Q1 2023 Jerash Holdings (US) Inc Earnings Call
Good day, ladies and gentlemen, and welcome to Jerash Holdings fiscal 2023 first quarter financial results. At this time, all participants have been placed on listen only mode and the floor will be opened for questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Roger Palmdale Investor Relations for garage holdings, Sir the floor is yours.
Thank you operator, good morning, everyone and welcome to Jurassic Holdings' fiscal 2023 first quarter conference call.
Upon dealt with Pinedale Wilkinson garage holdings Investor Relations firm it would be my pleasure momentarily to introduce the company's chairman and Chief Executive Officer, Sam Troy.
Financial Officer, Gilbert Lee and Eric Tang, who leads the company's operations in Jordan, but before I turn the call over to Sam I want to remind everyone. Today that the call may include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1990.
Five.
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.
Www Dot FCC Dot Gov, along with other company filings made with the SEC from time to time.
Actual results could differ materially from these forward looking statements to rash 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 Choy Sam.
Yeah.
Mr. <unk>. Please go ahead.
Okay.
Mr. Choi please check your mute button. Please go ahead.
Okay.
Oh, Okay, sorry, okay. Thank you. Thank you Walter and Hello, everyone. Our fiscal 2023 first quarter again, reflecting the rest holdings reputation at the pulp quality coming into such a Rotten Jordan.
Our competitive advantage to attract new global brand customers.
We are happy to report that.
Company.
First quarter revenue of 33 4 million.
S retailers throughout the world.
Including inflationary pressure and higher inventory levels were also feeling the impact.
Even smaller patrice or the quantity.
And then all the make sure to work products that command generally lower average selling prices such as salt.
Who neck and pool open ships.
Despite the challenging economic environment.
However, we see fiscal 2023 to be a transitional and opportunistic yeah.
This operation perspective.
And labeling the rest to continue his skull diversifying and expanding customer base.
S T with me a mouse for sample.
Churches to our growing roster of high profile global apparel brands earlier in the call.
And we have to produce needle orders the woman polo's in our fiscal third quarter.
Additionally.
Test orders for our first European based high end power brands are progressing well.
We are hopeful that this new customer.
They bucharest to be more visible among other European based apparel brands.
We are taking a conservative approach to our guide guidance, particularly in comparison to fiscal 2022, which experienced record high demand with the call.
Most.
Post Covid, we opened them.
We discuss those details momentarily and we will leave plenty of time for questions.
Sure.
I will now turn the call over to Eric Tang Who's based in Jordan.
Dubai will cover our financial results.
Hey.
Thank you Sam Hello, everyone.
With the challenging external environment, and the generally anticipated economic downturn by retailers.
Recent orders placed by our top global brand customers have been smaller.
Particularly for <unk> jet.
Comparable orders received last year.
We continue to proactively communicate with all existing customers to reconfirm their orders and shipment schedules.
We believe this trend will continue through fiscal 2020 free.
Retail sell through that.
<unk> inventories and work through economic and inflation recovery, which would impact both order fulfillment and delivery schedule.
Fortunately <unk> competitive advantage and the ability to attract new customers is keeping us busy.
Our manufacturing capacity remains essentially fully booked through December 2022.
The global trend continues to diversify supply chains away from Asia.
Especially China.
For a more stable and duty free country, such as Jordan.
Our scrutiny, which we have received production inquiries from several new premium brand customers.
Which we allow us to further diversify our customer base.
On the new customer front, we will start production for timberland and sketches in the third quarter.
Although initial orders for lower margin products and smaller quantities.
Beside can blend there are two other we have friends that we are in the process of bringing onboard.
Yes.
We are optimistic about working with our new customers.
And we are confident that over time this new global brands will grow in a meaningful way.
The new dollar tree for all multinational workforce is scheduled to be completed by the end of next month.
The high quality energy efficient living space will come 40 sites in high these safety measures will help position us for future growth as well as a third of our ESG goes on improving operation efficiencies cool concept electricity and water.
