Q2 2023 Jerash Holdings (US) Inc Earnings Call
[music].
Okay.
Good morning, ladies and gentlemen, and welcome to the garage Holdings fiscal 2023 second quarter financial results call.
At this time, all participants have been placed on a listen only mode.
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.
<unk> Investor Relations for Suraj holdings, Sir the floor is yours.
Thank you very much Ali and good morning, everyone. Good evening, I guess to some of you we have a truly global call.
Welcome to <unk> holdings fiscal two to three second quarter conference call I'm, Roger PON delegates Hondo Wilkinson rashes investors relations firm.
My pleasure momentarily to introduce the company's chairman.
And chief Executive officers and Troy.
Chief Financial Officer of Gilbert Lee and Eric Chang, who leads the company's operations in Jordan.
And before I turn the call over to Sam I want to remind all listeners.
Today's call May include forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95.
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 <unk> Holdings, most recent Form 10-K and form.
<unk> 10-Q 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 these forward looking statements and Euro Ash 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.
Thank you Roger and Hello, everyone.
So in general market conditions throughout the global retail sector continued to be impacted by.
Inflationary pressure.
Higher interest rates and inventory levels.
Also are feeling the impact.
Orders received during the current fiscal year.
Major customers have generally been smaller.
And with a product mix shift more to lower average selling price.
Compared with last fiscal year.
Also.
From a year over year comparison.
Last year was unusually strong due to pent up demand following the peak of it.
Spending.
Revenue for the Cisco tool.
Three.
Second quarter was lower than originally expected by approximately $4 million.
Lucas shipment postponements.
Dealer sell through the excess inventories.
Nevertheless.
As I mentioned last quarter.
Fiscal 2023 to be both a transitional and opportunistic.
Correct.
We are making excellent progress with the new sites and to expand and diversify our global brands customer base.
Production for two of our newest customers.
<unk> and sketches already has begun.
And initial shipments to both up beginning in the current quarter.
Also we are continuing to lose.
ZIP enclosed from other major global brands and we believe.
Prospective customers, who pay cotton ROE for this year.
We also are pursuing opportunities to gain with the peak was with high profile customer brands in other segments of apparel manufacturing.
Which we believe will further diversify our customer base in the years to come.
Just yesterday.
Hi.
Memorandum of understanding for a joint venture company.
Posada apparel broke.
One of the worlds largest government sectors IDEXX boxes.
With 13 manufacturing facility.
Yeah.
Ethiopia.
<unk> is well known for its high quality woven that payroll protection specializing in pinnacle common active sportswear and formal wear.
We also are gaming with the basically into the aesthetic.
Last year, we're at Tenneco clothing segment.
Pousadas customers.
Expressing interest.
Equally diversify and net reduction in Jordan.
With a long.
Standing.
Agreements with the U S EU and adequate.
In other countries we.
We will keep you apprised of our progress.
I will now turn the call over to Eric <unk>, who is based in Jordan and then <unk> will cover our financial results and discuss details of our approach to guidance for fiscal 2000 tons of <unk>.
Water.
Hi, Eric.
Thank you Sam Hello, everyone.
We will set challenging external retail environment.
Orders placed by our top robo, Brian customers have been smaller.
At the request of delivery schedules have been later date a year ago.
But we continue to actively communicate and maintain excellent relationship with each of our existing customer.
We believe current trends will continue through fiscal 'twenty trying to free as retailers sell through excess inventories.
That's really economic and inflation recovery, which.
Impacts both order fulfillment and delivery schedules.
Fortunately <unk> competitive advantage and visibility in the marketplace.
To bring the company to continue to receive new production inquiries from premium brands global.
Global brands trends.
Continue to diversify supply chains away from Asia, especially China.
On the new customer front.
Sam said, we launched production for Timberland as Scott just in the third quarter.
We are pleased to be working with well known brands.
Initial orders for products generally have lower margins and in relatively small quantities.
Our first order from timberland were shipped in late October .
