Okay, now our an capacity for an K factory is gerumming from three point five million pieces up to another additional one point zero zero zero zero zero four five trillion pieces a year.
Speaker 1: And then when you are shifting from the legacy customers to jeish customers.
Speaker 12: Does that have a big impact in terms of margins where it was that running much lower margin on the existing of the previous customers? Of just trying to understand that the dynamic there and how that might work through into the, into the numbers this year.
Speaker 6: Because in the beginning, when we took up the MK factory, So okay, So we took up also a new production management and also new and otherto workers which belongch to the old management.
Speaker 6: Okay So we have good spend some time to train the workers. Ok, to the level that can that they are capable to do dour own customers. So in the beginning to do three months we are only assigned to mpay factory workers Su subcontract orders we took from outside. Okay, we are not allocating any of our own fop orders to to the workers in order to play safe, but other to to three months training they are. They are very good and we deem that their efficiency can be a capabilility, can be able to produce our own customers' order.
Speaker 6: So starting November - okay, last year- and December we start filling up with mpk factory our own orders. This is my last question.
Speaker 8: I'm sorry Mark, I guess to answer your question at the beginning, because we were just using the MK factory to produce lower margin products, more simple items, items that we do for.
Speaker 8: For contract manufacturing. So those are typically much lower than the pleb orders that we we normally produce for the norphase and new balance.
Speaker 8: So but since then, I guess since the end of the last calendar year, they are now able and have the skcal and the efficiency to produce our higher margin pleb orders.
Speaker 11: Right it's helpmful. And then just my last kind of followup question is around.
Speaker 12: You know Bill versus BU. The see you, you know you RE ever acqures some capacity. D M K last year doesn't seem like there's a lot of additional of those poential facilities that are available for sale these haven't done. Maybe that changes in this environment. But anything about the bill versus buy and you know you got 25 million in cash, you know how do you. How do jux pose or how do you think about getting more aggressive in add capacity here? Do you just just be opportunistic and try out, you know quire something that are you existor do you put a a shovel on the ground and actually you know a greenfield buildill a new facility here at some point.
Speaker 9: Well we did have a plan to Bill on the land that we have, that we have purchased two or three years ago and we will continue to finalize the engineering study and it sign up that facility. But right now we're just kind of putting it off until we absolutely need it, until we can see how the market is going and whether whether we get some.
Speaker 8: Really solid commitment from our either existing customer or or some larger new customers before we decide to start the construction. And the construction will only take about a year, or at least space on our design. That new factory will take up to a year to finish. Now we always keep our ICE open for any purchase opportunity, any acquisition opportunity that we can buy now. Like you said, those kind of what opportunities are rare, but who knows, in this market condition.
Speaker 8: Maybe there something will come up and we do have the cash to do it if we need to. But at this point, because of the uncertainty in the market and the economy, we just want to play it safe and it be more conservative until we can see more clearly.
Speaker 15: Great thanks guys.
Speaker 14: Thank you, Thank you, Thank you.
Speaker 2: Your next question is coming from ramal D bcoo, from EIS capital, rama. Your line is live, Please go ahead.
Speaker 16: Thank and good morning. I think on a prior conference call you discussed the possibility of looking for alternative sources of fabric and the jordinary and I wonder if you could just give us an update on on how that initiatives going and if you'd made some progress there. Thank you, sure.
Speaker 8: Are you want? You want to talk about the fabrics lossingyes, maybe I can talk a little bit okay, So?
Speaker 6: All allongmed. Okay, gerash sourcing inteam is located in Hong Kong and China. Okay, but from? But our recent strategy is: we are now setting up. Okay, a new marketing sourcing and development department in jordanokay. Okay, So we have already.
Speaker 6: Employ some of very of experienced staff to fill up the key position.
Speaker 5: The purpose of this department is to have the customer to source trims and fbrics OK in the Middle East country like Turkey Egypt, etcea. one of the main reasons why we are doing so it is under the request of most of the buyas, because we have we have been facing a lot of problegrm about logist, the program from continainer living from China with D and Taiwan careoa to Jordan, and then it's create much longer leadak time them before during the pidemic and especiionally during couple of months before when shhai started lock down. We also.