H.
We plan to move approximately 1500 of our multinational workers. So this new dollar tree at the end of 2022.
Lastly, we are in talks with the United Nations and Jordan couple of months to add an additional 100 250 Syrian refugees to work at our factories.
Continue to focus on our social responsibility at false.
Surfing and that's the way you entrusted them draw yeah, you'll have refugees settle into that new hosting country.
With that I will turn the call to Gilbert to discuss our financial results and our fiscal 2020 free outlook Gilbert please.
Thank you Eric.
Revenue for our fiscal 2020 through your first quarter rose, 12% to $33 4 million from 29 9 million in the same period last year.
Gross margin expanded 100 basis points to 19, 8% for the fiscal 2023 first quarter from 18, 8% in the same period last year, reflecting lower average cost basis from larger production scale after integration of MK garments.
October 2021, and to a lesser extent margin improvements for products sold to local customers.
Operating expenses totaled $4 4 million in the fiscal 2023 first quarter versus $3 3 million in the same period last year.
The increase was primarily due to higher head count from the acquisition of MK garments and increase of approximately $294000 in stock based compensation and expenses related to recruitment of new migrant workers and the associated traveling expenses since.
Covid restrictions.
Limited our foreign worker recruitment for the past two years.
In addition, we have established a middle East and North Africa, the Mena region sourcing team and expanded our merchandising and sampling operations in Jordan over the past few months.
This strategic move will enable us to diversify our material and supply sources to reduce the dependency in Asia as well as to shorten material lead time.
Through strengthening our merchandising and sample development in Jordan, we will be able to facilitate a quicker response to customer inquiries and open up opportunities to other European based customers as well as global brand customers with EU market presence.
This increase in SG&A expense will pay off considerably in the long run.
More near term, we anticipate saving approximately half a million dollars in annual rent expense with the new dormitory, starting next calendar year.
Operating income totaled $2 $2 million in the fiscal 2023 first quarter versus $2 3 million in the same period last year.
Income tax expenses for the most recent physical first border was 560000 compared with 418000 in the same period.
Last year with the increase in part, reflecting a higher tax rate in Jordan as well as higher expenses in our China and U S entities that cannot be used to offset income in Jordan for tax purposes.
Net income for the fiscal 2023 first quarter was $1 7 million or <unk> 14 per share compared with $1 9 million or 17 cents per share in the same period last year.
<unk> balance sheet and cash position remained strong with cash of $21 5 million and net working capital of $55 6 million on June 30 of 2022.
Inventory was $29 million in accounts receivable amounted to $11 million.
Net cash used in operating activities.
Approximately $473000 in fiscal 2023 first quarter compared with $11 5 million in the same period last year. The net change reflects working capital activities, primarily due to the increased the decreases in inventory and AR.
Receivable.
As Stan mentioned, we are taking a conservative approach to our guidance given the inflationary environment that is affecting retail markets and consumer sentiment.
Along with a product mix shift to apparel items with lower margins and lower ASP.
Our fiscal 2023 second quarter revenue outlook is expected to be in the range of $41 million to $43 million compared with $45 7 million last year.
We are also expecting margin to be lower to 16% to 18% on average for the full year.
While customer order volume in total remains healthy.
We anticipate that revenue growth will be moderate for the full fiscal 2023, considering customers are placing smaller purchase orders and a product mix shift.
Again, we view fiscal 2023 could be transitional and opportunistic for duress. If last year, we were unable to accommodate new customer orders when capacity demands from our top global customers, where as such exceptionally high level.
That said, we are now continuing to focus on growing our customer base to expand our production and improve productivity for a reason the added new customer orders.
We will continue to closely monitor developments over the next few months and plan to provide an update on our next call.
Our board of directors approved a regular quarterly dividend of <unk> <unk> per share to all common stockholders on August 24th to stockholders of record as of August 27.
I mean August 20.