We also are working on test orders for two other brands and other additional leading global brand customers outside of the U S.
We are optimistic about diversifying our customer base, which we believe to be a healthy move what's the rush.
And we are confident that over time revenue from new global brands will grow in a meaningful way.
Construction of our new dormitory for multinational workforce is underway.
But now delay for a few months with the start of the rainy season.
We plan to move approximately 1005 hundreds of a multinational workers to this new dormitory during the first quarter of 2023.
We will be saving approximately $500000 in annual rental expense beginning next fiscal year.
With that I will turn the call to Gilbert to discuss our financial results.
Fiscal 'twenty 'twenty three outlook Gilbert.
Thank you Eric.
Revenues for our fiscal 2023 second quarter. It was $37 8 million compared with $45 7 million in the same quarter last year.
Inflationary pressures along with higher interest rates and inventory levels are affecting retailers, which took a toll on our performance.
Revenue also was impacted by approximately $4 million in customers' shipment postponements.
Gross margin was 18, 3% in the fiscal 2022nd quarter.
Herd with 22, 1% in the same quarter last year.
The decrease primarily was driven by the lower proportion of export orders that typically generate higher margins.
Operating expenses totaled $4 $3 million in the fiscal year 2023 second quarter compared with $4 5 million in the same quarter last year.
SG&A expenses remained elevated.
$4 3 million in fiscal 2023 second quarter comp.
Paired with $4 2 million in the same quarter last year.
It was primarily due to our newly established middle East and North Africa regions solving team and expansion of our merchandising and sampling operations this year in Jordan.
We have been receiving inquiries and positive feedback from customers for diversifying our material and supply sourcing to reduce the dependency on Asia as well as shortening.
Cereal lead times.
This in turn will enable us to provide quicker responses to our customers as well as open new opportunities to attract.
Additional global brands.
We're confident that our investments today and SG&A expenses will pay off considerably in the long run.
Operating income amounted to $2 $6 million and the physical 23 second quarter versus $5 6 million in the same period last year.
Interest expenses were 164000 in fiscal 'twenty, three second quarter compared with 46000 in the same quarter last year.
Net income for the fiscal 'twenty, three second quarter was $1 8 million or <unk> 14 per share versus $4 4 million or 39 cents per share in the same period last year.
Comprehensive income attributable to duress holdings common shareholder totaled one $6 million in the fiscal 'twenty, three second quarter, including a foreign currency translation loss of 216000 versus comprehensive income attributed to.
<unk> holdings common shareholder.
<unk> $4 4 million in the same period last year.
<unk> balance sheet and cash position remained strong with cash of $23 million and net working capital of $47 5 million.
September 32022.
Inventory was $36 4 million and accounts receivable amounted to 4 million.
Yeah.
Net cash provided by operating activities was $9 6 million for the six months ended September 32022, compared with $10 2 million for the same period in fiscal 2022.
The net change reflects working capital activity.
<unk> blow to increases in inventory and accounts payable and a decrease in accounts receivable.
We're taking a conservative approach to 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.
For the fiscal 2023 third quarter revenue is expected to be in the range of 33 million to $35 million compared with $36 8 million last year.
We also are expecting margins to be lower.
At $16 said, 16% to 18% on average for the full year.
As Sam and Eric pointed out.
We view fiscal 2023 to be transitional and opportunistic forward your rash.
Last year, we were unable to accommodate new customer orders when capacity demands from our top global customers, where as such exceptionally high levels.
We continue to focus on growing our customer base and pursuing other opportunities to enhance our competitive advantage product capabilities and offerings.
We will continue to closely monitor developments over the next few months and plan to provide an update on our next call.
On November four our board of directors approved a regular quarterly dividend of <unk>.
<unk> per share payable November 28.
To stockholders of record as of the.
November 18 2022.
On June 13, 2022, Giraffes board authorized a $3 million share repurchase program.
The share repurchase program will be in effect through.
March 31 2023.