Speaker 5: Phase problem, both a logist, the delay of container, which also jeopardize OK, the production of the governments which need and affect the delivery schedule which already set up by the bias. So if.
Speaker 5: The Sing of the trres and a fbreak OK, can be from, I mean, neighbboring countries like Turkey Egypt, ok. So the lead time from that and this kind of countries to Jordan is much, much short, at least maybe by 50% or even 60% of the lead time, and it will become, I mean, much more controllable, and this is accessible by the buyas. Another another reason why we are doing so: because OK somewhat, especially the cotton, everybody knows about the cots's cotton problegrm about in J in China.
Speaker 5: And more and more buyers, or almost all the buyers, are not buying from or using the cotton from a thingia anymore, and also many of the buyers ok- would like to have some kind of alternative plan to for trims and fribres in the Middle East country.
Speaker 5: So this is the reason why, a reason we have already started- okay, a new complecrete, new development, marketing and softening department.
Speaker 6: And actually our teams which funted So more than 10 members already started this job since a couple of months ago. They already ago and miedstudy and we a manufactred, millals and same supplier in Turkey and Egypt and business already started.
Speaker 6: Okay and recently we also have orders from buyers that we have also bought the trims and fbrics instead from China or Taiwan, which is before and now OK, the supplier in Turkey and Egypt became the replacement supplier. Okay, this is a latest situation and I think this triren will go on and our this department. I think the business will grow because of this new setup.
Speaker 16: Okay Thank you very much for turnhelpful. Thank youthank you. We have a follow-up question from Mike Baker, from da gidson. Mike, your lline is live. Please go ahead.
Speaker 11: Hello, Mike. Your line is now lie. Please pose your follow-up question.
Speaker 10: Thanks's about that I wanted to fall up on the question or the point about potentially delaying some of your construction and I guess the question two part question but one what are you seeing in terms of inventory. In the U's is there an apparel or a jacket inventory glot and are you seeing order cancellations and is that what is leading you to maybe push out some of that constructionwell. We do feel that our key customers they do have abundance of inventory because they have reduced their orders. So.
Speaker 13: Of course they won't tell us that they have too much inventory, but the we think that the inventory situation is only goingone to slow down the increase of purchasing is not goingone to cost them to to cancel orders, because they we do have orders that filled up our capacity until the end of December . So we're not worry about, kind of by when the pandemic hits, that customers are canceling the order, are posing it out.
Speaker 8: We won't see anything like that. Okay, one more if I could. I think in your 10 -k from last year you guys just goes to joackets for 25% every your mix, which should come down pretty substantially. Any idea what it was, I guess willn T see the K, But what it was in 2022 and where we should expect that to be for 2020 -three.
Speaker 9: inyou mean the mix of jackettsyesno we remember.
Speaker 8: What we said on the ten-k aboutwhat the mix of product categories.
Speaker 8: But maybe we can give an estimate. Eric, do you, do you know what the mix of jackket was for 2020 -two?
Speaker 5: four you mean for four 20 free 20 20 threeree, is it?
Speaker 8: And also the expectation with 2020, threeour expectation for 2000 and twentventy three is. I mean not only for the trjected order, for MO. Orders from.
Speaker 5: Current customers. I think they will reduce a little bit of the orders, not like last year when their I' be asking us to increase capacity for them. I think one of the reason we just mentioned, because I think they have, at this, adequate infantry to to be able to probition for providing to customers for certain period of time. But I'm sure that I think, moving forward, after the six to seven months they will, the customer will be startpped.
Speaker 5: No matter injecteted or allllow shirt or hands, they will. They will come up and start praising the orders than like before. Okay Thank.
Speaker 7: Thank Thank you. This does conclude the QA session for today. I would now like to turn the call back to Mr choy for closing remarks.
Speaker 4: Thank you operator, and thanks again to all of you for joining us today. We appreciate your support and interest in our company.
Speaker 4: And we look forward to speaking with your gaain soon on our fiscal 2023 first quarter call. Thank you everyone, Thank you.
Speaker 14: Thank you, Thank youthank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.