August 17, sorry.
Reflecting the board's and management's confidence in the long term future of duress Holdings on June 13, 2022, the board authorized a $3 million share repurchase program, which will be in effect through March 31 2023.
To date, approximately 23557 shares have been repurchased at an average price of $5.76 per share and we will remain active in the market in the months ahead.
With that we will now open up the call for questions.
Operator may we have the first question. Please.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
We asked about posing your question you. Please pickup your handset of listening on speaker phone to provide optimum sound quality. Once again. Please press star one if you have a question at this time I am please hold while we poll for questions.
First question is coming from Michael Baker from D. A Davidson.
Michael Your line is live.
Okay, Hi, Thanks, Hi.
Hi, guys a couple of questions for me.
Back in June you had said to expect.
You sort of went through a quarterly cadence and that said still yourselves around.
15% are you just said I think the term was moderate sales growth for the year, a moderate sales growth seems less than 15% to me is that a fair.
Characterization three of full year sales outlook.
Well right now we're looking at.
Full year of 2023 to be.
Basically flat.
Comparing to 2022, but there are hopes that we will be able to.
Come back stronger in the second half, but right now looking at the first half as you know we grew only 12% in the first quarter, we anticipate second quarter to be.
The lower than the second quarter of last year.
Looking at the orders that we have already and then projections from our existing customers.
The fourth.
Fourth quarter together will be about even with.
With our last.
Fiscal year, but we're not going to we're not going to really guide the whole year, because there are a lot of.
The uncertainties and with the global market being in this situation.
With the war going on in in Europe .
Then.
Inflationary so it's just very difficult to say, but we're working hard with our new new customers and then we.
Bringing on board.
A few more new customers so.
Well it is high at this time, where we're just going to say that.
This up this upcoming year is not going to be very clear.
Okay. So.
The correct, if I'm wrong, it does sound a little bit of a more cautious outlook.
Outlook than just a few months ago.
Well, let me know if I'm wrong about that.
But as a follow up.
We know there's inventory glut in apparel in the U S and that's causing some of the slowdown.
I'm wondering if if if you've been able to see any kind of a retail is working through that at all is that glut.
Similar worse better than it was two months ago and any sign of progress in working through that thanks.
Right now what we are seeing is it is a little bit worse than two months ago.
But but to us it is an opportunity to.
Utilize our capacity.
We are building additional capacity.
And comparing to last year, we do have more capacity. So we're going to use that to absorb and to bring onboard new customers that we have been trying to bring in.
In the past year or two.
So.
And then it is a it is a good opportunity for us.
Yeah sure no that that's definitely a good silver lining and the situation what one one more if I could again last quarter you had talked about full capacity through December still saying full capacity through December .
You know as am I reading too much into that that feels a little negative to me in other words the capacity.
You haven't been out to book out any more than you were.
Two months ago or is that am I interpreting that wrong.
Well right now we're still confident that we will be running at full capacity through December .
However, the mix will change the product mix will change.
We are going to bring in more local workers in local.
Orders.
And which one to use.
Any extra capacity too.
Two.
To fulfill orders from customers.
With lower Asps and.
With lower margins. So yes in terms of volume, we will use up all the capacity, but it's just that the asps and the margins will suffer.
That's why we're not going to.
We're not going to guide.
Anything.
Beyond this.
Current quarter because.
Things are changing but we're going to keep running running our capacity at full speed.
Understood and one more I guess point maybe question just.
Remind us so in terms of using this as an opportunity historically those new businesses do typically come on.
With lower runs on lower margins, which is what you're seeing now broadly over time, presumably that's an opportunity for that to build and so take advantage of the a little bit adding a little bit more capacity for new customers now you come in at a low margin well run businesses, but overtime that grows is that the right way to think about this opportunity.
Yeah, absolutely just for instance.
Three years ago, when we brought a new balance too.
To a family to them mix.
At that time, they were just sending us a lower ASP and lower margin products and then.