To date, approximately 105000 shares have been repurchased.
An average price of approximately $5 20 per share.
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 and if you have any questions. Please press star one on your phone at this time.
Yeah.
Our first question is coming from Michael Baker with da Davidson. Sir. Please go ahead.
Perfect.
Two questions one first.
Inventory, both your own and what Youre seeing from your.
Your customers. So your inventory is up significantly year over year and much higher growth rate than we've seen in the past. So can you talk about is there any risk of that inventory.
Or.
The complexion of that inventory and then as it relates to your customers I mean, I think everyone knows that retailers in the U S and probably globally their inventories are too high and so they're pushing back on orders that that's not that shouldn't be news to anyone I guess my question is in your view how situation today versus <unk>.
Three months ago or last time, we reported.
Our retail is working down that inventory at all and in your view or is it actually getting worse.
Okay first of all on the inventory question, yes inventory levels.
That we have on our books.
Higher than than before than normal.
Pairing to the beginning of the year and our inventory is about $8 million dollar higher and as we said there are about $4 million.
Our finished goods.
What's pushed over to the third quarter for shipment and that reflects.
That our customers' inventory levels are also very high.
They kind of just postponed the delivery of those.
Finished products, but I think everybody is working on working.
Working off their high inventory level and it will just take some time to.
Get it down.
Given the current.
Retail market situation.
And the global economy.
Consumers.
Less willing to spend.
Maybe Eric you can talk a little bit about the.
Situation.
Especially in Jordan.
Comparing two ago when we reported.
Okay.
I think before.
Before I referred to the three months ago. When we reported the situation now is getting a little bit worse in Jordan for all factories, because that you know.
Most all the factories manufacturing for U S brand at 90% of the manufactured product is to go to U S.
Now that I have spoken to a lot of brands and lots of frac trees because of the high infantry level. They have to cut down the order or they don't just placed new orders. So many of our smaller factory I mean, the size, maybe only 100 to 200 workers in Jordan they already costar, because they don't have to.
On direct order from the brands they only rely on subcontract all of this now even the manufacturer. They don't have enough order to fill up all their current capacity holiday gift cards. The order to the small factory. That's why a lot of them are closing down and for most of the factory okay. Nowadays.
Because they don't have enough work to fill up all the capacity. They are not working sometimes are only five states that we can set a fixed and the working hours some of them reduced from 12 to 10, some reduced from 10 to eight had somewhat even working staff at our start date.
Fletcher Rush, we are still trying to make yourself our full capacities. Okay. We still have enough order to free our production lines. Okay. So we are.
The situation, which I've spoken with many of the brands and the factories. Okay. It doesn't it will only reflect the real picture after the Christmas and new year sale all of them are saying the same thing.
Hmm.
Yes.
Eric It's alright.
A lot of our customers.
Waiting and see what's going to happen in this Chris.
Christmas and Thanksgiving season to see how the sales are before they before they decide what to do but definitely they are sitting on quite.
Quite a significant amount of inventory.
Oh, Okay. Yeah, that's really helpful commentary, if I could ask one more I guess set of questions just relative to the to the model on expectations. So you gave some color on how to expect the third quarter, but I guess you know so based on those comments you just made should we expect the sales weakness to continue into <unk>.
The fourth quarter as well so I'm wondering if you want to comment on that and then by implication.
What the what a full year of 2023 revenue number should look like and then the expenses being a little bit elevated $4 5 million or so do we expect that to continue for the next few quarters. It sounded like from your comments that that's a reasonable place to project the SG&A for the coming quarters.
Well I believe.
Well first of all the Q3, we have visibility on.
Pretty much.
It's going to be.
Off from last year.
Probably by about 8% comparing to last year Q3.
And for the full year, we really do.
Why.
Uncertain about.
What is going to look like.
Q4.
We think it will continue to be weak, but we just don't know how.
How weak it is going to be.
So we just want to be conservative.
I don't think there's going to be.
Well definitely it's going to be down from previous year.
So the whole year winter, we're not giving out any guidance, but.
I think it should be.
In line with.
Pretty much.
Our our global brand customers sales declines.
Declines.
So I think.
One thing.
I would like to give you information is that that's a possibility that's our last may.
May be have some improvement okay, I mean, I mean, not that it's worth it.
It is because we've got some oh, the confirmations recently that for me F. Because one of their wedding.
The country, Okay also duty free country they get.
Some big financial program. So we have with moving some of the orders from the country to Jordan, Okay, well, yes.
Now keep giving up some extra capacity, giving them too.
To accommodate this new order, which is to be shipped before the 31st of March which is the last quarter.
Okay.
But just to be conservative I think Q4 is going to last.
Yes.
Understood Yes.
And.
And then the second question about the about SG&A and operating expenses I think it will continue.
Around the $4 $34 4 million dollar level, we don't want to cut too too much, especially on SG&A, because we're investing right now is two.
Expand our sourcing and merchandising, especially in our Jordan.
That's the royalties so we can take advantage of.
Sourcing from from the Mena region as well as.
We're trying to attract European brand customers.
So I don't see that coming down significantly.
Significantly.
Fair enough. Thank you.
Sure. Thank you.
Thank you. Our next question is coming from Mark Argento with Lake Street. Please go ahead.
Good morning, guys, just a couple of quick questions.
I just wanted to better understand I know historically you guys have talked about how your capacity has been booked up.
So I assume you work with your customers they bought they place orders with you broke up your capacity.
What I'm a little maybe you could just walk me through how.
It sounds like you can manufacture product for them, but then they can decide when they take delivery how much latitude do they have.
Relative to kind of deciding when when delivery is when they want to accept delivery of the product.
Well the customers they dictate when they wanted to take the take delivery.
And in times like this.
They have the power to postpone the delivery because they want to.
They want they don't want that to be on the books.
Finished goods inventory.
So that's why some of the shipments were pushed off to two Q3 from Q2.
And then we.
We constantly every week.
We communicated with our customers to update their delivery schedule.
So but they are.
We have very good relationship with our customers like the App.
Balance and they try to work with us.
They also understand that situation and.
For the for the products that we produce.
It will definitely take it and sometimes they even pay for it in their brands.
It's just that they don't want they don't want us to ship until.
Until this is good for them.
Yeah.
Anything to add Eric.
Yes.
Our customers really were loyal to us okay. They understand the apparel difficult to even for example, one of the major customer new pilots there real quick okay. Although they tried to postpone some shipment into the next quarter, but are they still in tests to pay to us before the shipment because the delays caused by them.
Mhm.
Got it alright.
That's helpful.
And then just a quick question.
Sort of I think that's how you pronounce it talk a little bit about that in a yes from chip yeah. I mean are they are they a partner or a competitor or how do you how.
How should we think about that relationship.
It's one of the largest apparel crop in a in Asia country. Okay.
Total more than 30 facilities in those niche here and one in Africa.
Okay. The number for employees is around 28, thousands of people, okay, well for annual sales volume of more than $450 million, they're dealing with a lot of our threatened okay. Some of what some of the brands or to a free brands I'll come on Brian We did together with them to rush.
Okay. The purpose of they coming to have a joint venture with us It is.
It's not they don't have faith that they have too much business, but all of that business are concentrated in the Asia country. Nowadays. They told me that the buyers are requesting them to go outside from I mean to move some of the business to a duty free country and Jordan is the best location.
Most of the brands are talking to them. So this is the reason why they why they approach us okay, and what's the setup a joint venture with us and okay and.
The customer okay. The brand's cobos, sending out that if you have remaining staying in Asia and into this year, we cannot grow your business and if I can say anymore. If you are going to move to another country like duty free like Jordan, we can continue to grow so he.
If theyre thinking that to establish a new factory in Georgia may need one or two years' time they may.