In the first three to six months, we had to learn how to run the products.
And orders with smaller so at that time on margin.
Hit and but now they are growing very strongly and we are making.
The margin with new balance has been improving over the past year or two.
Awesome. Thank you I appreciate all the time.
Absolutely. Thank you.
Thank you and the next question is coming from Mark Argento from Lake Street, Mark Your line is live.
Hey, guys I appreciate it hey, Mark.
Yes.
Couple of quick questions first off on.
Obviously kind of cyclically, a little bit of a soft period right now just given that glut of inventory out in the channel post Covid and just kind of have to work itself through which I'm sure it would but.
But when you think about the opportunity to do longer term to add capacity does this create an opportunity for you I E. I think I'm sure probably some of your competitors and market Jordan, particularly our product beyond fuel and are feeling the pinch a little bit as well.
Any thoughts on you know cranking up the M&A strategy again.
It seems like this.
Macro trend towards moving away from Asia to other manufacturing venues, there's one that sticks around a lot longer than.
Just the cyclical ups and downs that you're experiencing right now, but just wanted to get your thoughts on more permanent and substantial capacity opportunities out there.
You are 100% right Mark.
Our our competitors as well.
People that we know.
And Jordan out of the factories.
Feeling the same and Eric told me a few days ago that.
Some countries they well.
None of the factories are running at full capacity et cetera.
Some are even running at 30% down from full capacity. So everybody is feeling the pain.
And if there is opportunity to.
Do some M&A like the one that we did in last year for MK will definitely jump on that because we have the cash.
Uh huh.
And if it rains.
New customers, if they're already doing business with some of the similar customers that we have that would even be better.
So yeah, we will open to.
Any opportunities any opportunity for for M&A.
Firstly in the in the Jordan or the end of May.
In our region.
Eric Sam do you have anything to add to this.
Yeah, I'd say I totally agree with what you are saying, okay. Although as a matter of fact, I mean I was approached by more than 10 15 factories apparel Jordan.
All facing.
Poverty.
Cutting down there or there's about 25% to 35% and they also need support from Suraj. In fact, Suraj also face the same call firm, that's our one or two of our major customer also reduce the order okay, but okay. At the same time, okay. We all win.
When other brands, Okay understand that suraj.
Mediate weekend capacity, Okay always geraci top hierarchy.
Media approach US Okay, and then we successfully took some orders from them and fulfill the capacity, although the profit margin might not be.
Put us like that the Jackup. We are doing that is we have a reasonable profit margin that we can fill up all our capacity.
Up to the end of December .
Yeah.
Samsung as well, yeah, I think that the economic outlook in the coming one or two that may not be good.
As we just discussed.
There will be opportunities for tourist as well because.
Some branding customer.
In the past didn't source any common from DTC country like Jordan.
And our strength is duty free as well as quality product. So some in fact.
We have.
Very positive discussion with some reputable brand name, we even saw some Jordan the Pos and no debt.
Can see the secrecy.
The source of Jordan instead of some political unstable countries.
And I.
I hope.
We can have a very I mean.
Opportunistic.
I'm.
Chance to do business with them and those the breadth of the brand name and I do believe the margin will be much higher than.
Other notable customers so I.
I hope I hope.
Maybe in the fiscal 2024.
First quarter of 2020 full we can stop business with them.
Upside down for C J solves such recertification.
That's from Bang Bang.
Then we will have.
We can diversify our customer with higher margin.
What business swap.
The rest of the world.
Yes, you're right actually we one thing that I would like to stress is that we have put in place.
Our Mena sourcing team in Jordan previously.
<unk> really focused on sourcing from Asia, and Hong Kong, and China, causing team have been.
Really just taking the lead in.
In terms of sourcing, but now we have put a team together in Jordan.
Source from.
The middle East and North Africa region. So we have already started sourcing.
Cheerios from Turkey from Egypt, and that is going to give us a significant competitive advantage going forward.
In addition, we have also.
Strengthen our merchandising and sample development capability in Jordan and.
That will give us a lot of opportunity to.
With any new customers any new brands, because we are right there too.
To do the product development and to do the pricing with them. So with just these two I b.
Belief, we're going to be very successful in bringing in new customers.
Great. That's helpful and just one housekeeping item did you mention Jordan. If you guys bought some stock back in the quarter could you just refresh that for me.
Yeah, we started.
We purchase program.
I think back in July .
Uh huh.
Yes.
I think we started buying in July and so far we have purchased about 24000 shares well we have just stopped because of the quiet period, but as soon as we file.
10-Q, we will begin buying again.
Great. Thanks, guys.
Sure. Thanks.
Okay. Thank you and the next question is coming from Peter Sidoti from Sidoti and company.
Your line is live.
Hi, just one quick question for the rest of the year do you see yourself generating cash using cash.
The cash flow through the end of the year.
Well it will be very careful with our with our cash flow situation.
Uh huh.
We always generate sufficient operating cash flow and we anticipate this upcoming well at least for the rest of the fiscal year, we will be profitable.
So.
And when you always have a sufficient credit facilities and now we're working with the two largest customers that we have the financing program with them that any time, if we need.
Cash faster.
They will pay us faster.
Now are we.
We do have to spend some capital.
Money.
On buying.
Let's say the the.
The building and the land for the MTA.
Battery and that is about two I think we still owe them to $2 million to two closed out of the deal.
We're going to buy the the office building that we have in our in Hong Kong and that is about $5 million. So just those two.
Well and also we have to finish up the.
The dormitory construction.
So we do anticipate spending quite a bit of money in terms of capital.
Capital expansion.
Yeah.
But other than that I think we we should have sufficient cash flow.
For this upcoming year.
I'm, sorry, you're purchasing a building in Hong Kong for $5 million.
It's not an entire building is just the office space.
We have been using for the past I don't know how many years.
But then in order to take advantage of the I.
I guess after COVID-19.
The real estate prices dropped and we also wanted to say if the rent so.
That's why the board decided to be purchased.
The property.
Thank you.
Mhm.
Thank you and the next question is coming from he has an opt in.
<unk> is a private investor your line is live.
Hi, thank.
Thank you guys for the update I just have one quick question regarding the operating expenses and the increase in debt.
I saw that you mentioned that part of it is due to increased head count from the MK acquisition, along with some other expenses can you highlight what is a one time expense out of that and what will be recurring.
Well the.
I think the one time expenses more on.
Bringing more overseas workers.
I think sins.
A year ago, when the when Covid just stop.
Our head count was like four 4500, 4200, and now we're close to 5800 people.
So over this year I think we brought in.
About 1000 workers is that accurate.
Eric.
Oh, Yes, yes, you are right.
Yeah. So.
Bringing in a thousand workers. It takes a lot of money we have to apply for the for the reserves we have to get permits from the.
From the Jordanian government to fly them in.
Uh huh.
So.
And.
Sure.
And we we also absorbed the <unk> factory 500 workers and.
I think it is now up to 650.
And it has room to go up to 800, so all of this increase.
Clothing, and a child related expenses.
Probably just one time, but we're looking at ways to to reduce our SG&A.
Uh huh.
Because because we're looking at are not so much coiled within this coming year.
So we are going to stop bringing in additional foreign workers.
For the time being.
We still have we still have permits to bring them in but it was just going to hold on to that.
As well as if.
If there are workers because they constantly either there are workers who whose.
Contracts are up and they have to go back and we wanted to for the time being not replacing those workers. So just.
Through attrition.
<unk> reduced our head count.
And well while that doesn't really affect SG&A that much because the workers are more on the cost of goods. So.
The line of cost of goods sold in the margin.
These were not going to spend as much money in terms of recruiting.
And the SG&A increase over the past year part of it.