My Expo to cope with a very good factory in Jordan. So they check they do a lot of statistics and check with many sources Thats Gerard shifts once the back in Jordan. So they approach us and then they want to sell the facility and move the business from some of the brands to Jordan and that we can grow together.
Yeah, and some of this global brands.
Customers that we have not done business with before and they are premium and really.
Very popular brands in Asia, well, some in U S and some in Europe .
And I think this is a very good opportunity for us to be able to expand and diversify our customer base are partnering with Louisiana.
Yeah.
And how do you anticipate the JV would work at a high level economically.
Kind of margins do you think that.
That business.
January .
Well right now all the details are still.
We haven't really sit down and discuss with booz and how how the detailed opinion shows an.
Investments in all those kinds of things right now we have just come to an agreement to have a Mou signed and then in the next six months, we will begin.
Talking and looking at all kinds of ways to work together, but.
At least three or four of their customers.
Already begun.
Uh huh.
Standing us down pose in talking about styles and what we can make for them. So that part is already ongoing so as soon as we are.
<unk> have come to an agreement with <unk> I think we will we will start.
Getting those new business very soon.
Okay.
Great and then last question for me.
The stock even after you care about maybe they have some it's a little bit here, but in the environment. What have you don't train at low single digits.
EV to EBITDA basis is sort of a valuation metric you audits.
Incredibly cheap, especially when you've got a ton of cash on the balance sheet. I know you got the buyback you bought a little bit of stock.
Can we wouldn't be where you guys can go more aggressively with that.
That buyback I can assume there's a better use of capital.
Buying back your own stock at these levels.
Yeah.
Well with the with the trading volume, we can't really we can't really do a lot on the.
On the buyback.
I think.
Right now we have stopped because of the reporting but even even during the regular time for purchasing for repurchase we could only do a few thousand shares a day.
Just because of the low trading.
And there are a lot of restrictions, where you can't really do much on that.
Plus.
Yeah.
Alright, Thanks, guys. Good luck the rest of the world This year.
Mhm.
Thank you.
Thank you.
Our next question is coming from Aaron Grey with Alliance Global Partners. Please go ahead.
Hi, Good morning, and thank you for your question.
So first one for me.
Yeah, absolutely. So first one for me one talk about little bit diversification, particularly with new brands coming on so if you flip it from a brand perspective, you know are you seeing increased demand for them to want a diverse supply.
Drone manufacturers, especially given the current climate there in with.
Inventory.
Any supply chain issues, so just a broader environment in terms of whether or not you see more incoming or just the appetite for those bigger brands that have diversified. Thank you.
Sure I think for both sides.
For the rash and also for this.
All of these new potential customers.
This year is the perfect timing.
We're exploring a new relationships.
First of all we have a we have the capacity to do the sampling to do the trial orders for them.
And they actually are.
To establish a new manufacturer it takes it takes quite a bit of time and.
And energy so it's not something that is immediate.
For now.
They would send us some orders to try and it takes time for us to make changes and make sure that everything.
<unk> meets their requirements.
Then they will send all the time and do all kinds of due diligence. So by the time, we get everything done it would be at least six to 12 months.
We started doing these kinds of things with timberland about 12 months ago actually.
And we're just now starting to ship timberland. So it takes time and I think where we have been working with some really.
Important brands.
Which I can't share the names at this time.
I think.
After after this year all of this will will.
Good luck.
Florida.
Grove and opportunity for the next fiscal year.
Hum.
Great. Thanks for that color that was really helpful. And then if I sure hope it's your own diversification in terms of.
You know your cost inputs right, so thinking about the gross margins right because the pricing on one side, but given it's probably more on the bigger brands. There. So I think about the input cost you talked about some initiatives you might have been a little bit more in your control in terms of what you could do to lower the cost of some of the raw materials, particularly as we go through the next year, where you might have to us more pricing pressure at the higher level.
Thank you.
Well I think the inflationary level or the global inflationary.
Sure Yes.
Do have some impact on our on our costs. However.
I believe.