Well there is a separate line item for stock based compensation and that is.
Over a million dollars.
Okay.
Yeah and in sales has has also.
Greece over comparing to last year.
Sales.
The selling costs, which includes.
The freight the outbound freight shipping the products to the ports that has increased.
Not just in volume, but also as you know oil prices have gone up so the those transportation costs has gone up also.
Okay.
So out of the.
Year over year for the operating expenses was about $1 1 million.
If you exclude the.
Stock based compensation that leaves about 800000, so how much of that do you think it's one time.
I don't have the detail in front of me, but I would believe.
About three or 400000, it's one time.
Okay. Thank you.
And just finally, you might get it to be.
With regard to the acquisition of the office in Hong Kong.
You mentioned its about $5 million how much in run the are you paying for that.
How much rent savings will come out of the acquisition.
I don't remember.
Exactly how much rent, we're paying for the Hong Kong Office, I think it's like $600000 a year is that right.
Ah Okay.
In fact, the reason I mean, why do we have to change the properties they have been.
Using that with.
Some decoration expenses has been spent on Beth so definitely we won't move out.
We've tried new offers more declaration or expenses with that.
And also.
For the purchase of the property of our own golfers.
Taking into account the depreciation of the offense over trend about 25 years and existing brands so wrong.
Close to 50 with the increase in grant.
From the landlord he would be close to.
Uh huh.
Fifth team.
Our U S dollar per month.
But that will be a wrong.
So it seems like.
300 360000.
U S dollar per year.
So after the call.
Alkylation and say there will be some savings taking into the precision power.
The gross depreciation would be yes.
Yes, yes.
And so that's why we purchase of property and also taking the COVID-19 situation the appropriate price.
Good evening is below market.
And and if we use the office for long definitely I mean, the office Vanda will be increasing yeah. So that's why we put a change there. So I mean after we put changes in terms of corporate loss in fact, there may be a little bit of savings.
Yeah.
Okay. Thank you.
Yeah. Thank you and the next question is coming from Michael <unk>, who is also a private investor Michael Your line is live.
Hi, Thanks for taking my question.
Since about the.
Second order.
Could you just give me more color on that.
Among them.
Reduce thing to order on Cherokee and kind of on that.
Yeah.
Eric can you answer this one.
The reduction in jacket orders.
That oh at all okay.
Our major customer is giving us.
Monthly check all of the 800000 pieces okay. So.
We already related to classic just now that Ted.
Yeah, they have retail.
Around.
200000 pieces to 250000 pieces a month, okay because of the excess inventory so.
So.
That means we have to find replacement order in order to fill up our weekend capacity and we have lots of firsts really doing so during the past couple of months and that's why we are still booked through our capacity is to walk through.
End of December .
So is this like a quarter. So you are.
For the whole year right. This is months up two weeks months.
For Iridex.
Actually the biopsy the indicators that our weapons out they would assume the extra 200 or 250000 pieces, but.
Patents on the market situation, especially okay.
During the D C. During the Christmas and new year, So they will keep us posted.
To us.
Okay, great. Thank you very much.
As clunky.
What does the new balance and not face a south on the corner.
Okay, but do you have this thing.
Uh huh.
The percentage right.
Yes, the dollar amount.
Yes.
And lastly, it's like you have a penny.
Tens of million something like that.
Well north face.
This quarter it is.
About $21 million.
And new balance is about $8 5 million.
Okay, great. Thank you very much.
Yes, that's really great yeah. Okay. Thank you that's all my questions. Thank you.
Thank you and that's all the time, we have for questions today I would now like to hand, the call back to Sam Choi for closing remarks.
Okay. Thank you operator.
And thanks again to all of you for joining yesterday.
Our prospects remain healthy as retrans reverse the current environment.
Appreciate your support and interest in our company and we look forward to speaking with you again soon on our fiscal 2023 second quarter call. Thank you very much.
Thank you ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.
Thank you very much.
Okay.
Sure.