Isn't until you get to.
The logistics cost.
<unk> has come down significantly back to a more normal level. So I think it just kind of offset each.
Charter in.
And we're not seeing much of a.
An increase in terms of our costing.
If we if we are able to maintain our facilities to run at.
Full capacity level, I think moves should be able to maintain a very efficient production cost.
And besides we would we're getting rid of some up in the <unk>.
<unk> and lease costs.
So hopefully that will.
That will help put more dollars to the bottom line.
Hum.
And Sam do you see any.
Any trend going whatever direction in terms of the.
Supply chain of raw material costs.
Hum.
Oh, Okay for Fletcher Iraq, Okay, we are doing a lot of things trying to reduce.
The operating cost at the factory for example to okay to move.
Migrant workers in the new dollar tree, we can I mean, the first stage, we can say $5 million and if you move all the micro and look this thing to the new Dawn, we can't say a million dollar a year for the rental okay.
Oh, Okay. We we already have discussed we will put a solar company too.
Victor practice to make the solar panel for all of our existing factories.
I think we can save in each factory at least 40% of the cost of electricity and the cost of soybean Jordan is much much.
Comparable to other countries so much more expensive a little the erection of the new solar panel system in each factory can also help us to reduce some of the operating costs of the factory and also we have some I mean contingency plans in case, okay. It doesn't have enough orders okay.
And while we want to keep the existing.
Capacity in order to meet the future demands okay at the peak season, we can reduce.
Some of the working hours, Okay actually we then.
Hum.
From the extra two hours, okay. It's a we request our brands to give approval to us for two more overtime to ours over time, if it is necessary, we can reduce overtime. Okay in order to cap to fill up all our capacity. This is all the options you're thinking about to reduce the operating costs.
Of the factory.
Okay, great. Thank you very much for the color then I'll jump back into the queue.
Okay.
Okay.
Thank you.
At this time there are no more questions in queue. So I'll hand, it back to Mr. Choi and management team for any closing comments.
Okay.
Okay.
Yeah.
Oh, sorry, we have one question that's come in sorry, it's from.
Rommel Dionisio with Aegis capital Sir Please go ahead.
Hi, good morning, Thanks for taking my question.
I think you talked about I know you've talked about in prior conference calls.
Looking at different sourcing for fabrics potentially in the middle East like regions like Egypt, I Wonder if you could just give us an update on that initiative and to the extent that you might be able to save some costs there as well. Thank you.
Oh, yeah, absolutely thanks from them.
In fact, we have already started.
Buying fabrics from Egypt, and Turkey for some of our cost.
One of our customers' programs.
So that has already begun.
<unk>.
I don't know if it was safe.
Significant amount of cost, but it will definitely because of the China is definitely the most cost in terms of fabrics, but if you add the shipping costs, all the way from China or Asia.
It kind of offset itself.
So I think the cost.
At the end of the day is.
Kind of.
Comparable.
So starting from Egypt, and from Turkey, Turkey is a little bit more expensive, but Turkey is good.
Good folio of technical fabrics, and more polyester and Egypt is more cotton base and a much cheaper however.
The best.
Advantage for us starting from the Middle East region is.
To shorten the lead time and be more reliable.
In terms of.
If there is any.
Supply chain.
Disruption.
Yes, that's it.
Update that we have and we are.
We have already begun sourcing from the middle East region, and they will grow and will continue to grow and that has actually given us opportunities to work with some of the.
New customers.
Okay. Thanks very much.
Thanks Shlomo.
Thank you.
I'd like to hand, the call back to Mr. Sam choice for closing comments. Thank you.
Thank you operator.
Thanks, again to all of you for joining us today.
Our prospects remain healthy.
Let me try to smooth it.
And challenging environment, we very much appreciate your support and interest in our company.
Please stay safe and healthy holiday season, and we will.
Look forward to speaking to you again soon thank you everyone.
Thank you. Thank you.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation.
Thank you very much.
Yeah.